Income Tax Appellate Tribunal - Pune
Tata Technologies Ltd.,, Pune vs Assessee on 27 February, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER
AND Ms SUSHMA CHOWLA, JUDICIAL MEMBER
ITA No.1345/PN/2011
Assessment Year: 2001-02
Tata Technologies Ltd.,
Plot No.25, Pune Infotech Park,
Hinjawadi, Pune - 411057 .... Appellant
PAN: AAACT3092N
Vs.
The Dy. Commissioner of Income Tax,
Circle 8, Akurdi, Pune .... Respondent
ITA No.64/PN/2012
Assessment Year: 2001-02
The Dy. Commissioner of Income Tax,
Circle 8, Akurdi, Pune .... Appellant
Vs.
Tata Technologies Ltd.,
Plot No.25, Pune Infotech Park,
Hinjawadi, Pune - 411057 .... Respondent
PAN: AAACT3092N
ITA No.1346/PN/2011
Assessment Year: 2003-04
Tata Technologies Ltd.,
Plot No.25, Pune Infotech Park,
Hinjawadi, Pune - 411057 .... Appellant
PAN: AAACT3092N
Vs.
The Dy. Commissioner of Income Tax,
Circle 8, Akurdi, Pune .... Respondent
Assessee by : Shri R.R. Vora
Revenue by : Shri Rajesh Damor
Date of hearing : 03-12-2014
Date of pronouncement : 27-02-2015
2
ITA No.1345/PN/2011
ITA No.64/PN/2012
ITA No.1346/PN/2011
Tata Technologies Ltd.
ORDER
PER SUSHMA CHOWLA, JM:
Out of these three appeals, cross appeals filed by the assessee and Revenue are against the order of CIT(A)-V, Pune, dated 24.08.2011 relating to assessment year 2001-02 against order passed under section 143(3) of the Income Tax Act, 1961. Further, the assessee has also filed an appeal against the order of CIT(A)-V, Pune, dated 24.08.2011 relating to assessment year 2003-04 against order passed under section 143(3) of the Income Tax Act, 1961.
2. All the appeals relating to the same assessee were heard together and are being disposed of by this consolidated order for the sake of convenience.
3. The assessee in ITA No.1345/PN/2011 has raised the following grounds of appeal:-
Ground No 1 - Disallowance of software expenditure of Rs 37,07,994/-
The learned CIT(A) has erred in treating the software expenditure of Rs.37,07,994/- as capital in nature and upholding the disallowance made by the AO.
Ground No 2 - Disallowance of deduction claimed under Section 35D of the Act in relation to expenditure incurred for increase in authorised share capital The learned CIT(A) has erred in upholding the disallowance of Rs. 3,08,000/- made by the AO in relation to the expenditure incurred for increase in authorized share capital of the company.
Ground No 3 - Ad-hoc disallowance of certain business expenditure The learned CIT(A) has erred in upholding the following ad-hoc disallowances made by the AO:
(a) Entertainment expense, gift expense and general expense of Rs 91,793;
b) Lease rent on vehicles, petrol and vehicle maintenance and vehicle taxes and registration of Rs.100,000;
c) Guest house expenses of Rs 50,000;
d) Telephone expenses of Rs 100,000;
e) Staff welfare expense of Rs.73,518; and
(f) Business promotion expenditure of Rs.50,000.3 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011
Tata Technologies Ltd.
Ground No 4 - Rejection of claim of deduction of premium of Rs.3,91,80,000 paid towards lease of land made during the course of assessment proceedings The learned CIT(A) has erred in upholding the disallowance made by the AO in respect of deduction of lease premium of Rs. 3,91,80,000 (claim made by the Appellant during assessment proceedings) on the basis that a claim not made in original or revised return and made during assessment proceedings cannot be allowed as deduction.
4. The Revenue in ITA No.64/PN/2012 has raised the following grounds of appeal:-
01. The Learned Commissioner of Income-tax (Appeals) has grossly erred in not considering the fact that the expenditure towards interest subsidy on housing loan to its employees by the assessee is not for business purpose and cannot be allowed u/s 37(1) of the Income-tax Act, 1961.
02. The Learned Commissioner of Income-tax (Appeals) has grossly erred in not appreciating the fact that assessee has given differential treatment in the books of account for expenditure incurred on set up of SAP Implementation of Rs.46,89,760/-, which has been claimed by the assessee as revenue expenditure.
03. The Learned Commissioner of Income-tax (Appeals) has grossly erred in not considering the fact that the notional interest on interest free loan to subsidiary company to be disallowed as the assessee has shown it in the books of accounts for the year under consideration and paid it in later year too.
04 For these and such other reasons as may be urged at the time of hearing, the order of the Ld. Commissioner of income-tax (Appeals) may be vacated and that of the Assessing officer be restored.
05. The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal during the course of appellate proceedings before the Hon'ble Tribunal.
5. The issue raised vide ground of appeal No.1 is against the disallowance of software expenditure of Rs.37,07,994/-.
6. The brief facts relating to the issue are that the assessee had incurred software expenses which included expenditure on Windchill software for managing product data and process, flexible pro-engineer software used in TTL's CAD business, SAP upgradation cost, excise package software, MS Office 2000, etc. The claim of the assessee was that the said expenditure was allowable as revenue expenditure. The Assessing Officer observed that the demarcation lying holding the software expenses to be revenue or capital was very thin and it was dependent upon the facts and circumstances of the case. As per the Assessing Officer, the assessee 4 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
during the year had incurred substantial expenditure on software totaling Rs.37,81,284/-. Considering the nature of software procured by the assessee, the Assessing Officer observed that the said software expenses were recurring expenses or expenses of general repairs and maintenance, to be incurred every year. Once the expenditure has been incurred for the said account of software which need not be incurred for another next 4-5 years, as the expenditure on the various items of software entailed enduring benefit to the assessee over a period of time, the same was held to be capital expenditure and depreciation @ 25% as applicable to Plant & Machinery was allowed by the Assessing Officer.
7. The CIT(A) vide para 11 at pages 13 onwards observed that Annual subscription charges of Rs.73,920/- were revenue expenditure in nature. The CIT(A) thereafter placed reliance on the ratio laid down by the Special Bench of Delhi Tribunal in Amway India Enterprises Vs. DCIT (2008) 114 TTJ (Del)(SB) 473 and observed that even where there was license to use the software, the same could be treated as capital expenditure. In order to determine the nature of software expenses, the functional test was the most relevant and reference was made to the observations of Special Bench of Delhi Tribunal. In view thereof, the CIT(A) held that Annual subscription charges of Rs.73,920/- were revenue expenditure. However, the excise package software amounting to Rs.2,29,725/- obtained for study purpose and training for implementation at Tata Motors was capital expenditure. The CIT(A) vide para 15 further observed as under:-
"15. Another category of software projects included in the above expenditure was for expenditure on licence to use the software. However, it has already been held by the Special Bench that this does not make it revenue expenditure, since by obtaining licence to use the software, the appellant has acquired tangible asset and becomes owner thereof. The Windchill software and Flexible Pro-engineer software costing Rs.12,56,870/- and Rs.16,86,394/- respectively were acquisition of software licenses for the first time. It has been explained by the assessee that the Windchill was a PDM software for providing customization and implementation services to the customers. Similar was the case of flexible Pro-Engineer Foundation software. It was also explained that the appellant has regularly incurred expenditure on the updates and objects of these two software in the subsequent F.Yrs. All these reveal that these softwares were part of the profit making apparatus of the appellant company and not for day to day trading or business activities or to increase the efficiency as such. The functionality criterion reveals that these two softwares were obtained for regular use by the appellant to provide implementation services to its customers and clients, which was one of the primary business of the appellant. Therefore, these softwares as held by the appellant were part of the profit making apparatus and not for improvement of 5 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
its own trading operations. Therefore, corresponding expenditure was capital in nature relying on the test laid down by the Special Bench decision."
8. The CIT(A) further held that the other items of expenditure i.e. Rs.96,000/- on firewall software, MS Office 2000 software at Rs.19,800/- and Macromedia Flash & Fireworks for Website design at Rs.39,500/- were held to be capital expenditure based on the functional test. Another expenditure of Rs.3,75,075/- being expenditure on conversion cost from R3 license to MySAP was also held to be capital expenditure by the CIT(A).
9. The assessee is in appeal against the order of CIT(A).
10. The learned Authorized Representative for the assessee pointed out that the assessee was in the business of developing software and also for SAP implementation and maintenance. For the operations of its business, two softwares i.e. Windchill software and flexible Pro-engineer softwares were acquired, which were claimed to be revenue in nature. Reliance in this regard was placed on the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. Raychem RPG Ltd. (2012) 346 ITR 138 (Bom).
11. The learned Departmental Representative for the Revenue placed reliance on the order of CIT(A) with special reference to para 15 of the order of CIT(A).
12. We have heard the rival contentions and perused the record. The assessee was engaged in the business of software development and provisions of software services. As per the assessee, the range of services included IT consultancy, transfer of SAP licenses, SAP implementation and maintenance, providing networking solutions, CAD/CAM engineering and design consultancy with a focus on the automotive sector. During the year under consideration, the assessee had incurred expenditure on software amounting to Rs.37,81,284/-. The assessee had given the break-up of the software expenses before the CIT(A) in tabulated form, which were reproduced at pages 9 to 11 of the appellate order. The first expenditure incurred by the assessee was on account of Annual subscription charges of Rs.73,920/- which has been allowed as an expenditure by the CIT(A), against which, 6 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
the Revenue has not filed any appeal. The second set of expenditures were claimed to be for specific purposes i.e. specific projects undertaken by the assessee in the ordinary course of carrying on its business. The assessee had spent Rs.4,000/-on purchasing of study material i.e. Cisco Internetworking CD Microlan. Another expenditure of Rs.2,29,725/- was incurred on excise package software which was also claimed to be for said purpose for implementing at Tata Motors. Both these expenditures were held to be capital by the CIT(A).
13. The Hon'ble Bombay High Court in CIT Vs. Raychem RPG Ltd. (supra) while considering the issue of allowability of expenditure incurred on software, has laid down the proposition that where the impugned software does not form part of fixed profit making apparatus of the assessee, then the same is to be allowed as revenue expenditure. Where the software package facilitates the assessee in trading operations or enabling the management to conduct assessee's business more efficiently or more profitably and hence, the said expenditure is revenue expenditure. The view of the Tribunal in the case was upheld by the Hon'ble Bombay High Court (supra).
