Income Tax Appellate Tribunal - Delhi
Indo Rama Synthetics (I) Ltd., New Delhi vs Department Of Income Tax
ITA NOS. 2002/Del/2008, 2130/Del/2008,
967/Del/2010 & 5323/Del/2011
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "C", NEW DELHI
BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER
AND
SHRI C.M. GARG, JUDICIAL MEMBER
I.T.A. No. 2002/Del/2008
A.Y. : 2003-04
M/s Indo Rama Synthetics (I) Ltd., vs. Asstt. Commissioner of Income
903, Mohandev Building, Tax,
13, Tolstoy Marg, Circle 11(1), CR Building,
New Delhi New Delhi
(PAN/GIR NO. : AAAC11530L)
AND
I.T.A. Nos. 2130/Del/2008, 967/Del/2010 & 5323/Del/2011
A.Yrs. : 2003-04, 2004-05 & 1997-98
Deputy Commissioner of Income vs. M/s Indo Rama Synthetics (I) Ltd.,
Tax, 903, Mohandev Building, 13,
Circle 11(1), Room No. 312, CR Tolstoy Marg, New Delhi
Building, New Delhi (PAN : AAAC11530L)
(Appellant ) (Respondent )
Assessee by : S/Sh. Ajay Vohra, Rohit Jain, Adv.
& Upvan Gupta, CA
Department by : Sh. RIS Gill, Sr. D.R.
ORDER
PER SHAMIM YAHYA: AM These appeals by the Assessee and Revenue are directed against the separate orders of the Ld. CIT(A). Since some of the issues are common and the appeals were heard together and these are being consolidated by this common order for the sake of convenience. 1
ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011
2. The grounds raised in assessee's appeal in ITA No. 2002/Del/2008 (A.Y. 2003-04) read as under:-
"(i) That the Ld. CIT(A) erred on facts and in law in directing the AO to reduce on proportionate basis, from the written down value of the respective block of assets, the sales tax subsidy received during the relevant assessment year for the purposes of computing depreciation allowance under the IT Act, 1961.
(ii) That the Ld. CIT(A) erred on facts in law in upholding the disallowance in respect of software maintenance / software development expenses amounting to ` 12,60,475/- holding the same to be in the nature of capital expenditure.
(iii) That the Ld. CIT(A) erred on facts and in law in holding that for computing book profit under section 115JB of the Act, the adjustment of the amount eligible for deduction under section 80HHC of the Act, in terms of clause (iv) of Explanation thereto, has to be calculated after reducing unabsorbed depreciation 2 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 from profits of business and not the amount of deduction calculated on the profit disclosed in the profit and loss account.
(iv) That the Ld. CIT(A) erred on facts and in law in upholding the charging of interest under sections 234B, 234C and section 234D of the Act.
The appellant craves leave to add, alter, amend or vary from the above grounds of appeal at or before the time of hearing."
3. The ground raised in Revenue's appeal in ITA No. 2130/Del/2008 (A.Y. 2003-04) read as under:-
(i) On the facts and circumstances of the case and in law, the CIT(A) has erred in directing to treat the sale tax subsidy as capital receipt instead of revenue receipt, thereby treating the same as not liable to tax.
(ii) On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of ` 1,85,94,706/- on account of provisions for doubtful debts and advances, ` 2,02,66,811/- being provisions for diminution in value of investment and ` 3 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 76,36,599/- being provisions for Gratuity made in the calculation of book profit u/s. 115JB of the IT Act.
iii) The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of hearing."
4. The ground raised in Revenue's appeal in ITA No. 967/Del/2010 (A.Y. 2004-05) read as under:-
(i) The order of Ld. CIT(A) is wrong, perverse, illegal and against the provisions of law, liable to be set aside.
(ii) On the facts and circumstances of the case and in law, Ld. CIT(A) has erred in deleting the disallowance of ` 88,54,25,094/- on account of sales tax subsidy.
(iii) On the facts and circumstances of the case and in laws, the CIT(A) has erred in deleting the disallowance of ` 6,45,300/- on account of brokerage and commission.
(iv) On the facts and circumstances of the case in law, the CIT(A) has erred in deleting the disallowance of ` 19,91,124/- on account of software maintenance expenses.
4
ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011
(v) The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of hearing.
5. The ground raised in Revenue's appeal in ITA No. 5323/Del/2011 (A.Y. 1997-98) read as under:-
(i) On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of ` 22,85,62,948/- made on account of treatment of sales tax subsidy as revenue receipts.
(ii) The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of hearing.
6. One common issue raised in Revenue appeals pertains to deletion of addition on account of sales tax subsidy by treating it as capital receipt.
7. Assessee in these cases claimed that sales tax subsidy received by the assessee was capital receipt not exigible to tax. Before the AO assessee also substantiated the same with the decision of ITAT (Spl. Bench), Mumbai in the case of CIT Vs Reliance Industries Ltd. 88 ITD 5 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 273 (Mum). AO on the other hand, found that the claim is unacceptable for the following reasons:
i) The subsidy was not intended to be a contribution towards capital outlay of the industrial unit. Further it was given with the object of enabling the assessee to carry on its business, although the purpose behind it was to encourage industrialization.
ii) Also, it was well settled that where subsidies granted were given by the Government to assist a trader in his business, they were generally speaking, payments of a revenue nature. They were supplementary trade receipts and not capital payments, although they might be called advances or might be subject to contingency of repayment.
iii) Reliance was placed on the decision in the case of Kesoram Industries & Cotton Mills Ltd. vs. CIT 191 ITR 518 of Hon'ble High Court of Calcutta.
