Income Tax Appellate Tribunal - Kolkata
Britannia Industries Limited, Kolkata vs Department Of Income Tax on 4 June, 2008
आयकर अपीलीय अधीकरण, Ûयायपीठ - "C", कोलकाता,
IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH- C, KOLKATA
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बी. आर. सी. डȣ.
डȣ. राव,
राव, लेखा सदःय ]
Before Shri B.R.Mittal, Judicial Member & Sri C.D. Rao, Accountant Member
आयकर अपील संÉया / ITA No. 1708 (Kol) of 2008
िनधॉरण वषॅ/Assessment Year 2004-05
Asstt.Commissioner of Income-tax -वनाम- M/s. Britannia Industries Ltd.,
Circle-7, Kolkata. -Versus- Kolkata. (PAN-AABCB2066P)
(अपीलाथȸ/APPELLANT) (ू×यथȸ/RESPONDENT)
अपीलाथȸ कȧ ओर से/ For the Appellant: ौीमती/Smt. A.Mookherjee
ू×यथȸ कȧ ओर से/For the Respondent: ौी/Sri D.S. Damle
आदे श/ORDER
बी.
बी. आर.
(बी आर. मीƣल),् Ûयायीक सदःय (B.R.Mittal), Judicial Member :
The department has filed this appeal for assessment year 2004-05 against the order of ld. C.I.T.(A)-VIII, Kolkata dated 04/6/2008 disputing the deletion of the additions made by the A.O.
2. Ground No.1 of the appeal reads as under :-
"1. That the Ld. CIT(A) did not appreciate the facts in deleting the additions of Rs.18,51,98,485 on account of working capital advances written off when they fulfilled neither the nature of working capital nor advance."
3. The relevant facts are that the assessee had given advances to its two sister concerns, who were contract biscuit manufacturers of the assessee, aggregating to Rs.18,51,98,485/- as under :-
(i) M/s. J.B. Mangharam Foods Pvt. Ltd. (hereinafter referred to in short as 'JBMFPL') having registered office at 3A, Rs. 6,86,02,085 Metro Chambers, 69/71, Trinity Street, Mumbai.
(ii) M/s. Manna Foods Pvt. Ltd. (hereinafter referred to
in short as 'MFPL') having registered office at Rs.11,65,96,400
48, Lavelle Road, Bangalore. Rs.18,51,98,485
The assessee stated that the said advances were given to above two concerns, viz., JBMFPL and MFPL, as working capital advances to meet their day to day operations.1
The assessee in the assessment year under consideration has claimed loss on account of irrecoverable working capital advances. The assessee stated that these advances were in the nature of business loss incurred in the course of business as both the parties expressed their inability to repay the aforesaid advances.
4. The A.O. proceeded to examine the nature of the advances given by the assessee- company to JBMFPL and MFPL. He has stated that both the abovenamed concerns, viz., JBMFPL and MFPL, did not need such a large amount of working capital advances. Both the concerns utilized the amount given by the assessee-company in giving loans and advances to others and also to invest in equity shares of M/s. Kwality Biscuits Pvt. Ltd., which is again an associate concern of the assessee-company. The A.O. has also stated that the assessee paid conversion charges, excise duty and other reimbursement of expenses as and when bills were raised on the assessee-company and the same were not adjusted. The A.O. stated that the aforesaid advances given by the assessee-company to JBMFPL and MFPL could not be said to be working capital advances at all. He has further stated that these were the investments made by the assessee-company and thus this is a capital expenditure in the hands of the assessee- company.