14. In view of the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. Raychem RPG Ltd. (supra), where the expenditure has been incurred for facilitating the business and which does not form part of profit making apparatus, then the software expenditure is to be allowed as revenue expenditure. The expenditure incurred by the assessee totaling Rs.2,33,725/- has been incurred in the ordinary course of carrying on the business and does not form part of its profit making apparatus, hence, the said expenditure is duly allowable as revenue expenditure in the hands of the assessee.
15. The next set of expenditure incurred by the assessee was on acquisition of license to use the software, but there is no acquisition of ownership rights of the software. The assessee had incurred expenditure of Rs.12,56,870/- on the acquisition of Windchill Software which is a PDM software purchased for developing resources and providing customization and implementation services to customers. Another expenditure of Rs.16,86,394/- was incurred for the acquisition of Flexible 7 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
Pro-Engineer software, which was admittedly, first time acquisition and was acquisition of rights to run the said software. The Windchill software was upgraded regularly and similarly, the other software Flexible Pro-Engineer software was also upgraded regularly. The functionality test laid down by the Special Bench of Delhi Tribunal in Amway India Enterprises Vs. DCIT (supra) is to be applied for determining the nature of expenditure to be capital or revenue. Where the assessee had incurred expenditure on software which has been acquired to facilitate the smooth functioning of day-to-day business operations of the assessee and which do not form part of its profit making apparatus, then the expenditure is allowable as revenue expenditure in the hands of the assessee. Accordingly, we direct the Assessing Officer to allow the expenditure of Rs.12,56,870/- and Rs.16,86,394/- as revenue expenditure.
16. Further the assessee had incurred the expenditure on the under-mentioned items:-
Sr No Description Amount (Rs.)
1 Firewall 4.1 CD 96,000
2 MS Office 2000 19,800
3 Macromedia Flash & Fireworks 39,500
for Website Design
4 Upgradation cost of 15 R/3 3,75,075
MySAP Licenses for TTL
17. The aforesaid expenditure incurred by the assessee was the acquisition of software programmes which in turn, were utilized to conduct day-to-day business activities more efficiently. Further, the expenditure incurred on upgradation of the system i.e. conversion from R3 software to MySAP license was required at regular intervals and such upgradation was to gain operational efficiency in the areas of the sales, distribution and production planning. Since the expenditure had been incurred to facilitate efficiency in the business resulting in more profitability, the said expenditure is to be allowed as revenue expenditure. The ground of appeal No.1 raised by the assessee is thus, allowed.
18. The issue vide ground of appeal No.2 raised by the assessee was against the disallowance of deduction claimed under section 35D of the Act. 8 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011
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19. The learned Authorized Representative for the assessee fairly pointed out that the issue stands covered against the assessee by the ratio laid down by the Hon'ble Supreme Court in Brooke Bond India Ltd. Vs. CIT 225 ITR 798 (SC) as also Punjab State Industrial Development Corporation Ltd. Vs. CIT 225 ITR 792 (SC). The assessee had claimed the expenditure in connection with issue of shares with a view to increase the share capital. The assessee had incurred expenditure of Rs.15,40,000/- out of which 1/10th was debited to Profit & Loss Account. However, the assessee added back the same and deduction under section 35D of the Act amounting to Rs.3,08,000/- was claimed. The Assessing Officer had disallowed the same relying on the ratio laid down by the Hon'ble Supreme Court in Brooke Bond India Ltd. Vs. CIT (supra) as also Punjab State Industrial Development Corporation Ltd. Vs. CIT (supra).
20. The CIT(A) upheld the decision of Assessing Officer in holding that since the expenditure was capital in nature and the same was not eligible under section 35D of the Act.
21. The assessee is in appeal against the order of CIT(A).
22. The issue raised in the present appeal is squarely covered by the ratio laid down by the Hon'ble Supreme Court in Brooke Bond India Ltd. Vs. CIT (supra) as also Punjab State Industrial Development Corporation Ltd. Vs. CIT (supra). The expenditure having been incurred by the assessee for increasing share capital admittedly, was a capital expenditure and the same could not be considered for computing deduction under section 35D of the Act. The ground of appeal No.2 raised by the assessee is thus, dismissed.
23. The issue vide ground of appeal No.3 raised by the assessee is against the disallowance made out of various heads of expenditure.
24. The Assessing Officer had taken note of different expenditures booked by the assessee in the Profit & Loss Account and considered the nature of said expenses and made certain adhoc disallowances both for personal / non-business element of 9 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
the expenditure. The various heads of expenditures considered by the Assessing Officer were as under:-
(a) Entertainment expense, gift expense and general expense of Rs 91,793;
b) Lease rent on vehicles, petrol and vehicle maintenance and vehicle taxes and registration of Rs.100,000;
c) Guest house expenses of Rs 50,000;
d) Telephone expenses of Rs 100,000;
e) Staff welfare expense of Rs.73,518; and
(f) Business promotion expenditure of Rs.50,000.
25. The CIT(A) upheld the order of Assessing Officer, against which the assessee is in appeal.
26. The learned Authorized Representative for the assessee pointed out that the adhoc disallowances were made by the Assessing Officer. It was further pointed out by him that the assessee was 100% subsidiary of TELCO and wherever perquisites were given to Director, the same was charged in his hands and there is no merit in the adhoc disallowance made for personal / non business element.
27. The learned Departmental Representative for the Revenue placed reliance on the order of CIT(A).
28. We have heard the rival contentions and perused the record. The first expenditure considered by the Assessing Officer was the staff welfare expenses which included canteen expenses of Rs.6,21,189/- and staff welfare expenses of Rs.8,49,177/-. The said expenditures included expenses on lunch, tea, refreshments, picnic and gift coupons, etc. and out of the same, 5% was disallowed for personal/non business purpose. We find no merit in the said plea of the authorities below, where the expenditure has been incurred both on canteen and staff welfare expenses. Accordingly, we direct the Assessing Officer to delete the addition of Rs.73,518/-.
29. The next head of expenditure was on account of entertainment expenditure of Rs.7,09,298/- on gifts of Rs.40,220/- and on general expenses of Rs.10,86,350/-. 10 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011
Tata Technologies Ltd.
The Assessing Officer had disallowed 5% of the said expenditure for non-business purpose and entertainment of personal guests. The assessee is a limited company and there is no merit in the said disallowance having been made without coming to the conclusion as to a particular expenditure being incurred for non-business purpose. We find no merit in the adhoc disallowance made at 5% under the said head; hence, we direct the Assessing Officer to delete addition of Rs.91,793/-.
30. The next set of expenditure is the lease rent on vehicles of Rs.26,21,370/-, on petrol & vehicle maintenance of Rs.11,62,391/- and Rs.7,12,696/- for vehicle taxes and registration. Out of these amounts, lump sum disallowance of Rs.1,00,000/- was made being for personal in nature. The case of the assessee being a limited company, there is no warrant for any personal expenses and hence, expenditure of Rs.1,00,000/- is directed to be allowed.
31. Another set of expenses were the Guest house expenses of Rs.5,38,286/- and telephone expenses of Rs.26,52,426/-. Out of which adhoc disallowance of Rs.50,000/- and Rs.1,00,000/- respectively were made for the reason that it was not possible to verify whether the same were incurred wholly and exclusively for business purposes and there was no personal usage of telephone. Following the earlier line of reasoning that in the case of a company, there is no merit in disallowance on account of personal use and hence, we direct the Assessing Officer to delete the addition of Rs.50,000/- and Rs.1,00,000/- made on these accounts. Similarly, Rs.50,000/- was disallowed out of business promotion expenses which was not warranted in the absence of particular expenditure having been pointed out by the authorities below. No disallowance on account of personal usage can be made in the hands of the assessee. Consequently, the ground of appeal No.3 raised by the assessee is allowed.
32. The issue in ground of appeal No.4 raised by the assessee is against the rejection of claim of deduction of premium of Rs.3,91,80,000/- paid towards lease of land.
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33. The brief facts relating to the issue are that no claim on account of the deduction of premium of Rs.3,91,80,000/- was made in the return of income. However, the said claim was made by way of submissions filed during the course of assessment proceedings. The claim of the assessee having not been made in the return of income or in revised return of income, was rejected by the Assessing Officer in view of the ratio laid down by the Hon'ble Supreme Court in Goetz India Ltd. Vs. CIT (2006) 284 ITR 323 (SC).
34. The CIT(A) upheld the order of Assessing Officer in view of no claim being made in the return of income or in revised return of income.
35. The assessee is in appeal against the order of CIT(A).
36. The learned Authorized Representative for the assessee pointed out that the assessee had claimed the deduction on account of premium paid for acquisition of leasehold rights and the same is in the nature of revenue expenditure. It was admitted by the Assessing Officer that no deduction was claimed in the return of income and both the Assessing Officer and CIT(A) had rejected the said deduction to the assessee as no claim was made in the return of income. Reliance in this regard was placed upon the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. Pruthvi Brokers & Shareholders (2012) 349 ITR 336 (Bombay). The next submissions made by the learned Authorized Representative for assessee was that the issue may be set-aside to the file of Assessing Officer to look into the matter. Alternate plea was raised by the learned Authorized Representative for the assessee that amortization of the said expenses may be allowed or depreciation on leasehold rights in land being intangible asset should be allowed to the assessee. Reliance in this regard was placed on the ratio laid down by Pune Bench of the Tribunal in ACIT Vs. Ashok Infrways (P) Ltd. (2013) 58 SOT 147 (Pun) (Trib). Another plea raised by the learned Authorized Representative for the assessee that Pune Bench of the Tribunal in Pioggio Vehicles Pvt. Ltd. Vs. JCIT in ITA Nos.965 & 966/PN/2009 relating to assessment year 2004-05 & 2003-04 vide order dated 06.04.2011 had set-aside the matter to the file of Assessing Officer to decide the applicability of depreciation on leasehold rights under the provisions of the Act.