Accordingly, AO added the amount of subsidy receveid as revenue receipt.
6
ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011
8. Upon assessee's appeal, Ld. CIT(A) observed that the sales tax subsidy pertains to assessee's unit at Butibori. Butibori is an industrial area developed by Maharastra Industrial Development Corporation in 1994. The assessee in 1995 set up its integrated polyester complex at Butibori for production of POY and PSF. The assessee was eligible to sales tax incentive by way of exemption under the 1993 New Package Scheme of Incentives of Govt. of Maharastra. Ld. CIT(A) also noted that Tribunal in the assessee's own case for AY1997-98, AY 2000-01 to 2002-03 while concurring with the ruling of the case of DCIT vs. Reliance Industries Ltd. 88 ITD 273 (Mumbai) (Special Bench) to the case of the assessee, had set aside the subject matter for comparison of the two scheme [one applied by Assessee before the Ld. CIT(A) and second availed and applied in case of Reliance (Supra)]. 8.1 A comparative chart on the salient features of the PSI 1979 with PSI 1993 was furnished by assessee before the Ld. CIT(A). ld. CIT(A) gave a finding that it is observed that object of the subsidy of both the scheme is for promotion of Industrialization in backward area of the state of Maharastra. Further, eligibility criteria and steps for processing of scheme (e.g. approval from government authorities, financing of project, expenditure on project, approval from SICOM, mode of disbursement of Sales tax incentive etc.) are similar in both the 7 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 schemes. Ld. CIT(A) found that according to the PSI 1993 purpose of the scheme is for encouraging setting up of manufacturing unit in backward area in the state. While granting subsidies for capital investment, the Maharastara Government does not disburse any amount by way of subsidy but allows industrial undertaking to collect usual charge on account of Sales Tax and retain it as Capital-Subsidy instead of depositing the Sales Tax collected. From this Ld. CIT(A) observed that the purpose of the scheme is not to support carrying on business in a more profitable manner but is for promotion /setting up the production unit in backward area. Collection of sales tax amount is simply a measurement of the subsidy to be allowed. Ld. CIT(A) held that one cannot say that subsidy was granted for carrying on its business operation in day to day manner. Before the Ld. CIT)A assessee also cited the case law of C.I.T. vs. Ponni Sugars and Chemicals Ltd. 306 ITR 392 (SC). In this case the Hon'ble Apex court held that the character of the receipt in the hands of the assessee company has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases one has to apply the 'purpose test'. The point of time when the subsidy is paid is not relevant. The source is immaterial; the form of subsidy is also immaterial.
8
ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 8.2 Ld. CIT(A) observed that the Special Bench of the Tribunal (Reliance Industries Ltd. (supra) relying on the principles laid down by Supreme Court in the case of Sahney Steel & Press Works Ltd. (supra) came to the conclusion that since the incentives were given for bringing about addition to necessary infrastructure in processing/developing the backward area, it would be in the nature of capital receipt not liable to tax. Ld. CIT(A) further gave a finding that the aforesaid decision of the Special Bench has been rendered on identical facts and is on all fours with the facts of the assessee's case. Ld. CIT(A) further noted that the Scheme under consideration of the Tribunal in the above case is the predecessor of the Scheme applicable to the appellant and had identical objectives. 8.3 Ld. CIT(A) further held that in the present case, the purpose of granting sales tax incentive is clearly only to provide an incentive for establishment of new industries in the underdeveloped regions or to expand its existing units of the State of Maharashta. That the intention is not to increase the viability of the eligible units but to promote development of further industry and infrastructure in the region. That in the aforesaid circumstances, the exemption availed of by the assessee's eligible units under the said notification would, in view of the decisions cited above, be a capital receipt not liable to tax. 9
ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 Therefore, Ld. CIT(A) held that this ground is to be held in favour of the assessee and notional amount of Sales-tax Subsidy is held as capital receipt not chargeable to tax.
9. Against the above order the Revenue is in appeal before us.
10. We have heard the rival contentions in light of the material produced and precedents relied upon. We find that Ld. CIT(A) has given a finding that issue in dispute was covered by the Special Bench decision of the Tribunal in the case of Reliance Industries Ltd. (Supra). Though the scheme applicable in the case of Reliance Industries Ltd. was 1979 scheme, however, in the 1993 scheme terms and conditions were of the same nature and intent. For this purpose, a comparative chart was referred by the Ld. CIT(A). As per the comparative chart the terms and conditions applicable in 1979 scheme were of the same nature and intent of the 1993 scheme. We further note that Mumbai Tribunal in the case of Everest Industries Ltd. in ITA No. 814/Mum/2007 has held that salient features of the 1993 scheme are identical to that of 1979 scheme. We further note that the Tribunal in ITA No. 678 & 679/Del/2012 in the case of M/s Indo Rama Textiles Ltd. on identical facts has held that the decision of the Mumbai Tribunal, Special Bench in the case of Reliance Industries 88 ITD 273 is applicable. Accordingly, in the background of the aforesaid discussion and 10 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 precedents, we hold that that the Ld. CIT(A) has passed a reasonable order which does not need any interference on our part. Accordingly, we uphold the same.