4.1. The A.O. has further stated that the claim of the assessee is not a real loss as the assessee-company has complete control over the ownership and management of both the concerns, viz., JBMFPL and MFPL. The A.O. has further stated that the write off of working capital advances in respect of the above two associate concerns by the assessee-company is due to close nexus and connection and if the persons to whom working capital advances have been given were unrelated, the assessee would have made all out efforts to recover them. No efforts of recovery have been made by the assessee. Hence the alleged loss claimed by the assessee is not real but only fictitious or notional. The A.O. has also stated that by giving working capital advances by the assessee to these two companies, the assessee-company has acquired a source of stock- in-trade and, therefore, it is a capital expenditure. The A.O. has also stated that both these companies are very much solvent and they are being carried on their businesses, as could be seen from the details filed by these two companies and discussed by the A.O. at page-4 (in respect of JBMFPL) and at page-6 (in respect of MFPL). The A.O. 2 has stated that even if for the sake of argument it is presumed that the loss is allowable, it will be merely an anticipated loss and such anticipated loss cannot be allowed because both the companies are contract biscuits manufacturers for the assessee-company and they are carrying on their businesses. The A.O. has also stated that assessee-company is a manufacturer and trader of the bakery products and not a bank or finance company. Therefore, advancing money to others is not the business of the assessee. The loss claimed by the assessee does not spring directly from the carrying on of the business of bakery products. Neither it is incidental to it. The A.O. has also considered the cases cited by the assessee stating that write off of irrecoverable working capital advances is an allowable revenue expenditure, but has distinguished those cases on the ground that in all those cases the parties to whom the money was advanced were unrelated persons. The cases cited by the assessee before the A.O. are mentioned in para 25a of the assessment order, which are as under :-
i) CIT vs. Mysore Sugar Limited [46 ITR 649 (SC)]
ii) Indore Malwa United Ltd. vs. State of Madhya Pradesh [55 ITR 736 (SC)]
iii) CIT vs. Jwalaprasada Radha Kishan [107 ITR 540 (All.)]
iv) CIT vs. Inden Biselers [181 ITR 69 (Mad)]
v) T.J. Lalvani vs. CIT [78 ITR 176 (Bom)]
vi) P. Satyanarayan vs. CIT [116 ITR 803 (AP)]
vii) CIT vs. Abdul Razak & Co. [136 ITR 825 (Guj)] In view of the above, the A.O. disallowed claim of write off of advances made by the assessee and added the same to the income of the assessee. Being aggrieved, assessee filed appeal before the ld. C.I.T.(A).
5. On behalf of the assessee it was contended that the A.O. disallowed the claim of the assessee primarily on the fact that the parties are related to the assessee and thus the loss was not real, which was written off in the books of account of the assessee. It was further contended that both the concerns to whom the advances were given by the assessee were contract manufacturers of the assessee-company and dependent solely on the assessee for their earnings. That their soul source of revenue was processing charges paid by the assessee-company. That the said contract manufacturers were offering most competitive rates because the assessee made substantial advances, which 3 had helped the assessee in economizing its cost of production. The working capital advance paid by the assessee could have been repaid only out of earning made by them from the assessee and from no other source. The assessee entered into subvention agreements with both the parties under which the assessee gave up its right to receive the amounts advanced and wrote off the advances in its books because the investment made by them in the body corporate or by way of advance had proved to be bad and, therefore, both the companies had made provisions in their respective books for diminution in value investment and provision for bad and doubtful advances. It was also contended that both the contract manufacturers in their respective books for the year ended 31st March, 2004 wrote back the amount of liabilities and, therefore, the assessee had lost all rights and claims in respect of the amounts due from the contract manufacturers. Hence the loss had occurred to the assessee in assessment year 2004-05. That the subvention agreements were executed in March, 2004. The assessee also placed reliance before ld. C.I.T.(A) on the decision of Hon'ble Delhi High Court in the case of C.I.T. vs. Honda Siel Power Products Ltd. [165 ITR 577). It is not correct citation and the correct one is 165 Taxman 577 equivalent to 300 ITR 56. The ld. C.I.T.(A) after considering the above submissions of the assessee deleted the disallowance made by the A.O. of Rs.18,51,98,485/- vide paras 6 to 9 of the impugned order, which read as under :-
"6. I have considered the submissions of the A/c and have perused the reasoned order passed by the Assessing Officer. It is not in dispute that both M/s. Mangharam Foods Pvt. Ltd. and Manna Foods Pvt. Ltd. were contract manufacturers of the appellant. The sole source for the revenue for the said 2 concerns, were processing charges received from the appellant. It is not in' dispute that the appellant had granted advances to these parties in the earlier years and in the books of the appellant these advances appeared as trading advances & not loans. No interest was charged thereon. In the month of March 2004 the appellant executed subvention agreements with both the companies under which the appellant's right to receive back the trading advance was extinguished and thereby the appellant lost its right to recover back any sums from the said 2 companies. Pursuant to the said subvention agreement the appellant wrote off the amounts due from both the parties. In the books of the debtor companies also the amount waived by the appellant was credited in their respective Profit & Loss A/cs. Fact leading to write off were disclosed in their respective Audited financial statements. Copies of the audited final accounts of both the debtors were filed from which it appeared that in the case of J.B. Mangharam Foods Pvt. Ltd. the following information was disclosed:
4"During the year, the company has written back Rs. 6,86,02,085/- (P.Y. Rs.Nil) being working capital advance shown under the head "Other Liabilities" as per the subvention agreement dated 25th March, 2004 ".