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37. The learned Departmental Representative for the Revenue on the other hand pointed out that the issue of allowability of leasehold premium as revenue expenditure was decided against the assessee by the Special Bench of Mumbai Tribunal in JCIT Vs. Mukund Ltd. (2007) 106 ITD 231 (Mumbai) (SB). Further, it was pointed out that even the amortization of leasehold premium over the life of lease was not to be allowed as expenditure. The learned Departmental Representative for the Revenue further stressed that no depreciation on the leasehold rights holding the same as intangible asset was to be allowed in the hands of the assessee.
38. We have heard the rival contentions and perused the record. The first aspect of the issue raised in the present appeal is the allowability of an expenditure which was not claimed in the return of income but was raised by way of submissions filed during the course of assessment proceedings. Both the Assessing Officer and CIT(A) rejected the claim of the assessee at the outset since no claim was claimed in the return of income or in revised return of income filed by the assessee. Reliance in this regard was placed on the ratio laid down by Hon'ble Supreme Court in Goetz India Ltd. Vs. CIT (supra). As far as the case of the Assessing Officer is concerned, admittedly, in view of the ratio laid down by the Hon'ble Supreme Court in Goetz India Ltd. Vs. CIT (supra), the claim of the assessee was not allowable, where no such claim was made in return of income or in the revised return of income. However, during the appellate proceedings, the CIT(A) is empowered to consider the claim of deduction made by the assessee. The Hon'ble Bombay High Court in CIT Vs. Pruthvi Brokers & Shareholders P. Ltd. (2012) 23 taxmann.com 23 (Bom) has considered the issue at length and observed that before the appellate authority, the assessee can make a claim of deduction in respect of an item which was not claimed in the return of income. Following the said ratio laid down by the Hon'ble Bombay High Court in CIT Vs. Pruthvi Brokers & Shareholders P. Ltd. (supra), we reverse the order of CIT(A) in this regard and hold that the said claim of deduction could be considered by the CIT(A) during the course of appellate proceedings. However, we do not think it fit to restore the issue back to the CIT(A) and proceed to decide the issue since the said issue has been raised before us by the assessee.
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39. The next aspect of the issue is the merit in the claim of deduction on account of premium paid towards lease of land to be allowed as revenue expenditure. The assessee claimed the lump sum of premia of Rs.3.91 crores paid towards land taken on lease from Maharashtra Industrial Development Corporation (MIDC) for a term of 95 years be allowed as revenue expenditure. The said lump sum payment was paid to MIDC in the first year i.e. the year under appeal. Against the payment of lease premia, the assessee got the benefit of lower annual rent of Re.1/- over a period of 95 years. The claim of the assessee in this regard was that the said payment made in the first year is in the nature of advance rent and was eligible for deduction under section 37(1) of the Act. The learned Authorized Representative for the assessee in this regard placed reliance on the ratio laid down by the Hon'ble Gujarat High Court in DCIT Vs. Sun Pharmaceutical India Ltd. (2009) 227 CTR 206 (Guj) and also on the ratio laid down by the Bangalore Bench of the Tribunal in DCIT Vs. Columbia Asia Hospitals (P) Ltd. (2013) 142 ITD 225 (Bangalore - Trib), which in turn relied on the ratio laid down by the Hon'ble Karnataka High Court in CIT Vs. H.M.T. Ltd. (1993) 203 ITR 820 (Kar).
40. The learned Departmental Representative for the Revenue however, placed reliance on the decision of Special Bench of Mumbai Tribunal in JCIT Vs. Mukund Ltd. (supra).
41. The issue arising before the Special Bench of Mumbai Tribunal in JCIT Vs. Mukund Ltd. (supra), was in relation to the claim of expenditure against the payment made for acquisition of leasehold rights from MIDC. The said payment was termed as premium on leasehold land which was claimed as revenue expenditure by the assessee. The Tribunal noted that the Assessing Officer had not allowed the claim of the assessee though the assessee had placed reliance on the ratio laid down by Hon'ble Karnataka High Court in CIT Vs. H.M.T. Ltd. (supra). The Tribunal after considering the issue at length and also after referring to various judicial propositions propounded by different High Courts, Tribunals and applying the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. Khimline Pumps Ltd. (2002) 258 ITR 459 (Bom) held that the benefit conferred on the assessee of leasehold rights for 99 years 14 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
against the lump sum payment of Rs.2.04 crores was of enduring nature and there was no material on record to suggest that the said sum was paid by way of advance rent nor there was any provision for adjustment towards rent or for its repayment to the assessee. In view thereof, it was held that the consideration paid by the assessee therein in terms of agreement between the assessee company and MIDC for obtaining leasehold rights from MIDC in favour of the assessee for a period of 99 years, was capital in nature and therefore, not allowable as deduction. The issue was decided by the Special Bench of Mumbai Tribunal in line with the ratio laid down by the jurisdictional High Court in CIT Vs. Khimline Pumps Ltd. (supra).
42. The issue arising before us is identical to the issue before the Special Bench of Mumbai Tribunal in JCIT Vs. Mukund Ltd. (supra). In the facts of the case before us also, the assessee had made lump sum payment to MIDC for the acquisition of leasehold rights in land and such payment made by the assessee was for holding the land for a period of 95 years and hence, was of enduring nature. Consequently, the said expenditure claimed by the assessee as revenue in nature is not allowable in the hands of the assessee as deduction.
43. The second issue of amortization of leasehold premium over the period of lease is not allowable as deduction in view of the expenditure being held as capital in nature. The plea of the assessee was that premium paid for acquiring leasehold right in land is nothing but in the nature of advance rent is to be rejected in view of the ratio laid down by Special Bench of Mumbai Tribunal in JCIT Vs. Mukund Ltd. (supra).
44. Another alternate plea was raised by the assessee that the depreciation on such leasehold rights in the land should be allowed in view of the same being an intangible asset. The Pune Bench of the Tribunal in Piaggio Vehicle Pvt. Ltd. Vs. Jt.CIT in ITA Nos.965 & 966/PN/2009 relating to assessment years 2004-05 & 2003- 04, vide order dated 06.04.2011 had set-aside the matter to decide the applicability of depreciation on leasehold rights in the land under the provisions of the Act, since aspects were not considered by the Revenue authorities during the course of assessment proceedings or appellate proceedings.
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Tata Technologies Ltd.
45. However, we find that the Pune Bench of the Tribunal in M/s. Drilbits International P. Ltd. Vs. DCIT in ITA No.1361/PN/2010, relating to assessment year 2006-07, vide order dated 23.08.2011 had considered the issue of allowability of depreciation on leasehold rights of land and had held that no such depreciation is allowable to the assessee on the premise that a person holding freehold land would not be allowed depreciation on such land and where the person holds leasehold rights in the land if depreciation is allowed, then it would place the person holding freehold land to be at dis-advantage and the same is not justifiable. The Tribunal also held that the leasehold rights in the land were not intangible assets. The relevant observations of the Tribunal vide para 13 are as under:-
"13. After considering the above submissions, we do not find substance in the contention of the Ld. A.R. that the leasehold rights in the land are entitled to depreciation. The decision of Hon'ble Supreme Court in the case of Techno Shares (Supra) is not helpful to the assessee as the Hon'ble Supreme Court has been pleased to hold in its decision in that case that their judgment should not be construed to mean that every business or commercial right would constitute a license or franchise in terms of Sec. 32(1)(ii) of the Act. The depreciation even under the amended Sec. 32 of the Act is allowable only on the restricted categories of tangible/intangible assets which are specifically enumerated in the Section. The intangible asset on which the depreciation is allowable u/s. 32(1)(ii) of the Act are know-how, patent, copy rights, trade marks, franchise or any other business or commercial rights of similar nature acquired on or after 1.4.1998. Under these circumstances, we fully concur with the submission of the Ld. D.R. that the provisions of the Act cannot be interpreted to mean that leasehold rights granting such type of ownership over land etc., would also qualify as intangible assets for the ITA No.1361/PN/2010 M/s.Drilbits International P. Ltd. A.Y. 2006-07 Page of 28 6 purpose of depreciation under the Act. Certainly, this would lead to a conflicting situation where land acquired on freehold basis would not be eligible for depreciation but similar land acquired on leasehold basis would be eligible for depreciation that too at a higher rate. Under these circumstance, we are not inclined to interfere with the action of the A.O in disallowing the claimed depreciation in question on leasehold rights over the land treating the same as intangible asset u/s. 32(1)(ii) of the Act. The ground Nos. 2 & 2.1 are thus rejected."
46. In view thereof, we find no merit in the plea of the assessee. Accordingly, the alternate plea raised by the assessee also fails and the ground of appeal No.4 raised by the assessee is thus, dismissed.
47. Now, coming to appeal of the Revenue in ITA No.64/PN/2012.
48. The issue in ground of appeal No.1 raised by the Revenue is against the order of CIT(A) in allowing the expenditure incurred towards interest subsidy on housing 16 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
loans to the employees of the assessee as business expenditure under section 37(1) of the Act.
49. The brief facts relating to the issue are that during the year under consideration, the assessee had debited interest subsidy expenditure of Rs.25,90,959/-. The explanation of the assessee in respect of the said expenditure was that the scheme of granting interest subsidy on housing loans to the employees was part of Tata Technology Limited Human Resource Policy, which was part of the terms of employment of all employees joining the assessee company. The assessee further submitted that interest subsidy given to all the employees had been disclosed in Form No.16 issued to all the employees, who had availed the benefit. The copies of sample Form No.16 were submitted during the course of assessment proceedings along with extract of Human Resource Policy of the assessee. The next plea of the assessee was that the said expenditure was considered as part of staff welfare expenses for the year ending 31.03.2001 and was claimed as allowable expenditure under section 37(1) of the Act. The Assessing Officer did not accept the contention of the assessee as on the perusal of the Profit & Loss Account, it was noted that the assessee had debited interest of Rs.65,31,486/- which was interest paid by the assessee @ 13.5%. On the other hand, the assessee was found to be charging interest on the housing loans extended to the employees @ 4% interest. Since the assessee had debited the interest which was paid at higher rate whereas funds which were mixed funds i.e. own funds and also borrowed funds, out of which, the housing loans were advanced at lower rates, as per the Assessing Officer, connotes reduction of taxable profits. The next observations of the Assessing Officer was that where the assessee had given certain benefit to the employees, if the said provision did not form part of employment contract of the employees with the assessee, such expenditure could not be said to have been incurred only and exclusively for the purpose of business. Hence, the interest subsidy of Rs.25,90,959/- was disallowed by the Assessing Officer.