11. Another ground raised in Revenue's appeal ITA No. 967/Del/2010 is that Ld. CIT(A) erred in deleting the disallowance of ` 6,45,300/- on account of brokerage and commission.
12. In this case AO had made the disallowance stating that details and relevant papers pertaining to brokerage payment were not in order. AO referred to the claim of Brokerage Commission of RS.6,45,300/-. Thereafter he observed that it is seen that the details and relevant papers pertaining to M/s Siddhi Vinayak relating to brokerage payments for material supplied for amounting to ` 6,45,300/- were not in order and hence the amount claimed as deduction was added back.
13. Before the Ld. CIT(A) assessee submitted that the company was facing a lot of problem in realizing old debts from certain debtors. Since the defaulting parties failed to make payment even after the institution of criminal proceedings against them, the assessee engaged services of "recovery agents" M/s Siddhi Vinayak Enterprises for bringing parties on settlement terms. A fixed percentage of the 11 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 settlement amount agreed between the assessee and the defaulting parties pursuant to engaging such service was paid by the assessee to Siddhi Vinayak Enterprises, the details of which are as under:
S.No. Party name Outstanding Settlement Payment to since amount (` in recovery lacs) agent (`)
1. Blue Blends Group 1994 33.00 4,63,000
2. Sacheti Synthetics 1995 62.50 77,500 Ltd.
3. Siddhartha Super 1995 45.00 1,04,800 Spin Mills Ltd.
Total 6,45,300 13.1 Ld. CIT(A) observed that supporting documents, namely,
vouchers of payments made to Siddhi Vinayak Enterprises, copy of bills raised by Siddhi Vinayak Enterprises for rendering of services and sample copy of managerial approval given by the assessee for settlement with defaulting debtors were produced before him. It was claimed before the Ld. CIT(A) that same set of papers were submitted before the AO during assessment proceedings. Considering the above, ld. CIT(A) gave a finding that the documents submitted by assessee for the payments made to Siddhi Vinayak Enterprises are bona fide and in the course of business and the disallowance made by assessing officer needs to be deleted.
14. Against the above order the Revenue is in appeal before us. 12
ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011
15. We have heard the rival contentions in light of the material produced and precedents relied upon. We find that Ld. CIT(A) had given a finding that payments were made for realization of old debts by the assessee by engaging the services of M/s Siddhi Vinayak Enterprises. M/s Sindhi Vinayak Enterprises was able to collect payments to the tune of ` 140.50 lacs. The supporting documents in this respect relating to vouchers of payments made to Siddhi Vinayak Enterprises, copy of bills raised by Siddhi Vinayak Enterprises for rendering of services and sample copy of managerial approval given by the assessee for settlement with defaulting debtors were made available to the Ld. CIT(A) as well as Assessing Officer. Hence we find that there is no infirmity in the finding given by the Ld. CIT(A) that the documents submitted by the assessee for the payments made to M/s Sidhi Vinayak Enterprises are bonafide and in the course of business and the disallowance made by the AO needs to be deleted. Accordingly, we uphold the order of the Ld. CIT(A) on this issue.
16. Another ground raised in Revenu's appeal in ITA No. 967/Del/2010 is that the Ld. CIT(A) erred in deleting the disallowance of ` 19,91,124/- on account of software maintenance expenses.
17. On this issue AO observed that the expenditure of ` 19,91,124/- cannot be allowed as revenue expenditure for the following reasons:- 13
ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011
- As per Accounting Standards 26 issued by the Institute of Chartered Accountants of India an Intangible Asset is defined as follows;
"An intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others or for administrative purposes".
Therefore, an intangible asset is a non-monetary asset, it has no physical substance and it can be held for own use or for providing services.
- The intangible asset as per this definition should, therefore, satisfy the conditions of only have, identifiably; control over a resource; and expectation of future economic benefit flowing to the enterprises.
- The Accounting Standards 26 (issued 2002) has in para 7, 9 and 10 given specific examples of computer software whether developed internally or acquired externally, as intangible assets of the company.
- The Rajasthan High Court in CIT v Aravalli Construction Company, 259 ITR 30 held that expenditure on 14 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 computer software is capital in nature. Same view has also been supported by ITAT Delhi Bench 'A' in the case of Maruti Udyog Ltd. V DCIT 92 TTJ (Delhi) 987."