7. It further appeared that in the accounts for the Year ended 31st March 2004 the said J.B. Mangharam Foods Pvt. Ltd. had debited provision for diminution in the value of its investment amounting to Rs.4,18,43,402/- and provision for bad & doubtful advances amounting to Rs.2,70,00,000/-. The advances written off pertain to the business carried on by the debtor. In the audited financial statement of Manna Foods Pvt. Ltd. the said debtor had disclosed the following note relating to liabilities written back.
"In terms of subvention Agreement dated 22nd March, 2004 with Britannia Industries Limited (BIL) working capital advance received from BIL amounting to Rs. 11,65,96,400 has been waived by BIL subject to certain covenants".
It appeared from the notes on account of the said company that it had written off irrecoverable business advances made to various parties amounting to Rs. 7,63,50,000/- and diminution in value of Investment amounting to Rs.4,02,19,231/-.
8. These facts therefore, indicated that both the companies were left with adequate assets out of which they could have repaid the trade advance granted by the appellant. As noted from the accounts of the debtors the principal source of revenue for both the companies was processing charges received from the appellant and therefore, repayment of the trade advance would have been possible only if the appellant had increased the processing charges. But for the payment of processing charges by the appellant both the debtors did not have warewithel of their own to raise sufficient funds for the repayment nor the companies were left with sufficient assets out of which they could have repaid the amounts advanced by the appellant. Facts on record establish that the financial position of both the contract manufacturers was weak in as much as they were left with no sufficient assets out of which they could have repaid the trading advance granted by the appellant. It is not proved by the A.O. that the investments and trade advance granted by the respective contract manufacturers were on account of the appellant or for the appellant's benefit. Both the contract manufacturers continued to remain owners of the shares held by them by way of investment. Due to continued losses of the investee company the value of investment was permanently eroded for which provision was made in the books writing down value of investment. It is also not the case of the A.O. that the trading advances written off in the books of the contract manufacturers were advanced for the appellant's business. The advances were granted by the contract manufactures and always appeared in their books. In the circumstances when in the Subvention Agreement the appellant waived its right to receive the amounts advanced, the appellant irrevocably lost its right to claim the refund of sums advanced to both the parties. Under the circumstances the amount written off was certainly business loss of the appellant. In absence of the subvention agreement, other courses that were open for appellant was to grant increase in the processing charges to the contract manufactures out f which the appellant could have recovered its trading advance. In such case also the appellant would have been allowed deduction for the expenditure and the tax effect would have been the same. Under 5 the circumstances if the appellant wrote off irrecoverable trading: advance in its books then such amount was allowable as business loss. For claiming deduction for such loss it was not necessary for appellant to prove that the debtors had run up huge losses and thereby they were on the brink of insolvency.