50. The CIT(A) after considering the written submissions filed by the assessee noted that the assessee had explained that the provisions of interest on housing 17 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
loans to the employees was treated as perquisites under Rule 3 of Income Tax Rules (in short 'Rules') and therefore, the same was legally allowable. The next observation of the Assessing Officer that the benefit did not form part of contract of employment of the assessee with its employees was also claimed to be factually incorrect as the said benefit was part of assessee's Human Resource Policy and the quantum of benefit available was determined on the basis of grade of the employees. Where the expenditure was incurred for commercial exigency and the reasonableness of the expenditure had to be judged from the point of view of businessman, the assessee claimed that the issue was covered by series of decisions. The CIT(A) referred to the ratio laid down by the Hon'ble Supreme Court in CIT Vs. Walchand and Co. Pvt. Ltd. (1967) 65 ITR 381 (SC), Sasoon J David and Co. (P) Ltd. Vs. CIT (1979) 118 ITR 261 (SC). In view of the said ratios laid down by the Hon'ble Supreme Court, the CIT(A) held that the expenditure incurred on account of interest subsidy provided on housing loans to the employees was an allowable deduction under section 37(1) of the Act.
51. The Revenue is in appeal against the order of CIT(A).
52. The learned Departmental Representative for the Revenue placed reliance on the order of Assessing Officer.
53. The learned Authorized Representative for the assessee placing reliance on the order of CIT(A) pointed out that where the expenditure on providing benefit to the employees, which was considered as part of the salary cost of the employees, who are the key drivers of the business of the assessee company, was incurred wholly and exclusively for the business purposes. Further, as per Rule 3 of the Rules, the perquisites valuation rules also takes cognizance of the provision of said type of benefit by the employers to the employees and accordingly, provides for the valuation of perquisites in respect of housing loans. The plea of the assessee before us was that in view thereof, the relevant expenditure is allowable under section 37(1) of the Act.
54. We have heard the rival contentions and perused the record. The assessee during the year under consideration had made provision for interest on housing loans 18 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
to the employees totaling Rs.25,90,959/-. The said expenditure was incurred on account of reimbursement of interest cost on housing loans obtained by the employees. Where the said benefit forms part of employee compensation package and is provided as per the Human Resource Policy adopted by the assessee company vis-à-vis of its employees, then such expenditure incurred by the assessee is wholly and exclusively incurred for the purpose of carrying on the business. The expenditure of providing benefit to the employees had been considered by the assessee as part of the salary cost of the respective employee and the perquisites value of such benefit being allowed to the employees had been worked out as per Rule 3 of the Rules, the said expenditure is thus, recognized by the provisions of the Act as an allowable expenditure. Where the law itself envisages the provision of such benefit to the employees, which in turn, is considered by the assessee as part of its salary cost, the expenditure having been incurred wholly and exclusively for the purpose of carrying on the business, is duly allowable as business expenditure under section 37(1) of the Act. Upholding the order of CIT(A), we dismiss the ground of appeal No.1 raised by the Revenue.
55. The issue in ground of appeal No.2 raised by the Revenue is against the deletion of addition made on account of expenditure incurred on set up of SAP Implementation amounting to Rs.46,89,760/-.
56. The brief facts relating to the issue are that the assessee had incurred certain expenditure in connection with set up of SAP centre at Pune, which included SAP License cost of Rs.44,00,465/- and salary cost of SAP consultants of Rs.2,89,395/-, totaling Rs.46,89,760/-. In the books of account, the assessee had deferred the expenditure over a period of thirty six months and accordingly Rs.1,30,271/- was charged to the Profit & Loss Account for the year under consideration. However, in the computation of income filed along with return of income, the said amount was added back and the entire cost of Rs.46,89,760/- was claimed as allowable expenditure under section 37(1) of the Act. The Assessing Officer show caused the assessee to give the nature of expenses and why the expenditure be not spread over as per the treatment in the books of account. The Assessing Officer was of the view 19 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
that where the assessee itself had deferred the expenditure over a period of three years in its books of account and since SAP license cost was to give enduring benefit to the assessee and where the assessee itself had estimated the enduring benefit for three years, the claim of entire expenses in the captioned year was not acceptable. The Assessing Officer further observed that through there was no provision in the Income Tax Act for deferment of expenditure, which was in the nature of revenue expenditure, various courts had held that where the assessee had given a deferential treatment in the books of account, subsequent change of the claim in the computation of income for the purpose of tax could be over ruled. Reliance was placed on series of decisions including the ratio laid down by the Hon'ble Supreme Court in Madras Industrial Investment Corporation Ltd. Vs. CIT 225 ITR 802 (SC) and the Hon'ble Bombay High Court in CIT Vs. Taparia Tools Ltd. 260 ITR 102 (Bombay). The Assessing Officer out of the total claim of Rs.46,89,760/- excluded the salary cost of Rs.2,89,395/- and the SAP license cost of Rs.44,00,365/- was spread over three years and 1/3rd of the cost was allowed during the year. The balance of Rs.29,33,577/- was disallowed.
57. The CIT(A) allowed the claim of the assessee observing as under:-
"21. I have considered the submissions and the material available on record. It is noticed that the expenditure is incurred in obtaining the SAP licence cost for the appellant's own use. In the explanation, it was explained that since the appellant was also engaged in SAP implementation for other customers, a total of 3000 licences were obtained during the year costing Rs.26.8 crores, out of which 40 licences were used by the appellant for its inhouse SAP implementation for increasing its productivity and business systems etc. SAP was an enterprise resource Planning (ERP) software package and the appellant has also cited a recent decision of the Hon'ble Bombay High Court in the case of CIT v. Raychem RPG Ltd [2011] ITA No. 4176/2009 (Bom), order dated 04/07/2011 in which the Tribunal orders was upheld. The Tribunal followed the Special Bench decision of Amway India Enterprises, (supra) and held that in the case of an ERP package, the expenditure on purchase was a revenue expenditure, since this software facilitated assessee's trading operations enabling the management to conduct the business more efficiently, but it did not form part of the profit making apparatus. However, the Assessing Officer himself has not treated this expenditure as capital expenditure but allowed only I/3rd on the basis of the appellant's claim of the same as deferred revenue expenditure. On a careful perusal of the explanation submitted by the appellant, as discussed above, I am of the considered opinion that since there was no such case of deferred revenue expenditure concept under I.T. law, and the judgements of the Apex Court and the Bombay High Court relied upon by the Assessing Officer were in a different context and related to financial instruments where there was a continuing liability, the appellant's contention in this regard is legally tenable. This ground of appeal is accordingly allowed."20 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011
Tata Technologies Ltd.
58. The Revenue is in appeal against the order of CIT(A). The learned Departmental Representative for the Revenue placed reliance on the order of Assessing Officer.
59. The learned Authorized Representative for the assessee placed reliance on the order of CIT(A).
60. We have heard the rival contentions and perused the record. The assessee was engaged in software development and provision of software services. As pointed out by us in the paras hereinabove, the assessee was engaged in range of services which also included SAP implementation and maintenance. For carrying out the business of SAP implementation, the case of the assessee was that it requires SAP licenses. During the year under consideration, the assessee had debited sum of Rs.44,00,365/- on account of SAP license cost. Out of the total licenses procured by the assessee, 40 licenses were used by the assessee for its in-house SAP implementation. The proportionate cost of 40 licenses of Rs.1,10,009/- per license aggregating to Rs.44,00,365/- was debited to the Profit & Loss Account. The assessee has placed the copy of invoices for purchase of SAP license at pages 247 to 250 of the Paper Book. The explanation with regard to the said acquisition of SAP licenses was that it decided to implement the first phase of SAP Module in financial year 2000-01. The assessee further explained that SAP was an Enterprise Resource Planning Package (ERP Package), was a information system management tool, used for the purpose of integration of business information data management, etc. The assessee had implemented certain SAP Modules i.e. in the field of Finance, Costing, Sales & Distribution, Material management and Fixed assets during the year under consideration and the purpose of SAP implementation was to reap the benefits of system integration and improved time cycles, accuracy and efficiency. The assessee in the books of account, had deferred the expenditure over a period of 36 months and sum of Rs.1,30,271/- was charged to the Profit & Loss Account for the year ending 31.03.2001. However, in the computation of income filed along with return of income, the assessee added back the said sum of Rs.1,30,271/- and debited the entire cost of Rs.46,89,760/- as allowable revenue expenditure under section 37(1) of the Act. The 21 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
said sum of Rs.46,89,760/- includes the salary cost of SAP consultants at Rs.2,89,395/-. The total expenditure has been allowed as revenue expenditure by the CIT(A), against which, the Revenue is in appeal.
61. The claim of the assessee was that the said expenditure was allowable as deduction under section 37(1) of the Act as the expenditure had been incurred during the year under consideration and the SAP license cost was relatable to the carrying on of the business of the assessee more efficiently and hence, was revenue expenditure and could not be treated as deferred revenue expenditure in accounts parlance. We find merit in the plea of the assessee in this regard, wherein as various courts have held that irrespective of the method of accounting followed by the assessee, the allowability of the expenditure is to be as per the provisions of Income Tax Act and not in accordance with the accounting standards. Reference in this regard is being made to the ratios laid down by the Hon'ble Supreme Court in Kedarnath Jute Mfg. Co. Ltd. Vs. CIT (1971) 82 ITR 363 (SC) and Hon'ble Bombay High Court in CIT Vs. Bhor Industries (2003) 264 ITR 180 (Bombay). Accordingly, we hold that the assessee can claim the entire expenditure as deductible in the computation of income irrespective of its treatment in the books of account.
62. The second aspect of the issue was the allowability of expenditure in the hands of the assessee. As referred to by us in the paras hereinabove, the assessee had utilized 40 licenses for its in-house SAP implementation for increasing its productivity and also for increasing the efficiency of its business system. The assessee was also engaged in the SAP implementation for other customers and in total had purchased 300 licenses during the year, out of which 40 licenses were utilized by the assessee for its own business, cost of which was claimed as business expenditure by the assessee. As the software purchased by the assessee facilitated the business operations of the assessee and also enabled the assessee to conduct its business more efficiently, then the same is to be allowed as business expenditure in the hands of the assessee. Reliance in this regard is placed upon the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. Raychem RPG Ltd. (supra), wherein the assessee had acquired an Enterprises Resource Planning i.e. ERP 22 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
package. The Tribunal while deciding the appeal of the assessee had held that the said package facilitates the assessee's trading operations or enables the management to conduct its business more efficiently or profitably, but was not in the nature of profit making apparatus. The order of the Tribunal has been upheld by the Hon'ble Bombay High Court and software expenditure was allowed as revenue expenditure.