18. Before the Ld. CIT(A), it was submitted by the assessee that the assessee has been paying ` 19,91,124/- per annum towards SAP end user license-fee since 1998-99 when the agreement for using SAP software was entered into. It was further submitted that with the rapid advances in computer software, the technology acquired in a particular year pales into obsolescence very fast. A continuous upgrading and constant improvement of the software is absolutely essential. It has not been the case of the assessee that it was installing a new computer and / or software for the first time. The assessee during the year had only paid yearly end-user license fee in respect of existing computer software which was already loaded on its computers for the facilitation of more efficient day to day management and trading operations. The expenditure on computer software was incurred with the view to increasing efficiency of the operations and maintenance of vital data, which was necessary for carrying on the business more efficiently. Considering the above, Ld. CIT(A) gave a finding that the amount involved has actually been paid towards monthly license user fee. It is neither a technology up-gradation nor a capital expenses 15 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 which gives enduring benefit in subsequent years. That as per details and supporting documents provided by assesseee, the said expenses are revenue in nature, hence were to be allowed fully. Ld. CIT(A) further observed that the SAP is a programme like oracle program used by I.T.D. Application in computerization of all the process of the department. That similarly, SAP helps the assessee to keep day to day inventory control, purchase module, sales module, cash analysis, HR system and other important processes in computer server so that all the parameters in running the industry can be controlled by skilled manpower on real time basis. Ld. CIT(A) further observed that the SAP application is nothing but interconnection of tables in which the rows of the tables are updated periodically after getting the data from field through different censors or though human intervention so that the data base management can be implemented in knowing the different parameters of the company in real time basis. The computer memory is used to preserve the data and feed it to the management for necessary action at the time of requirement. Therefore, Ld. CIT(A) held that the SAP program cannot be overlooked and for such industry it is a necessity and not luxury. Ld. CIT(A) further found that the monthly expenditure incurred in running such program has to be allowed as 16 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 revenue expenditure like land, telephone, electricity and other monthly expenditure incurred by the company.
19. Against the above order the Revenue is in appeal before us.
20. We have heard the rival contentions in light of the material produced and precedents relied upon. We find that the assessee has been paying ` 19,91,124/- per annum towards SAP end user license-fee since 1998-99 when the agreement for using SAP software was entered into. Ld. CIT(A) has given a finding that it is neither for technology up-gradation nor a capital expenses which gives enduring benefit in subsequent years. Ld. CIT(A) held that the said expenses are revenue in nature and hence have to be allowed fully. We do not find any infirmity in the order of the Ld. CIT(A) in this regard and accordingly, we uphold the same.
21. Another issue raised in Revenue's appeal being ITA No. 2130/Del/2008 is that the Ld. CIT(A) is erred in deleting the addition of ` 1,85,94,706/- on account of provisions for doubtful debts and advances, ` 2,02,66,811/- being provisions for diminution in value of investment and ` 76,36,599/- being provisions for Gratuity made in the calculation of book profit u/s. 115JB of the IT Act. 17
ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011
22. On this issue assessee has conceded that the provision for doubtful debts and advances and provision for diminution in value of investment is not pressed in view of the retrospective amendment made in section 115JB w.e.f. 1.4.2001.
22.1 As regards the issue of provision for gratuity. AO observed that in the case of Bharat Earth Movers Ltd. vs. CIT 245 ITR 428 (SC), the Hon'ble Apex Court has held the provision for gratuity is allowable under MAT provisions if it has been made on actuarial valuation. However, AO noted that assessee failed to give any proof regarding his method of calculation of the aforementioned provision. In this view of matter, the AO added back the provision for gratuity to the income of the assessee.
23. Before the Ld. CIT(A), it was submitted that the provision for gratuity was made by actuarial valuation for determining the liability. It was further submitted that no adjustment u/s. 115JB of the Act, is therefore, is called for in respect of an ascertained liability following Metal Box. Co. of India vs. Their Workmen 73 ITR 53 (SC); BEMN 245 ITR 428 (SC); DCIT vs. Eicher Motors Ltd. 82 TTJ 61 (Indore). 23.1 Ld. CIT(A) noted that as per sub clause (x) of clause (II) Schedule 15 of the accounts, it has been stated that provision for liability on account of retirement gratuity and leave encashment is 18 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 made on the basis of actuarial valuation. In that view, the provision towards gratuity liability is ascertained and could not have been added back under clause (c) of Explanation u/s. 115JB. Ld. CIT(A) further noted that even otherwise, in the assessee's own case for A.Y. 2002-03, a decision in favour of the assessee has been rendered in the first appeal order. Accordingly, ld. CIT(A) held that the addition of provision for gratuity for determining book profit u/s. 115JB is held to be without merits.
24. Against the above order the Revenue is in appeal before us.
25. We have heard the rival contentions in light of the material produced and precedents relied upon. We find that Ld. CIT(A) has given a finding that provision for gratuity in this case has been made on the basis of actuarial valuation. In that view of the matter, the liability can be said to be ascertained, accordingly, no disallowance in this regard is called for. Assessee in this regard has placed reliance upon the following case laws:-
- CIT vs. ILPEA Paramount P. Ltd. 336 ITR 54 (Del).
- DCM Engineering Ltd. vs. ACIT 134 TTJ 715 (Del.) 19 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011
- CIT vs. Hewlett Packard India (P) Ltd. 314 ITR 55/222 CTR 378 (Del.)
- CIT vs. Bechtel India (P) Ltd. 2007 TIOL 675 HC Del
- Dresser Value India P Ltd. vs. ACIT 2009 30 SOT 495 (Mum)
- CIT vs. Echjay Forgings Pvt. Ltd. 251 ITR (Bom). 25.1 The above cited case laws duly support the plea of the assessee.