9. Facts on record on the other -hand prove that the assets of the contract manufactures were not adequate to pay off the amount of trading advance. I also note that continued support to the contract manufacturers was necessary in the business interest of the appellant as they were facilitating trading operations of the appellant. The appellant had an established long term arrangements with both the companies for supply of biscuits to meet the growing demand for appellant's bakery products. On the facts of the case therefore, I find that the decision of the Delhi High Court in the case of CIT Vs. Honda Siel Power Products Ltd. [165 ITR 577] was squarely applicable. In that case the assessee was engaged in manufacture of portable generator sets who advanced certain amounts to the suppliers of Tools & Dies for components of generator sets. The assessee claimed that the advance paid was non-recoverable and tools & dies were properties of the contract manufactures / supplier. The claim for deduction was disallowed by the A.O., but allowed by the Tribunal. While upholding the Tribunal's order the Court found that the moulds & dies of the suppliers for which advance was made were the properties of the supplier and this was decisive in deciding the nature of expenditure. The Court found that the Tooling advance paid to vendors was non-recoverable. Not only that there was an assurance of continued supply of components, but as result of this arrangement there was a price advantage which was in the revenue field and therefore, the Court allowed the claim of the assessee. In the present case also both the debtors are contract manufactures of the appellant with whom the appellant has long standing arrangement for supply of biscuits which are processed in their plants. The appellant enjoys price advantage. These contract manufacturers also ensure continuity in supply of biscuits. In the circumstances when the appellant found that the assets of the debtorsj were not sufficient to repay the trade advance, the appellant had option either to.. write off the trading advance or initiate legal proceedings or increase the processing charges out of which the advance could be recovered. Legal proceeding for recovery of advance would have adversely affected the appellant's economic interest as such course would have put the source of supply of biscuits, in jeopardy. In case of other 2 options the loss was required to be borne by the appellant. Having regard to the commercial considerations and expediency involved, the appellant chose to write off the trading advance pursuant to Subvention Agreement. It appeared that the Subvention Agreement were acted upon by the parties. In the books of the debtors the amounts written off were credited to the respective Profit & Loss A/cs. Having regard to the totality of the facts therefore, I find that when the appellant actually wrote off the amounts pursuant to Subvention Agreements with the parties, the deduction was allowable. Accordingly, disallowance of Rs. 18,51,98,485/- is deleted."
Hence the department is in appeal before the Tribunal.
6. On behalf of the department, the ld. Departmental Representative submitted that both the concerns to whom the assessee made advances are associate concerns of the 6 assessee and were contract biscuits manufacturers for the assessee. The ld. Departmental Representative submitted that the A.O. observed that the assessee- company reimbursed the bills raised by the said two concerns towards conversion charges payable by the assessee. Therefore, the advances were not meant for adjustment with future purchases by the assessee from both these two concerns to whom the assessee stated to have made working capital advances. The Ld. Departmental Representative submitted that there was no formal agreement entered into by the assessee with the above two concerns while giving advances and the A.O. has rightly stated that these were the investments made by the assessee-company in other associate concerns of the assessee through JBMFPL and MFPL. Hence it is a capital expenditure and not a revenue expenditure in the hands of the assessee-company. The Ld. Departmental Representative submitted that the said money advanced by the assessee was not used for day to day operations but for the investment in shares and giving loans to others. He referred to pages 9 to 13 of the assessment order and submitted that the A.O. after considering the parameters has rightly disallowed the claim of the assessee that it did not relate to the operation of the business of the assessee. The Ld. Departmental Representative submitted that both the concerns are associate concerns of the assessee and the assessee has full control over those concerns and, therefore, the loss claimed by the assessee is hypothetical. The Ld. Departmental Representative submitted that the order of the ld. C.I.T.(A) is based on conjecture and surmise and the same should be reversed by confirming the action of the A.O.
7. On the other hand, the ld. A/R supported the order of the ld. C.I.T.(A) and submitted that the assessee-company extended advances to aforesaid two concerns to enable them to carry on day to day production and also to enable them to do modernization so that there could be an expansion and the demand of the assessee could be met. The ld. A/R submitted that the said advances were made by the assessee for the purpose of its business as a measure of commercial expediency. He submitted that it was a prudent business decision of the assessee-company to make advances to above two concerns. Relying on the decision of Hon'ble Apex Court in the case of S.A. Builders vs. C.I.T. [288 I.T.R. 1 (SC)], the ld. A/R submitted that the expression "commercial expediency" is one of wide import and includes such expenditure as a 7 prudent businessman incurs for the purpose of business. He submitted that the Hon'ble Apex Court held that even if the expenditure may have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. He submitted that once it is established that there was nexus between the expenditure and purpose of the business, which need not necessarily be the business of the assessee itself, the revenue cannot justifiably claim to put itself in the arm of the businessman or in the position of the Board of Directors and assume the role to decide how much is the reasonable expenditure having regard to the circumstances of the case. The ld. A/R further submitted that on account of substantial loss to the said two concerns, the assessee decided not to insist for recovery and entered into subvention agreement dated 25th March, 2004 to waive all working capital advances. The ld. A/R submitted that if the assessee had not waived off the said working capital advances, both the concerns had negative network and could not carry on their operation. The ld. A/R submitted that merely because the said two concerns were associate concerns of the assessee-company, a different view could not be taken. He submitted that the assessee- company actually suffered loss when it wrote off the working capital advances in its books of account. He submitted that the assessee-company had taken the business decision in the interest of its business and to ensure continued supply from the contract biscuits manufacturers. He submitted that a similar issue was considered in the assessee's own case in assessment year 2003-04 in ITA No.1789 (Kol)/2008 vide order dated 31/8/2010, copy placed at pages 28 to 41 of the paper book, and the Tribunal vide para 18 of the order confirmed the order of the ld. C.I.T.(A) by rejecting the ground of appeal taken by the department and confirming the order of ld. C.I.T.(A) to allow the assessee's claim of deduction of Rs.1,04,63,615/- which represented write off in respect of loan advanced to M/s. Marvel Agrex Ltd. He submitted that the order of the ld. C.I.T.(A) is justified and the same should be confirmed.