63. In the facts of the present case before us also the assessee had made investment in the ERP package and following the ratio laid down by the Hon'ble Bombay High Court, we hold that the assessee is entitled to the claim of deduction under section 37(1) of the Act. The Assessing Officer while deciding the issue had allowed 1/3rd on cost as being relatable to the year and the balance sum of Rs.29,33,577/- was disallowed. The assessee had only booked Rs.1,30,271/- in Profit & Loss Account as allowable expenditure but in the computation of income had claimed the entire expenditure of Rs.46,89,760/- to be allowed under section 37(1) of the Act. In contrast to which the Assessing Officer had allowed 1/3rd of the total expenditure. In other words, the plea of the assessee that the expenditure incurred for the purpose of business of the assessee has been partly accepted by the Assessing Officer. However, balance of the expenditure has not been allowed in the hands of the assessee being deferred revenue expenses, which plea is not to be applied in view of the various decisions of the Hon'ble Supreme Court as referred to by us in the paras hereinabove. Upholding the order of CIT(A), we dismiss the ground of appeal No.2 raised by the Revenue.
64. Now, coming to the ground of appeal No.3 raised by the Revenue, is against the working of disallowance of notional interest on interest free loans advanced to the subsidiary companies.
65. The facts relating to the issue are that during the year under consideration the assessee had given advance of Rs.3,32,21,920/- to M/s. Tata Technologies, USA, subsidiary company of the assessee company. The Assessing Officer noted that the assessee had advanced the money without charging any interest. Since the assessee was paying interest on the various loans received from banks and other 23 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
companies, the advance given to the subsidiary company was treated as non- business advance and notional interest @ 13.5% was applied to work out the disallowance at Rs.24,575/-.
66. The CIT(A) noted the explanation of the assessee that assessee had advanced the said loan of Rs.3.32 crores on 30.03.2001 and no interest was received for two days during current financial year since 30.03.2001 was the Friday and the funds became available to the subsidiary company only on 02.04.2001 which was Monday. The assessee was charging interest on the said advance from the next financial year onwards. The CIT(A) in view of the facts and circumstances, held that no interest was chargeable in the year, since the funds became available to the subsidiary company only on 02.04.2001. We find merit in the claim of the assessee in this regard. Admittedly, the loan was given on 30.03.2001 by the assessee to its subsidiary company which was a Friday. The loan became available to the subsidiary company on 02.04.2001 i.e. on Monday after clearance from the Bank and interest on the said loan was charged from the next financial year. In the facts and circumstances of the case, we find no merit in the order of Assessing Officer in charging notional interest on the said advances made, which became available to the subsidiary company only from the next financial year. Upholding the order of CIT(A), we dismiss the ground of appeal No.3 raised by the Revenue.
67. The assessee in ITA No.1346/PN/2011 has raised the following grounds of appeal:-
Ground No 1 - Disallowance of deduction claimed under Section 35D of the Act in relation to expenditure incurred for increase in authorised share capital The learned CIT(A) has erred in upholding the disallowance of Rs. 3,08,000/- made by the AO in relation to the expenditure incurred for increase in authorized share capital of the company.
Ground No 2 - Disallowance of deduction of amortized lease premium expenditure The learned CIT(A) has erred in upholding the disallowance made by the AO in respect of deduction claimed for amortized lease premium of Rs.4,15,053/-.
Ground No 3 - Disallowance of provision for expenditure in respect of provision for benefit under Bhavishya Kalyan Yojanano ('BKY'), an employee welfare scheme 24 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
The learned CIT(A) has erred in upholding the disallowance of provision for expenditure under BKY scheme of Rs.54,16,204/-.
Ground No 4 - Disallowance of provision for expenditure in respect of Mediclaim Insurance Coverage scheme The learned CIT(A) has erred in upholding the disallowance of provision for expenditure under Mediclaim Insurance Coverage scheme of Rs.19,53,311/-.
Ground No 5 - Exclusion of export turnover of Rs. 35,788,503 pertaining to Software Technology Unit CSTP') from the export turnover for the purpose of computing deduction under Section 80HHE of the Act The CIT(A) has erred in upholding the treatment of the AO in excluding the export turnover of STP unit of Rs.35,788,503 for the purpose of calculation of deduction under Section 80HHE of the Act.
68. The issue in ground of appeal No.1 raised by the assessee is against the deduction claimed under section 35D of the Act. The said issue is similar to the issue raised vide ground of appeal No.2 by the assessee in ITA No.1345/PN/2011 and following the same line of reasoning, we hold that the assessee is not entitled to the claim of deduction on account of expenditure incurred for increase in authorized capital of the assessee company. The ground of appeal No.1 raised by the assessee is thus, dismissed.
69. The issue in ground of appeal No.2 raised by the assessee is against the disallowance of deduction claimed for amortized lease premium expenditure. We find similar issue was raised by the assessee vide ground of appeal No.4 in the appeal relating to assessment year 2001-02 and we have decided the issue and rejected the claim of the assessee. Following the same parity of reasoning, we dismiss the ground of appeal No.2 raised by the assessee.
70. The issue in ground of appeal No.3 raised by the assessee is against the disallowance of provision for expenditure in respect of benefit under Bhavishya Kalyan Yojanano (BKY) as an employee welfare scheme amounting to Rs.54,16,204/-. The issue in ground of appeal No.4 is against the disallowance of Rs.19,53,311/- in respect of Mediclaim Insurance Coverage Scheme.
71. The brief facts relating to the issue are that during the year under consideration the assessee had debited a sum of Rs.54,16,204/- towards BKY Scheme. The assessee was asked to submit the details of the said scheme and the 25 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
nature of expenditure and its allowability. In reply, the assessee claimed that it had made a provision in its financial statements towards BKY Scheme, which was an employee welfare scheme. As per the scheme, in the event of death of an employee during the tenure of his / her service, the employee's nominee would be paid 50% of the last drawn consolidated pay every month for the balance period of the service with the company up to reaching the age of superannuation. The assessee further explained that as on 31.03.2003, the provision required for such a benefit scheme was worked out at Rs.1.24 crores, out of which, an incremental provision of Rs.54.16 lakhs was debited for the year under consideration. The claim of the assessee was that the said liability was worked out on scientific and reasonable basis and the provision was made as per the Accounting Standards issued by the ICAI. The Assessing Officer observed that the provision made by the assessee was contingent in nature as the said payments were to be made in the event of death, and there was no certainty of the said event. The Assessing Officer observed that it is an established position of law that when the occurring of an event is not certain, then the same cannot be treated as a liability that has accrued to the assessee. In the instant case it was seen that no expenditure was incurred out of the provision that has been earlier made and is available for the year under consideration. Whereas, in the case of an accrued liability, the payments are made within near future. It is a case where a liability has accrued for sure, but only the payment is delayed. But, such is not the case with respect to the provision being made by the assessee. Accordingly, the said amount of Rs.54,16,204/- is disallowed and added back to the total income of the assessee. The Assessing Officer also disallowed the expenditure booked on account of Mediclaim Insurance Coverage Scheme being contingent liability.
72. The CIT(A) noted that Pune Bench of the Tribunal in assessee's own case for assessment years 1998-99 and 2000-01, in ITA Nos.86 & 1394/PN/2003 vide order dated 29.12.2006 had held that such provision for expenses were not allowable as a deduction. Further, the Tribunal directed the Assessing Officer to allow deduction only of such amounts as represented by the benefits actually payable to the eligible employees during the year i.e. where the liability had become ascertainable and crystallized. In view the ratio laid down by Pune Bench of the Tribunal, the CIT(A) 26 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
dismissed the grounds raised by the assessee as untenable under law. Similar claim in respect of the provision for Mediclaim Insurance Benefits in which an incremental provision of Rs.19,53,311/- was debited to the Profit & Loss Account was also dismissed by the CIT(A).
73. The assessee is in appeal against the order of CIT(A).
74. The learned Authorized Representative for the assessee fairly conceded that the Tribunal in assessee's own case in the earlier year has disallowed the said provision made in the books of account on account of BKY Scheme, against which the assessee has not filed any appeal. However, subsequent to the order of Tribunal dated 29.12.2006, the Hon'ble Supreme Court vide order dated 12.05.2009 in Rotork Controls India (P) Ltd. Vs. CIT (2009) 314 ITR 62 (SC) has held that a provision is recognized when an enterprise has a present obligation as a result of past events and / or where it is probable that an outflow of resources could not be required to settle the obligation and also where reliable estimate could be made of the amount of obligation. Another plea raised by the learned Authorized Representative for the assessee was that similar claim of provision made in accordance with the AS-15 on the basis of actuarial valuation was considered and allowed by the Chandigarh Bench of the Tribunal in M/s. Glaxo Smithkline Consumer Healthcare Ltd. Vs. ACIT in ITA No.1148/Chd/2011 relating to assessment year 2007-08, vide order dated 02.04.2013 and also in Bokaro Power Supply Co. (P) Ltd. Vs. DCIT in ITA No.4921/Del/2010, relating to assessment year 2007-08, vide order dated 24.01.2013. It was the contention of learned Authorized Representative for the assessee that the law of precedence can to be reviewed because of change in circumstances as held by Hon'ble Bombay High Court in CIT Vs. Thane Electricity Supply Ltd. (1994) 206 ITR 727 (Bom).
75. The learned Departmental Representative for the Revenue placed reliance on the order of Assessing Officer with special reference to the observations on page 8 of appellate order.
27ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011
Tata Technologies Ltd.