Accordingly, we do not find any infirmity in the order of the Ld. CIT(A) and hence, we uphold the same.
26. Another ground raised in assessee's appeal in ITA No. 2002/Del/2008 is that ld. CIT(A) erred in directing the AO to reduce on proportionate basis, from the written down value of the respective block of assets, the sales tax subsidy received during the relevant assessment year for the purposes of computing depreciation allowance under the IT Act, 1961.
27. In this case Ld. CIT(A) gave a finding that the subsidy amount was capital receipt. However, he further added that pursuant to 20 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 introduction of Explanation (10) in section 43(1) w.e.f. 1.4.89, any subsidy intended to meet the cost of assets should go to the reduce the actual cost for the purposes of allowance of depreciation u/s. 32 of the Act. Ld. CIT(A) held that hence the amount of sales tax exemption is also to be proportionately reduced from the WDV of the respective block of asset on the basis of cost of project indicators given in the eligibility certificate issued by SICOM. Hence, ld. CIT(A) directed that the amount of sales tax incentives held as capital receipt in an earlier part of this order be considered as a reduction from the block of asset to arrive at the admissible amount of depreciation. AO was accordingly directed to give the effect to the same.
28. Against the above order the Assessee is in appeal before us.
29. We have heard the rival contentions in light of the material produced and precedents relied upon. Ld. Counsel of the assessee submitted that the provision of Explanation (10) in section 43(1) will not be applicable to the assessee's case for the following reasons:-
- Explanation 10 to Section 43(1) of the Act, only applies in a case where any portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government / State 21 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 Government/ any other authority/ any other person in the form of subsidy or grant or reimbursement, etc.
- Ld. Counsel of the assessee further submitted that on perusal of the said explanation, it is patently clear that the only in a situation where subsidy received by the assessee is intended to meet the cost of an asset acquired by the assessee, such subsidy is required to be adjusted against the actual cost of the asset for the purposes of section 28 to 41 of the Act.
- Ld. Counsel further submitted that Explanation 10 to section 43(1) of the Act has been inserted with effect from 1.4.1999. Prior to the aforesaid insertion, the Apex Court in the case of C.I.T. vs. P. J. Chemicals Ltd. : 210 ITR 830, held as follows:-
"The expression 'actual cost' needs to be interpreted liberally. The subsidy of the nature granted by the Government to industries, does not partake of the incidents which attract the conditions for their deductibility from 'actual cost'. 22
ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 Government subsidy, it is not unreasonable to say, is an incentive not for the specific purpose of meeting a portion of the cost of the assets, though quantified as or geared to a percentage of such cost. If that be so, it does not partake of the character of a payment intended either directly or indirectly to meet the actual cost.
Reliance was further placed on the decision of Vishakapatnam Bench of Tribunal in the case of Sasisri Extractions Ltd. vs. ACIT 307 ITR 127 (AT), wherein after considering the provisions of Explanation 10 to Section 43(1) of the Act, it was held that subsidy received for encouraging investment in backward area, even if computed with reference to cost of investment in fixed assets, will not be reduced from the cost of assets by applying the provisions of aforesaid Explanation.
To the similar effect are the following decisions:
23 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 - Inventaa Chemicals Ltd. vs. ACIT : 42 SOT 249 (Hyd) - CIT vs. Ellora Time Pvt. Ltd. Tax Appeal No. 1011 of 2010 (Guj). - Soham Electroplast Pvt. Ltde. Vs. ITO ?ITA No. 1578/PN/2008 (Pune). 29.1 We have considered the submissions. We find that
Explanation 10 to Section 43(1) read as under:-
"Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee."
29.2 In this regard, ld. Counsel of the assessee has submitted that in assessee's own case there is no linking of the subsidy received to the acquisition of asset. The subsidy in this case has been 24 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 received for encouraging investment in backward area, even if computed with reference to cost of investment in fixed assets, will not be reduced from the cost of assets by applying the provision of aforesaid Explanation. In this regard, case law relied upon by the Ld. Counsel of the assessee of the Vishakapatnam Tribunal in the case of Sasisri Extractions Ltd. vs. ACIT 307 ITR 127 (AT) is relevant. In this case, it was held that the subsidy received for encouraging investment in backward area, even if computed with reference to cost of investment in fixed assets, will not be reduced from the cost of assets by applying the provisions of aforesaid Explanation. 29.3 We further find that in Inventaa Chemical Ltd. vs. ACIT 42 SOT 249 (Hyd.), the tribunal has held that the payment of subsidy is not related to the actual acquisition of assets and subsidy is granted on capital investment on land, building and machinery, then it cannot be reduced from the value of asset (WDV). Hence, in the background of the aforesaid discussions and precedents, we hold that ld. CIT(A) has misdirected himself in directing the AO to reduce the amount of subsidy from the WDV of the asset. Accordingly, we set aside the order of the ld. CIT(A) and decide the issue in favour of the assessee.
30. Another issue raised in the Assessee's appeal in ITA No. 2002/Del/2008 is that the Ld. CIT(A) erred on facts in law in upholding 25 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 the disallowance in respect of software maintenance / software development expenses amounting to ` 12,60,475/- holding the same to be in the nature of capital expenditure.