8. In rejoinder, the ld. Departmental Representative submitted that the decision of the Tribunal dated 31/8/2010 (supra) is not applicable to the case of the assessee as in that case there was a written agreement and the debtor was also declared a sick company by BIFR. Hence the debt written off was allowed unlike in the assessment year under consideration.
89. We have carefully considered the orders of the authorities below and the submissions of the learned representatives of the parties. We have also gone through the cases cited by the authorities below and the ld. A/R of the assessee (supra). We observe that the assessee-company is in the business of manufacture, marketing, sale and distribution of bakery products, such as biscuits, cake, bread etc. We observe that the assessee-company has given advances of Rs.6,86,02,085/- to JBMFPL and of Rs. 11.65.96.400/- to MFPL and stated that the same have been given as working capital advances. We observe that both these concerns are contract biscuits manufacturers for the assessee-company. The assessee has stated that the said advances are in the nature of working capital and have been given to meet day to day operations of the said two concerns. We observe that the said advances had been given in the financial years 2000- 01 and 2001-02, the details of which are given by the A.O. at pages 10 & 12 of the assessment order and in the books of account of the assessee these amounts are shown as trading advances. The department has not disputed the above facts. No interest has been charged on the aforesaid advances given by the assessee-company. The Hon'ble Delhi High Court has held in the case of Honda Siel Power Products Ltd. (supra) that where an advance is made by the assessee-company, manufacturing portable generator sets, to suppliers of tools and dies which are required for components of generator sets to ensure continued supply of components, such advances are in the nature of revenue expenditure, even though tools and dies purchased remained under the ownership of such manufacturers, because as a result of this arrangement there was a price advantage to the assessee-company. In the case before us we observe that the assessee-company has stated that on account of advances made by it to the abovenamed two concerns, viz. JBMFPL and MFPL, the assessee-company was assured competent rates in getting continued supply of biscuits manufactured on behalf of the assessee-company and as a result of this arrangement there was a price advantage to the assessee-company, which was in the revenue field. We further observe that the assessee-company found the assets of contract biscuits suppliers to be insufficient to repay the trade advances. In the said circumstances, the assessee had options either to write off the debt or initiate legal proceedings against its trade debtors or increase the processing charges, out of which advances could be recovered. According to the assessee, the measures of legal action 9 and increase in processing charges would have adversely affected its own economic interest and the loss was ultimately required to be borne by the assessee. Therefore, considering the commercial considerations and expediency, there was no other option left to the assessee but to write off the trade debts pursuant to subvention agreement. Further, in the books of the debtors, the amounts written off were credited to their respective P/L Accounts. We observe that the department has not disputed the facts that the assessee was ensured by the contract manufacturers, to whom the advances have been given by the assessee-company, continuity in supply of biscuits. We also observe on perusal of subvention agreement entered into with the above two concerns dated 22/3/2004 with MFPL and dated 25/3/2004 with JBMFPL that the assessee-company advanced working capital advances to facilitate the business of manufacturing and selling of biscuits and in view of weak financial condition of the said two concerns, the assessee-company decided for waiver of advances. It is stated in the said subvention agreements that the said two concerns will not increase the contract packing charges for a period of four years from the date of commencement of the said agreements and will also endeavour to reduce such contract packing charges. The said two concerns also committed to train its employees to manufacture/services of varieties of biscuits marketed by the assessee-company and also committed to provide such services at competitive prices. The above covenants and the facts substantiate the contention of the assessee that the advances had been given by the assessee-company due to business expediency and in its business interest in the course of