76. We have heard the rival contentions and perused the record. The issue arising before us was in respect of the provision made for benefit under BKY Scheme which as per the assessee was an employee welfare scheme. Another claim made by the assessee was on account of provision for expenditure in respect of Mediclaim Insurance Coverage Scheme. The assessee had formulated the scheme known as Bhavishya Kalyan Yojana (BKY), under which it was to provide monthly payments to be made in the event of employee's death or in the case of total / partial disablement, for the balance period of employees service with the company up to the age of superannuation, provided the death or disability occurred during the tenure of employee's service. The assessee determined provision of BKY Scheme benefit at Rs.1,24,24,000/- as on 31.03.2003 and for the year under consideration, provision of Rs.54,16,204/- was made which in turn was debited to the Profit & Loss Account as the opening balance as on 01.04.2002 was Rs.70,07,796/-.
77. The assessee also made a provision of benefit of Mediclaim Insurance Coverage and debited the same to its Profit & Loss Account. As per the scheme, the employees were entitled for Mediclaim Insurance coverage for hospitalization (up to prescribed limit) after retirement and for reimbursement of medical expenses up to Rs.600/- annually. The claim was extended for the benefit of retired employees and their spouses till the retired employee attains the age of 70 years. Similar provision was made in the earlier year and as on 31.03.2002, a provision of Rs.14,26,689/-, however, for the period ending 31.03.2003, the provision was determined at Rs.33,80,000/- and the differential of Rs.19,53,311/- was debited to the Profit & Loss Account for the financial year 2002-03. The claim of the assessee was that the valuation of the liability had been done on a scientific actuarial valuation basis, yet both the provisions made by the assessee i.e. on account of BKY scheme and Mediclaim scheme benefit were disallowed by the authorities below being contingent in nature.
78. The Tribunal in ITA Nos.86 & 1394/PN/2003, relating to assessment years 1998-99 and 2000-01 vide order dated 29.12.2006 had considered the Rules of the scheme at length. The relevant clauses of the scheme were reproduced by the 28 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
Tribunal under para 32 and vide para 33, it was observed by the Tribunal that the scheme was applicable only in relation to the ex-employees as defined under the Rules i.e. who do not already have a ward employed in any unit of the company and who had not taken voluntary retirement. Further, it was noted by the Tribunal that ex- employee for the purpose of the scheme was defined as only such persons who separate from the services of the company as a permanent employee on or after 01.04.1989, at an age below their normal superannuating age of 60 years or by reason of death or permanent and total disablement either as a result of injury on works or otherwise. Further, the beneficiary was also defined under the said scheme and once the beneficiary satisfies the conditions contained in the Rules, then he or she actually becomes eligible to receive the benefits under the scheme. The relevant findings of the Tribunal vide para 33 are as under:-
"33. On reading the aforesaid Clauses, it is more than clear that this Scheme is applicable only in relation to an "Ex-Employee" as defined under these Rules, who does not already have a ward employed in any unit of the Company and, who has not taken voluntary retirement. Ex-Employee, for the purpose of this Scheme, is defined as only such persons, who separate from the services of the Company as a permanent employee on or after 1st April, 1989, at an age below their normal superannuating age of sixty years as per Company's records, by reason of death or Permanent and Total Disablement either as a result of injury on works or otherwise. The Beneficiary shall mean a person, who having satisfied the conditions contained in the Rules, becomes actually eligible to receive benefits under the Scheme. The Beneficiaries eligible to receive the benefit under the Scheme will be in the order of sequence, i.e. firstly the Ex-Employee, thereafter the Beneficiary Spouse or Spouses in the event of death of Ex-Employee, and thereafter, the Beneficiary Ward where no beneficiary Spouse exists. The benefit under this Scheme is termed as "Kalyan Payment". "Kalyan Payment" will be monthly of an amount equal to 50% of salary or Rs 1.000/- whichever is more, and in case more than one Spouse is eligible, the Kalyan Payment will be distributed among them in equal share. The eligibility for Kalyan Payment commences from and inclusive of the month of separation of the Ex-Employee and, subject to the provisions of Clause 5, will end with and inclusive of the month in which the Ex-Employee would have attained the superannuating age of 60 years as per the Company's records. It is also provided in Clause 5 that the eligibility for Kalyan Payment will cease from and inclusive of the month in which any Ward of the Ex-Employee is employed in any unit of the company. From these provisions, it is, thus, clear that the liability of ' the assessee Company to pay the beneficial amount, i.e. Kalyan Payment, under the Scheme would arise only in case where the Permanent employee of the assessee company, who does not already have a Ward employed in any unit of the company, and who has not taken any voluntary retirement, is separated from the services of the company on or after the 1st April, 1989, at an age below their normal superannuating age of 60 years, by reason of death-or permanent and total disablement, either as a result of injury on works or otherwise, and this liability to pay Kalyan Payment shall commence from and inclusive of the month of separation of the aforesaid employee and will end with and inclusive of the month in which the said eligible employee would have attained the superannuating age of 60 years as per the company's records. However, the eligibility of Kalyan Payment will cease from and inclusive of the month in 29 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
which any Ward of the Ex-Empfoyee is employed in any unit of the Company, and also in other situations as provided in Clauses 5.2 and 5.3."
79. After considering the various aspects of the scheme, the Tribunal considered whether liability to make the Kalyan payment accrues and arises on the assessee during each accounting period and it was held that it does not so arise. The relevant observations of the Tribunal vide paras 34 to 36 are as under:-
"34. In the light of the above provisions, we have to see whether the liability to make Kalyan Payment accrues and arises on the assessee during each accounting period in respect of its all permanent employees. Our answer to this has to be in the negative, inasmuch as the assessee's liability to pay Kalyan Payment arises only when its any permanent employee, who does not already have a Ward employed in any unit of the company, and who has not taken any voluntary retirement, is separated from the services of the company on or after the 1st April, 1989, at an age below their normal superannuating age of 60 years, by reason of death or permanent and total disablement, either as a result of injury on works or otherwise. In other words, the assessee's liability to make Kalyan Payment arises on the happening of certain contingencies, i.e. a permanent employee of the assessee company, who does not have already have a Ward employed in any unit of the company, and who has not taken any voluntary retirement, fe to be separated from the services of the company on or after the 1st April, 1989, at an age below his normal superannuating age of 60 years, by reason of death or permanent and total disablement, either as a result of injury on works or otherwise, unless and until these contingencies that a permanent employee of the assessee company, who does not already have a Ward employed in any unit of the company, and who has not taken any voluntary retirement, is separated from the services of the company on or after the 1st April, 1989, at an age below their normal superannuating age of 60 years, by reason of death or permanent and total disablement, either as a result of injury on works or otherwise, the Company's liability to pay benefits under the Scheme to any employee would not arise. In fact, there may be certain situations in the case of a number of pemtement employees of the assessee Company, where such liability may never arise, as for example, a permanent employee of the assessee company may not separate from the services of the company on or after the 1st April, 1989, at an age below their normal superannuating age of 60 years, by reason of death or permanent and total disablement, either as a result of injury on works or otherwise, or he may retire in the normal course at the age to superannuation. To say, in the face of the above Rules that the liability to make Kalyan Payment under the Scheme by the employer accrues and arises annually in respect of all the permanent employees employed by the assessee company would be against the facts. The liability of the assessee company to make Kalyan Payment under the Scheme would arise or allowability in respect of those permanent employees, who do not already have a Ward employed in any unit of the company, and who has not taken any voluntary retirement, are separated from the services of the company on or after the 1st April, 1989, at an age below their normal superannuating age of 60 years, by reason of death or permanent and total disablement, either as a result of injury on works or otherwise, and that too only for the period commencing from and inclusive of the month of such separation of the permanent employee and will end with and inclusive of the month in which such eligible employee would have attained the superannuating age of 60 years, subject to the provisions of Clause (5) of the Scheme. If only these contingencies, as discussed above, are satisfied in a given year, a definite liability can be said to have accrued and arisen to the assessee under the said Scheme, notwithstanding the fact whether the Kalyan Payment is started to be paid from the month of the separation of the Ex-Employee or not. The 30 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
assessee would only be entitled to make the provision of liability under the said Scheme from year to year only in respect of such employees, who does not already have a Ward employed in any unit of the company, and who has not taken any voluntary retirement, are separated from the services of the company on or after the 1st April, 1989, at an age below their normal superannuating age of 60 years, by reason of death or permanent and total disablement, either as a result of injury on works or otherwise, for the period commencing from the month of such separation of eligible employee and which is relatable to the period falling in the relevant accounting year.
35. The terms and conditions of this Scheme makes it clear that right of an eligible employee to claim the benefit under the Scheme as a matter of right arises only in the month in which he is separated from the services of the company on or after the 1st April, 1989, at an age below his normal superannuating age of 60 years, by reason of death or permanent and total disablement, either as a result of injury on works or otherwise, and thus, it is clear that the employer's right to claim benefit arises only on fulfillment of certain contingencies or conditions noted above.
36. The liability arising under the terms and conditions of this Scheme are on quite on different footing as to that of the Gratuity Schemes, Earned Leave Schemes, Warranty Schemes and Liability of incurring certain expenses against sales as were considered by the Hon'ble Supreme Court in the case of Calcutta Co. Ltd v CIT (1959) 37 ITR 1 (SC), Metal Box Co of India Ltd v Their Workmen (1969) 73 ITR 53 (SC) and Bharat Earth Movers v CIT (2000) 245 ITR 431 (SC), and as were considered by the Privy Council in the case of IRC v Mitsubishi Motors New Zealand Ltd (1996) 222 ITR 697 (PC), which was followed by the Delhi High Court in the case of CIT v Vinitec Corporation P Ltd (2005) 278 ITR 337 and also by the Kerala High Court in the case of CIT v Indian Transformers Ltd (2004) 270 ITR 259 (Ker)."