31. On this issue AO referred to the Accounting Standards 26 issued by the ICAI which includes as per the definition above, computer software whether developed internally or acquired externally. AO further relied upon the case laws in the case of CIT vs. Aravalli Construction Company 259 ITR 30; ITAT, Delhi Bench decision in the case of Maruti Udyog Ltd. vs. DCIT 92 TTJ 987 and Apex Court decision in the case of Assam Begal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34. The AO held that software maintenance and development expense are capital expenditure and therefore are only to be allowed depreciation @ 60% as against the assessee's claim of revenue expenditure.
32. Upon assessee's appeal ld. CIT(A) upheld the action of the AO.
33. Against the above order the assessee is in appeal before us.
34. Assessee's submission in this are as under:-
"The assessee during the year paid yearly license fees in respect of existing computer software which were already loaded on the computers and for purchasing certain other application software required for facilitation of more 26 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 efficient and profitable day to day management and trading operations.
The Special bench of the Tribunal in the case of Amway India Enterprises vs. DCIT : 111 ITD 112, wherein the Special Bench held that the question of allowability of software expense had to be decided by applying the functional test.
Attention is further invited to the following recent decisions wherein, after considering the decision of the Special Bench in Amway Enterprises (Supra), the expenditure incurred on software has been has a revenue expenditure :
- CIT vs. M/s Raychem RPG Ltd. : 245 CTR 515 (Bom).
- M/s ST Microelectronics Private Limited. Recently, the Delhi High Court in the case of CIT vs. Asahi India Safety Glass Ltd. 245 CTR 529 held that expenditure incurred on application software is allowable revenue deduction. The same was followed by the Delhi High court in the case of CIT vs. Amway India Enteprises : 1344/2009. It is submitted that the Punjab and Haryana High court in the recent case of CIT vs. Varinder Agro Chemicals Ltd., : 27
ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 309 ITR 272 held that software expense are allowable revenue expenditure since technology is fast changing and day by day systems are being developed in new way.
According to the High court no enduring advantage results, pursuant to incurring such expenditure."
35. Ld. Departmental Representative on the other hand relied upon the orders of the authorities below.
36. We have heard the rival contentions in light of the material produced and precedents relied upon. We find that assessee in this case assessee has paid yearly license fee in respect of existing computer software which were already loaded on the computers and for purchasing certain other application software required for facilitation of more efficient and profitable day to day management and trading operations. In this regard, the case laws relied upon by the ld. Counsel of the assessee also supports the case of the assessee. 36.1 We further note that in Revenue's Appeal being ITA No. 967/Del/2010 (A.Y. 2004-05) above on this issue, we have upheld the order of the Ld. CIT(A), wherein, it has been held that this expenditure are revenue in nature. We also rely upon the reasoning given in 28 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 the aforesaid issue and accordingly, set aside the order of the Ld. CIT(A) and decide the issue in favour of the assessee.
37. Another issue raised in Assessee's appeal in ITA No. 2002/Del/2008 is that the Ld. CIT(A) erred on facts and in law in holding that for computing book profit under section 115JB of the Act, the adjustment of the amount eligible for deduction under section 80HHC of the Act, in terms of clause (iv) of Explanation thereto, has to be calculated after reducing unabsorbed depreciation from profits of business and not the amount of deduction calculated on the profit disclosed in the profit and loss account.
38. At the outset, on this issue, ld. Counsel of the assessee submitted that the issue involved is covered in favour of the assessee by the decision of the Delhi Tribunal in assessee's own case for A.Y. 2002-03. Ld. Counsel of the assessee further placed reliance upon the following case laws:
- Ajanta Pharma Ltd. vs. CIT : 327 ITR 305 (SC)
- DCIT vs. Glenamark Laboratories Ltd. 127 TTJ 719 (Mum).
- CIT vs. Magna Electro Castings Ltd. : Tax Case (Appeal) No. 247 of 2009 (Mad.) 29 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011
- Ambika Cotton Mills Ltd. and Ors. (2010) 33 DTR 183 (Mad.)
- DCIT vs. Ors. Vs. Syncome Formulations India Ltd., Crystal Granite and Marble Ltd., Bhushan Steel and Strips Ltd., Thirumalai Chemicals Ltd. : 292 ITR 144 (Mum) (SB).
- ITO vs. Amalgamated Bean Coffee Trading Co. P Ltd (2007) 19 SOT 1 (Bang.).
- ITO vs. Godrej Soaps Ltd. : 114 TTJ 950- (Mum)
- CIT vs. GTN Textiles : 248 ITR 372 (Ker.).
- DCIT vs. Govind Rubber (P) Ltd. 89 ITD 457 (Mum).
- DCIT vs. JK Industries Ltd. ITA BO 1301/Kol/05
- Smruthi Organics Ltd. vs. DCIT 290 ITR 172 (Pune)(AT).
- M/.s Banswara Syntex Ltd. vs. ACIT 2007 TIOL 229 (Jodh.).
- Circular NO. 680 dated 21.2.1994.
30
ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011
- CIT vs. Bharti Information and Technology Services Ltd. 340 ITR 593.