its business to ensure continued supply of biscuits. As held by the Hon'ble Apex Court in the case of S.A. Builders vs. C.I.T. (supra) that the expression "commercial expediency" is one of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business and if the expenditure is incurred on the grounds of commercial expediency, it is allowable as business expenditure. We also observe that the department has not disputed the fact that if the assessee had not written off/waived the said advances given by it to these above two concerns, the said two concerns had negative network and could not carry on its operation. Therefore, we find merits in the contention of the ld. A/R that it would have affected adversely the business interest of the assessee-company and the decision was taken to write off the said advances in the course of its business 10 operation. We agree with the ld. A/R that merely because the said concerns, to whom advances had been given, were associate concerns of the assessee-company, it could not alter the legal position to make the real loss into an hypothetical loss or a fictitious loss as contended by ld. Departmental Representative and/or held by the A.O. 9.1. In view of our discussions above, we uphold the order of ld. C.I.T.(A) in deleting the disallowance of Rs.18,51,98,485/-, which was made by the A.O. Ground No.1 of the Revenue's appeal is, therefore, dismissed.
10. Ground No.2 of the appeal reads as under :-
"1. That the Ld. CIT(A)'s action was not proper in his treatment of share buy back expenses as revenue expenditure without assigning definite reasons or distinguishing on fact the decision of Apex Court."
11. We observe that the above issue is covered by the decision of I.T.A.T., 'C' Bench, Kolkata dated 31/8/2010 in the assessee's own case for assessment year 2003-04 in ITA No.1789/Kol/2008 and the Tribunal vide para-6 of the order after considering the decision of Hon'ble Apex Court in the case of Punjab State Industrial Development Corpn. Ltd. [225 ITR 792 (SC)] decided the issue in favour of the assessee. Copy of the said order of the Tribunal is placed on pages 28 to 41 of the paper book. Facts and circumstances of the assessee's case for the assessment year under consideration being identical to those for assessment year 2003-04, we respectfully following the said order of the Tribunal hold that the ld. C.I.T.(A) has rightly deleted the disallowance of Rs.11,42,963/- by treating the expenditure on share buy back as revenue expenditure. Therefore, ground No.2 of the Revenue's appeal stands dismissed.
12. Ground No.3 of the appeal reads as under :-
"1. That software charges cannot be considered as revenue expenses and hence Ld. CIT(A) was not justified in deleting the additions made by the A.O."
13. We observe that the above issue is also covered by the order of I.T.A.T., Kolkata Bench 'C' dated 16/9/2005 in ITA No.1189/Kol/2004 in the case of ACIT vs. Gontermann Peipers (India) Ltd., wherein the Tribunal in paras 10 to 19 of the order held as under :-
"10. We first deal with the objection of A.O. holding that the assessee was obtaining enduring benefit from the installation of such software. In our opinion, it would be misleading to assume that in cases, securing a benefit for the business would be, 11 prima facie, capital expenditure so long as the benefit is not so transitory as to have no endurance at all. There may be cases where the expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test.
11. The Hon'ble Supreme Court in one of its landmark decisions in case of Empier Jute Co. Ltd. -vs.- CIT reported in 24 ITR Page 1 has held that advantage consists merely in facilitating the trading operations or enabling the management and conduct of the business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.
12. Coming to the expenditure made by the assessee on account of software, we do find that the softwares, generally, do not have a long life. These softwares do not bring into existence a new asset or any benefit of an enduring nature. The buyer only acquires the software arid not the copyrights in such softwares itself. Accordingly, no new asset is being created nor any benefit of an enduring nature arises to the buyer.
13. We also find that such expenditure incurred by the assessee has been made for meeting the rapid growth in the field of computer technology and for upgradation of its computer system which was necessary for the smooth running of its business. The Hon'ble Calcutta High Court in case of CIT -vs.- Health & Co (Calcutta) (P.) Ltd. reported in 114 ITR 605 has held that a payment made to remove the possibility of recurring disadvantage cannot be considered as a payment made to acquire an enduring advantage.