80. The Tribunal then referred to the ratio laid down by the Hon'ble Supreme Court in Bharat Earth Movers Vs. CIT (2000) 245 ITR 431 (SC), wherein it was held that the provision made for meeting the liability incurred by the employer under the leave encashment scheme was proportionate with the entitlement earned by the employee subject to the ceiling on accumulation on the relevant date and thus, it was held to be not on account of contingent liability. The relevant para 37 reads as under:-
"37. In the case of Bharath Earth Movers v CIT (supra), the matter was related to the provision made by the assessee company for meeting the liability incurred by it under the Leave Encashment Scheme proportionate with the entitlement earned by the employees of the assessee company in any give year. In this case, the provision for leave encashment of the leaves already earned by the employee in the relevant previous year was allowed as deduction treating the same as a liability, which has definitely arisen in the accounting year, on the reason that the right to leave encashment can be sought by the employee either during the years of service or at the end of the service with regard to the leave already earned by him during the course of service rendered by him from year to year. Therefore, it is clear that, in this case of Bharat Earth Movers, the leave was already earned by the assessee during the year, in which the provision was made for the leave credited to the assessee's account. The liability to pay leave encashment was thus certain, inasmuch as the employee has earned the leave during that year in which the provision was made. The provision made for meeting the liability incurred by the employer under the leave encashment scheme proportionate with the 31 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
entitlement earned by the employee subject to the ceiling on accumulation on the relevant date was thus held to be not on account of any contingent liability. In this case, the Hon'ble Supreme Court found substance in the submission of the ld Senior Counsel for the assessee, which is as under:-
"Shri S.li. Daslur, the learned senior advocate for the appellant- company, has submitted that he liability is a certainty. A provision is made for meeting the liability to the extent of entitlement of the officers and staff to accumulating earned/vacation leave subject to the ceiling limit of 240/126 days as may be applicable. Having accumulated leave in particular year, in the succeeding year the employee may either avail of the leave or apply, for its, encashment. If he avails of the leave then additional provisions for encashment is not made in the reserve account. However, if he does not avail of the leave and instead chooses lo encash his entitlement, he becomes entitled to an additional number of days as accumulated leave. For example, having rendered service for 365 days in the year "A" an officer becomes entitled to avail leave for 30 days in the succeeding year "B", the provisions in the leave reserve account is made in the year "A" for payment of an amount equivalent to 30 days' salary so as to meet the clam for encashment. If he chooses to encash the leave and renders service for full 365 years in the year "B", then the amount transferred lo reserve is paid to him and in view of his having earned again the next entitlement for 30 days leave, the provisions is made therefor by transferring the appropriate amount in the reserve account. If he avails of the leave then he is paid the leave salary. The leave salary is paid from the reserve. Whether the amount is paid as salary by drawing upon the current year's profit and loss account or from the reserve, it would not make any difference in practice as there would be no double payment and hence no double claim for deduction. In either case, the liability is certain through the period in which the liability would be incurred is not certain though the period in which the liability would be incurred is not certain inasmuch as the leave encashment can be sought for by the employee either during the years of service or at the end of the service. Subject to the ceiling every employee would either avail of the leave or seek encashment and. therefore, the liability is a certainly; it cannot be called a contingent Stability. We 'find substance in the submissions of the learned senior counsel for the appellant."
81. The Tribunal thereafter vide para 38 drew the distinction and held as under:-
"39. In the case of Metal Box Co of India Ltd v Their Workmen (supra), the provision for Gratuity liability was made in the light of putting in every additional year of service by the employee, notwithstanding the fact that the Gratuity was payable on the termination of the employee's service either due to retirement, death, or termination of service. The basis of determining the Gratuity was the year of services put in by the concerned employee. Here the services has already been rendered by the employee and in respect of his every additional year of services, the liability to Gratuity definitely accrued and arose to the company, notwithstanding the fact that the payment is deferred. So, this case is also not applicable to the facts and circumstances of the present case."
82. The Tribunal also made reference to the ratio laid down by the Hon'ble Supreme Court in Metal Box Co. of India Ltd. Vs. Their Workmen (1969) 73 ITR 53 (SC) and also the ratio laid down by the Hon'ble Supreme Court in Calcutta Co. Ltd. Vs. CIT (1959) 37 ITR 1 (SC), vide paras 39 and 40 and observed as under:- 32 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011
Tata Technologies Ltd.
"40. In the case of Calcutta Co Ltd. (supra), .... However, in the present case, the assessee's undertaking to give benefits under the Scheme can import a liability on the assessee only when any permanent employee of the assessee company is separated from the service of the assessee Company in the manner provided in the Rules, which has already been discussed and observed above. Therefore, relying on this decision, the liability to pay benefits under the Scheme in any given year would accrue or arise to the assessee Company only in respect of those employees who have been separated from the services of the assessee Company in the manner laid down in the Rules and who are eligible to receive the benefit, i.e. "Kalyan Payment" relating to the months falling in that year and not in respect of all employees of the assessee Company in general."
83. The Tribunal thus, held as under:-
"42. In the light of the discussion made above, we may conclude that the undertaking given by the assessee Company in the 'said Scheme of Bhavishya Kalyan Yojana, to give the benefit in the nature of Kalyan Payment, would import a liability on the assessee company only on the dates of the separation of its any permanent employees from the company's services at an age below their normal superannuating age of 60 years by reason of death or permanent and total disablement, either as a result of injury on works or otherwise, provided the said employee does not already have a Ward employed in any unit of the Company and who has not taken any voluntary retirement, and the liability in each year would be quantified for the month/s for which he is entitled to receive "Kalyan Payment" as per rules of the Scheme, in any accounting year. This provision would also be subject to other contingencies provided in Rule 5, the happening thereof would result in stoppage of the "Kalyan Payment"
84. Another aspect noted by the Tribunal was the payments made by the assessee to the permanent employees who had been separated from the services of the company on or after 01.04.1989, who fulfilled the conditions laid down in the scheme and it was held by the Tribunal as under:-
"46. Having held so, we restore the matter back to the file of the AO for ascertaining the quantum of liability accrued or arisen to the assessee in respect of the benefit payable only to the Ex-Employees, i.e. the permanent employees, who do not already have a Ward employed in any unit of the company, and who have not taken any voluntary retirement, are separated from the services of the company on or after the 1st April, 1989, at an age below their normal superannuating age of 60 years, by reason of death or permanent and total disablement, either as a result of injury on works or otherwise, insofar as the liability is relatable to the months for which the Ex- Employee is entitled to receive the benefit in any given year, and then to allow the same, if any, as deduction while computing the profits and gains from the assessee's business. While ascertaining the quantum, the AO shall take into account the amount of benefit payable to each employee as well as the other conditions whereby the payment is otherwise ceased, in the relevant year."
85. The Tribunal further deliberated upon the provision made under the Mediclaim Insurance Scheme vide paras 46 to 51 and it was held that the provision is not allowable in the hands of the assessee. However, certain directions were given in respect of the liability of the assessee to reimburse the medical expenses of the persons retired and it was observed as under:-
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Tata Technologies Ltd.
"51. It is definite that the assessee has to reimburse the medical expenses of its employees after their retirement upto the period of 10 years, and, therefore, making the provision thereof in each year in respect of employees who have already retired and has not completed the period of 10 years thereafter would be on account of definite liability of the assessee, notwithstanding the fact that it may have to be discharged at a future date. Having held so, we restore this issue to the AO for ascertaining the amount of provision with all reasonableness, in respect of the assessee's annual liability to reimburse medical expenses and to pay annual premium of Medi-claim Policy with regard to the employees who have already retired and has not completed the period of 10 years thereafter, and then allow the same, if any, as deduction. We order accordingly."
86. Another aspect noted by the Tribunal was the reference made to AS-15 issued by the Institute of Chartered Accountants of India. The Tribunal vide para 52 observed as under:-
"52. Before parting with the issue relating to the assessee's claim on account of the provision for "Bhavishya Kalyan Yojana" as well as for "Medi- claim Scheme", we would like to consider one more contention of the assessee, whereby the assessee has tried to support its claim by making a reference lathe Accounting Standard 15 issued by the Council of the Institute of Chartered Accountants of India. This AS-15 deals with the accounting for retirement benefits in the Financial Statements of Employers. The retirement benefit, which has been referred to in this AS-15 are (a) Provident fund, (b) Superannuation/pension, (c) Gratuity, (d) Leave encashment benefit on retirement, (e) Post-retirement health and welfare schemes, and (f) Other - retirement benefits. This case is not in respect of the retirements benefits on account of (a) Provident fund, (b) Superannuation/pension, (c) Gratuity, (d) Leave encashment benefit on retirement. The retirement benefit schemes in the Accounting Standards are defined as arrangements to provide provident fund, superannuation or pension, gratuity, or other benefits to employees or leaving service on retiring, or after an employee's death, to his or her dependants. Defined benefit schemes in the said Statement are the retirement benefit schemes under which" amounts to be paid as retirement benefits are determinable usually by reference to employee's earnings and/or years of service. In this AS-15, nowhere it is provided that the assessee is under an obligation to make a provision for a liability,, which are purely of contingent in nature being dependant on happening of certain events. As already discussed above, the benefit to be paid by the assessee under these two schemes viz. "Bhavishya Kalyan Yojana" and Medi-claim Scheme" are not determinable by reference to the employee's earnings and/or years of service the employee has put in, in any relevant accounting year. These two benefit schemes promoted by the assessee are not akin to the scheme of pension, gratuity, leave encashment benefit on retirement and other retirement benefits that are determinable with reference to the employee's earnings and / or the years of service the employee has put in, so as to make it necessary for the assessee to make a provision for these benefits in all the years. This issue as to the applicability of AS-15 to both the schemes in question has been rightly decided by the CIT (A) by holding that AS-15 are of no help to the assessee to claim the deduction of a provision made on account of both the schemes, which is found to be purely of contingent in nature dependant on the happening of certain events. We are in full agreement with the observations and conclusion arrived at by the CIT (A) with regard to the applicability of AS-
15. The CIT{A) is also right in holding that principle of accountancy does not override the provisions of the tax statutes. In this view of the matter, the assessee's claim on the basis of Scheme or the Statement of Accounting Standard-15, for the purpose of computing the assessee's total income under the provisions of the Income-tax Act, is found to be of without any merit and, hence, it is rejected on that count also."34 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011
Tata Technologies Ltd.