39. Ld. Departmental Representative on the other hand relied upon the orders of the authorities below.
40. We have heard the rival contentions in light of the material produced and precedents relied upon. We find that the ld. Counsel of the assessee has claimed that this issue is covered in favour of the assessee by the Delhi Tribunal in assessee's own case for A.Y. 2002-
03. Further, we note that Hon'ble Apex Court in the case of Ajanta Pharma Ltd. CIT 327 ITR 305 (SC) has held that for computing book profit in terms of section 115JB, net profit as shown in the P&L account have to be reduced by the amount of profits eligible for deduction u/s. 80HHC and not by the amount of deduction u/s. 80HHC. 40.1 Ld. Departmental Representative could not controvert the submissions of the ld. Counsel of the assessee on this issue. 40.2 Respectfully following the above said precedents, we set aside the orders of the Ld. CIT(A) on this issue and decide the issue in favour of the assessee.
31
ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011
41. Another issue raised in assessee's appeal in ITA No. 2002 is that Ld. CIT(A) erred in upholding the charging of interest u/s. 234B, 234C and section 234D of the Act.
42. In this regard, at the outset, ld. Counsel of the assessee submitted that he shall be pressing for deletion of charging of interest u/s. 234B only.
43. In this regard, assessee's submission are as under:-
"Interest under section 234B of the Income Tax Act, 1961 ('the Act') During the relevant previous year, the assessee had debited provision for diminution in value of investment and provision for doubtful debts to its profit and loss account and claimed the same as deduction while computing 'book profits' as per the provisions of section 115JB of the Income Tax Act, 1961 ('the Act'). The tax liability of the assessee, in respect of relevant previous year, was computed as per the provisions of section 115JB of the Act.
In the assessment order for the relevant assessment year, the aforesaid provisions were disallowed by the 32 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 assessing officer. However, on appeal, the CIT(A) reversed the decision of the assessing officer and allowed reduction of aforesaid provisions while computing 'book profits' .
Against the order of the CIT(A), the Revenue has filed appeal before the Tribunal.
Subsequently, the provisions of section 115JB of the Act were retrospectively amended by the Finance (No.2) Act, 2009, with effect from 01.04.2001. As per the said amendment, the assessee is required to increase its 'book profits' by the amounts set aside as provision for diminution in value of any assets. In view of the aforesaid retrospective amendment, the assessee has, in fairness, surrendered the aforesaid claim of provision for diminution in value of investment and provision for doubtful debts, which were decided by the CIT(A) in favour of assessee. It is respectfully submitted that additions to 'book profits' of assessee on account of retrospective amendment in law, should not result in levy of interest 33 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 under section 234B of the Act, in view of the legal position discussed hereunder:
Submissions It is respectfully submitted that the assessee cannot be held to be in default in payment of advance tax under sections 208 to 210 of the Act, as the advance tax liability with respect to legal position prevailing at the relevant time i.e. during relevant financial year was duly deposited with government treasury by the assessee. Accordingly, interest under section 234B of the Act is not chargeable in the present case. The provisions of sub-section (1) of section 234B read as under:
"234B. Interest for defaults in payment of advance tax.
(1) Subject to the other provisions of this section, where, in any financial year, an assessee who is liable to pay advance tax under section 208 has failed to pay such tax or, where the advance tax paid by such assessee under the provisions of section 210 is less 34 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 than ninety per cent. of the assessed tax, the assessee shall be liable to pay simple interest at the rate of one per cent for every month or part of a month comprised in the period from the 1st day of April next following such financial year to the date of determination of total income under sub-section (1) of section 143 and where a regular assessment is made, to the date of such regular assessment, on an amount equal to the assessed tax or, as the case may be, on the amount by which the advance tax paid as aforesaid falls short of the assessed tax.
........... ........... ........."
On perusal of the aforesaid section, it is evident that interest is leviable in a case where an assessee defaults in payment of advance tax. Thus, the sine qua non for imposition of interest under section 234B of the Act is default on the part of the assessee in payment of advance tax.
In terms of sections 208 to 210 of the Act, it will be further noticed that an assessee is required to 35 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 compute and pay advance tax during the relevant previous year on the estimated income of the assessee.
In the present case, the assessee duly paid advance tax by estimating its income during the relevant previous year in accordance with the then prevailing legal position and the provisions of the Act. It is only on account of subsequent retrospective amendment in law that the advance tax paid by the assessee would fall short of the tax payable on the income as per the amended law. It was not possible for the assessee, at that time, to foresee the retrospective amendment, which was yet to be introduced in future, and accordingly adjust his advance tax liability. Therefore, by no stretch of imagination can it be held that, during the relevant previous year, there was any default on the part of the assessee in payment of advance tax in accordance with the provisions of sections 208 to 210 of the Act.
In view of the aforesaid, it is respectfully submitted that since there was no failure/ default on the part of 36 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 the assessee in payment of advance tax, no interest is leviable under section 234B of the Act.
Reliance in this regard is placed on the decision of the Calcutta High Court in the case of Emami Ltd. V. CIT:
337 ITR 470. In that case, their Lordships held that the fact that interest was payable by the assessee pn account of retrospective amendment, which was not even in the knowledge of the assessee at the time of payment of advance tax and therefore, the assessee could not be expected to have paid advance tax on something which would not even have been in his contemplation."