87. The learned Authorized Representative for the assessee stressed before us that the liability had been worked out on the basis of actuarial valuation and where the valuation has been made on a scientific basis, then such liability is to be allowed in the hands of the assessee as held by the Hon'ble Supreme Court in Rotork Controls India (P) Ltd. Vs. CIT (supra). Further reliance on was placed on the ratio laid down by the Chandigarh Bench of the Tribunal in M/s. Glaxo Smithkline Consumer Healthcare Ltd. Vs. ACIT (supra). On the perusal of the order of Tribunal in assessee's own case for the earlier years, it is apparent that the Tribunal has come to a finding that the liability of the assessee has not crystallized in the year under consideration, since the said liability would only arise on the happening of certain events which would happen in the future, hence the liability is a contingent liability. The issue of the liability having been worked out on the basis of AS-15 or scientific method is different aspect of the issue, but the first point to be considered is the nature of liability i.e. whether it had arisen in the year under consideration or it would arise on the happening of certain event in future. The finding of the Tribunal in the case of assessee was that the liability to pay under BKY Scheme or Mediclaim Insurance Scheme would only arise on the happening of certain events in future and consequently, the Tribunal came to a finding that the liability having not been crystallized during the year under consideration was a contingent liability and was not allowable in the hands of the assessee. We are in conformity with the finding of Tribunal in this regard and applying the same, we hold that assessee is not entitled to the claim of allowance of provision for expenditure under BKY Scheme of Rs.54,16,204/- and also the provision made for expenditure in respect of Mediclaim Insurance Coverage Scheme amounting to Rs.19,53,311/-. However, as held by the Tribunal, the assessee is entitled to claim of expenditure in respect of benefit payable to Ex-employees, who have retired & fulfill the conditions of the Scheme. Reference is made to paras 46 and 51 of the order of the Tribunal (supra). Accordingly, we direct the Assessing Officer to determine the deduction on account of BKY Scheme and Medical Insurance Scheme, in view thereof, the grounds of appeal Nos.3 and 4 raised by the assessee are thus, partly allowed.
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Tata Technologies Ltd.
88. The last issue raised by the assessee vide ground of appeal No.5 is vis-à-vis exclusion of export turnover of Rs.3.57 crores pertaining to the Software Technology Unit from the eligible export turnover for the purpose of computing the deduction under section 80HHE of the Act.
89. The brief facts relating to the issue are that the assessee during the year under consideration had claimed deduction under section 10A in respect of its first unit and separate deduction under section 80HHE of the Act was claimed on account of second unit. The claim of the assessee was that in computing export turnover and total turnover for the purpose of computing profits eligible for deduction under section 80HHE of the Act, the turnover of the entire business of the company was considered. However, the profits and gains of business or profession had been arrived after claiming deduction under section 10A of the Act in respect of the first unit. Therefore, as per the assessee, a deduction under section 80HHE of the Act was not being claimed in respect of profits on which the deduction under section 10A of the Act already been claimed and hence, there was no total deduction. However, the Assessing Officer noted that when the export turnover pertains to the STP unit had already been considered for claiming deduction under section 10A of the Act, such export turnover cannot again be considered for the purpose of deduction under section 80HHE of the Act. Therefore, the export turnover of the STP unit was reduced from overall export turnover and the deduction under section 10A of the Act and 80HHE of the Act were re-computed.
90. The CIT(A) dismissed the claim of the assessee observing as under:-
"15. I have considered the submissions and material available on record. The appellant's explanation is that the profits on which deduction has been claimed has been excluded while claiming deduction u/s.80HHE. However, by including the export turnover of the STP unit on which deduction u/s.10A has been separately claimed, the assessee is in effect claiming deduction for profit pertaining to STP unit also. U/s.10A, deduction is allowable to the extent of 100% and therefore, the entire corresponding export turnover has already been considered for this purpose. In this connection, it is relevant to refer to a recent decision of ITAT Mumbai in the case of Tata BP Solar India Ltd. Vs. Addl.CIT (2011) 130 ITD 386 (Mum); in which the same point, in the context of 80HHC, was decided in favour of revenue. There is no case of ambiguity or two different interpretations possible in this case; as it is a fundamental basis of taxation that more than 100% deduction cannot be given, unless specifically provided in the Act. The Hon'ble Supreme Court in the judgement in the case of Escorts Limited Vs. UOI & Ors. (1993) 199 ITR 43 (S.C.) held that it was 36 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
a fundamental, though unwritten, axiom that no legislature could have at all intended a double deduction in regard to the same business outgoing; and if it was intended, it will be clearly expressed. Therefore, following the same logic, no deduction u/s.80HHE was admissible on the same export turnover, which was already utilized to claim 100% deduction u/s.10A for the STP unit belonging to the appellant. It is therefore, held that by including the export turnover of STP unit for the purpose of claiming deduction u/s.80HHE, the appellant has proportionately claimed higher deduction than was otherwise available under the scheme of the Act. The Assessing Officer was therefore, right in disallowing the claim to this extent by excluding the export turnover in the STP unit for the deduction u/s.80HHE in the non-STP unit. This ground of appeal is accordingly dismissed."
91. The assessee is in appeal against the order of CIT(A).
92. The learned Authorized Representative for the assessee at the outset of hearing pointed out that the issue of exclusion of export turnover pertaining to STP for the purpose of claiming deduction under section 80HHE of the Act is squarely covered by the decision of Pune Bench of the Tribunal in Serum Institute of India Ltd. Vs. ACIT in ITA No.948/PN/2005 relating to assessment year 2001-02, vide order dated 18.01.2012.
93. The learned Departmental Representative for the Revenue on the other hand placed reliance on the order of CIT(A).
94. We have heard the rival contentions and perused the record. The issue in the present appeal is against the exclusion of export turnover of the EOU unit while computing the deduction under section 80HHE of the Act. Similar issue in respect of computation of deduction under section 80HHE of the Act vis-à-vis the inclusion / exclusion of the export sales arose before the Tribunal in Serum Institute of India Ltd. Vs. ACIT (supra) and it was held as under:-
"47. Inclusion of the export sales of the EOU unit in the 'export turnover', the numerator of the formula devised for computation the allowable deduction u/s 80HHC is the main contention of the revenue. Revenue has taken the argument against such inclusion, while it pleads for inclusion relevant turnover of the EOU unit in the 'total turnover', the denominator in the said formula. Per contra, relying on various decisions, the assessee takes the stand that the inclusions of Export turnover and the total turnover of the EOU unit has to be done in export turnover and total turnover in the formula. For this, we undertake to examine the relevant provisions to adjudicate if such inclusions are prevented or otherwise. We shall first take up the export turnover as defined in the Act. The expression 'export turnover' is defined in the Explanation (b) to Section 80HHC of the Act and the same is reproduced as under "(b) "export turnover" means the sale proceeds received in, or brought into, India by the assessee in convertible foreign exchange in 37 ITA No.1345/PN/2011 ITA No.64/PN/2012 ITA No.1346/PN/2011 Tata Technologies Ltd.
accordance with clause (a) of sub-section (2) of any goods or merchandise to which this www.taxguru.in28 ITA No.948/PN/2005 Assessment Year:2001-02 Serum Institute of India Ltd. section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962"
48. From the above, the legislature has used the expressions 'the sale proceeds received in, or brought into, India by the assessee' and the expressions 'by the assessee' deserves emphasis as it connotes that the 'export turnover' should be of assessee level. Meaning thereby, the assessee's level 'export turnover' needs to be considered. The expression is wide enough to include the export sales of the 'EOU unit'. Further, by the use of expression 'any' before 'goods and merchandise' all the goods and merchandise is covered. However, the restriction apply to such goods and merchandise, which are listed in clause (b) of Section 80HHC (2) i.e. Mineral oil and minerals and ores (other than processed minerals and ores specified in 12th Schedule to Act."
95. The CIT(A) had placed reliance on the ratio laid down by Mumbai Bench of the Tribunal in Tata BP Solar India Ltd. Vs. ACIT reported in 103 ITD 386 (Mum) (Trib) in holding that the Assessing Officer was correct in excluding the export turnover while computing exemption under section 80HHE of the Act. The Pune Bench of the Tribunal in Serum Institute of India Ltd. Vs. ACIT in ITA No.948/PN/2005, relating to assessment year 2001-02, vide order dated 18.01.2012 had considered the ratio laid down by the Mumbai Bench of the Tribunal in Tata BP Solar India Ltd. Vs. ACIT (supra) and reliance was placed on the ratio laid down by the Hon'ble Bombay High Court in Hindustan Unilever Ltd. Vs DCIT (2010) 325 ITR 102 (Bom) and it was held that the assessee was entitled for inclusion of export sales in the export turnover.
96. Further, section 80HHE (5) of the Act provides that where a deduction under section 80HHE of the Act is claimed and allowed in respect of eligible profits, no deduction shall be allowed in relation to such profits under any other provisions of the Act. In the case of the assessee, the eligible profits considered for deduction under section 80HHE of the Act excluded the profits that had already been claimed under section 10A of the Act. Hence, there is no case of double deduction of profits by including the export turnover of STP in the export turnover for claiming deduction under section 80HHE of the Act.
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97. We find support from the ratio laid down by the Delhi Bench of the Tribunal in Jindal Exports (P.) Ltd. Vs. ACIT reported in 31 ITD 217 (1989), wherein it was held as under:-
"There is one more aspect of the matter section 80HHC does not make any distinction between the export turnover from the Free Trade Zone and from other areas. The revenue may feel that once the entire income of the industrial undertaking is exempt under sec. 10A a further deduction under sec. 80HHC in respect of the same turnover may give an unintended advantage to the assessee. In actual practice however it may not be so. If the undertaking incurs a loss, then the advantage or benefit under sec. 10A may be illusory. Why should the assessee be denied deduction allowable under section 80HHC ? This is particularly so when the gross total income, in any case, has to be a positive figure before any deduction under Chapter VIA can be allowed.
30. We are of the considered view that deduction under sec. 80HHC cannot be denied simply because the income of the industrial undertaking is exempt under sec. 10A. But even if two reasonable constructions of the relevant provisions are possible, that construction which favours the assessee, must be adopted - CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 (SC)"
98. In the above said facts and circumstances, we direct the Assessing Officer to include the export turnover of the EOU unit while computing the deduction under section 80HHE of the Act. The ground of appeal No.5 raised by the assessee is thus, allowed.
99. In the result, both the appeals of the assessee are partly allowed and the appeal of the Revenue is dismissed.
Order pronounced on this the 27th day of February, 2015.
Sd/- Sd/-
(G.S. PANNU) (SUSHMA CHOWLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Pune, Dated: 27 t h February, 2015.
GCVSR
Copy of the order is forwarded to: -
1) The Assessee;
2) The Department;
3) The CIT(A)-V, Pune;
4) The CIT-V, Pune;
5) The DR "A" Bench, I.T.A.T., Pune;
6) Guard File.
By Order
//True Copy//
Assistant Registrar
I.T.A.T., Pune