44. Ld. D.R. could not controvert the aforesaid submissions of the assessee.
45. We have heard the rival contentions in light of the material produced and precedents relied upon. We find that the assessee in this case became liable for advance tax due to the retrospective amendment made by the Finance Act, 2008. In this regard assessee's submission is that additions to 'book profits' of assessee on account of retrospective amendment in law, should not result in levy of interest 37 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 under section 234B of the Act. It has been claimed that it is only on account of subsequent retrospective amendment in law that the advance tax paid by the assessee would fall short of the tax payable on the income as per the amended law. It was not possible for the assessee, at that time, to foresee the retrospective amendment, which was yet to be introduced in future, and accordingly adjust his advance tax liability. Therefore, by no stretch of imagination can it be held that, during the relevant previous year, there was any default on the part of the assessee in payment of advance tax in accordance with the provisions of sections 208 to 210 of the Act.
46. We further note that ITAT, Delhi in the case of DCIT vs. Uttam Sugar Mills Ltd. in ITA No. 3223/Del/2010 vide order dated 16.12.2010 reported in 137 TTJ 157 has held as under:-
"The question is as to whether interest under ss. 234B and 234C of the Act can be charged for default in payment of advance tax and for deferment of advance tax, respectively, where the payment of tax became due only because of the amendment by way of insertion of Explanation 1(h) to s. 115JB (2) of the Act, the amendment having been made operative retrospectively. It was due to the filing of the revised statement of assessable income, that the book 38 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 profit was increased by the amount of the deferred tax. But for the retrospective amendment, the assessee was not liable to be taxed on account of adjustment of deferred tax. Undeniably, this is the obtaining legal position as per Apollo Tyres Ltd. vs. CIT (2002) 174 CTR (SC) 521 : (2002) 255 ITR 273 (SC) and Asstt CIT vs. Balarampur.
Chini Mills Ltd. (2007) 111 TTJ (Kol) 230. Now, the amendment having come about only by virtue of the Finance Act 2008, obviously there was no mala fide intention on the part of the assessee, as has been recognized in Priyanka Overseas Ltd. vs. Dy. CIT (2002) 75 TTJ (Del) 783: (2001) 79 ITD 353 (Del), in a similar fact situation. It was noted therein that from CBDT Order No. F 400/234/95-IT(BJ, dt. 21st May, 1996, it was clear that the intention of the tax authorities was not to levy interest where any amendment came with retrospective effect This gets further corroborated from the fact that while processing the return of income, the AO himself did not charge interest under ss. 234B and 234C of the Act Further, it has been time and again held that where the assessee is under a bona fide belief and based his estimate of income 39 ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011 as per the law prevailing at the relevant time, no interest under ss. 234B and 234C of the Act is leviable. This is the position settled under col. 1 p. 3 of the CIT(A)'s order: Aero Leather (P) Ltd. vs. Union of India (1992) 194 ITR 7 (Del); Asstt CIT vs. Jindal Irrigation Systems Ltd. (1996) 56 ITD 164 (Hyd); Sant Lal vs. Union of India (1996) 134 CTR (P&H) 581 : (1996) 222 ITR 375 (P&H); A.M. Sainalabdeen Musaliar vs. Union of India & Ors. (1999) 155 CTR (Ker) 647: (2000) 242 ITR 400 (Ker); CBDT Order No. F. 400/234/95-IT(B) dt 21st May, 1996 and amended on 30th Jan., 1997; CIT vs Anand Prakash (2009) 224 CTR (Del) 72: (2009) 20 DTR (Del) 259:
(2009) 316 ITR 141 (Del); Priyanka Overseas Ltd. vs. Dy. CIT (supra); and CIT vs. Satish Traders (2001) 166 CTR (MP) 80: (2001) 247 ITR 119 (MP). Obviously, no one can be forced to perform impossibility.
In view of the above, the learned CIT(A) cannot at all be said to have erred in holding that interest under ss. 234B and 234C of the Act was wrongly charged. Therefore, finding no force in the grievance sought to be raised by the Department by way of the ground taken, the same is rejected."
40
ITA NOS. 2002/Del/2008, 2130/Del/2008, 967/Del/2010 & 5323/Del/2011
47. In the background of the aforesaid discussions and precedent we set aside the order of the Ld. CIT(A) qua interest u/s. 234B and decide the issue in favour of the assessee.
48. In the result, the appeal by the assessee in ITA No. 2002/Del/2008 is partly allowed, by Revenue in ITA No. 2130/Del/2008 is partly allowed and Revenue's appeal in ITA No. 967/Del/2010 and ITA No. 5323/Del/2011 stand dismissed. Order pronounced in the open court on 22/6/2012.
Sd/- Sd/-
[C.M. GARG]
GARG] [SHAMIM YAHYA]
JUDICIIAL MEMBER
JUDIC ACCOUNTANT MEMBER
Date 22/6/2012
"SRBHATNAGAR"
Copy forwarded to: -
1. Appellant 2. Respondent 3. CIT 4. CIT (A)
5. DR, ITAT
TRUE COPY
By Order,
Assistant Registrar,
ITAT, Delhi Benches
41