14. We also find that the Hon'ble Apex Court in another landmark decision has taken an identical view in case of Alembic Chemicals Works Co. Ltd. -vs.- CIT reported in 177 ITR 377, wherein it was observed as under :-
"It would, in our opinion, be unrealistic to ignore the rapid advances in research in antibiotic medical microbiology and to attribute a degree of endurability and permanence to the technical know-how at any particular stage in this fast changing area of medical science. The state-of-art in some of these areas of high priority research is constantly updated so that know-how could not be said to bear the element of the requisite degree of durability and non-ephemerality to share the requirements and qualifications of an enduring benefit capital asset. The rapid strides in science and technology I the field should make us a little slow and circumspect in too readily pigeonholding an outlay such as this as capital ..."
15. The Hon'ble jurisdictional High Court in case of CIT -vs.- Karanpura Development Co. Ltd. reported in 144 ITR 538 has also held that when the predominant and main purpose of incurring the expenditure was to carrying on the 12 business, although the incidental advantage is of some endurance, it cannot effect the revenue nature of the expenditure.
16. Calcutta Tribunal on similar issue in case of ITC Classic Finance Limited -vs.- DCIT reported in 112 Taxman 155 has held that the software expenses are allowable as revenue expense on the premise that the software was needed in every establishment for day-to-day work.
17. Apart from above, various other Benches of Tribunal have also held that the software expenses are revenue in nature. Apart from the order of 1TAT. Jaipur Bench relied by the ld. A.R., ITAT. Delhi Bench in case of Media Video Limited -vs.- JCJT reported in 122 Taxman 28 held as under :
"In the modern times, where globalization, liberalization and computerization are taking place in the industry at a very fast speed, the software is very significant apparatus which brings qualitative improvement in the functioning of an organization. Thus, the software has to be updated very frequently. It becomes obsolete very fast. It does not create any new asset. It does not bring any long enduring benefit. Thus, the expenditure on software could not be held to be capital expenditure. Accordingly, the disallowance was to be deleted."
19. In view of the above and the judicial pronouncement, we find that the technology is changed at a rapid pace and it directly affects the way of business is done. Since the technology becomes obsolete very fast and as such no enduring benefit is enjoyed by investing in software packages as due to rapid development in the field of computer technology. New softwares are developed with more advanced features and technology. As a result, the existing software becomes redundant and needs to be replaced with new one and, therefore, no software has a life of more than a year and accordingly, in that case, the expenses incurred for the acquisition of the software has to be treated as revenue in nature. We, therefore, keeping in view the above facts and circumstances of this case and taking into consideration the above judicial pronouncement by various Courts and Benches of Tribunal including Hon'ble jurisdictional High Court and Hon'ble Supreme Court, are of the opinion that the ld. CIT(A) while deleting the disallowance made by the A.O. has passed a well reasoned and speaking order which does not call for any interference at our end. We, therefore, uphold such order of ld. CIT(A) and reject the ground raised by the Revenue in this regard.
14. We further observe that I.T.A.T., Kolkata Bench 'A' vide order dated 31/10/2010 in ITA No. 412/Kol/2010 in the case of ITO vs. Jubilee Investments & Inds. Ltd. by following the Special Bench decision of I.T.A.T., Delhi Bench in the case of Amway India Enterprises vs. DCIT [111 ITD 112 (Delhi)] has upheld the order of ld. C.I.T.(A) on this issue and dismissed the ground of appeal of the Revenue. The Special Bench (supra) held that since software becomes obsolete with technological innovation and 13 advancement within a short span of time, it can be said that where life of the computer software is shorter (say less than two years), it may be treated as revenue expenditure. It was further held that nature of advantage of computer software has to be seen in a commercial sense. It was further held that if the advantage is in the capital field then the same would be capital expenditure. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably, while leaving the fixed capital untouched, the expenditure would be on revenue account.
15. Hon'ble Delhi High Court has held in the case of CIT vs. G.E. Capital services Ltd. [300 ITR 420 (Del)] that cost of upgradation of software is a revenue expenditure. In view of the above, there is no infirmity in the order of ld. C.I.T.(A) in deleting the disallowance made by the A.O. on this count. We, therefore, uphold the order of ld. C.I.T.(A) on this issue by rejecting ground No.3 taken by the department.
16. In the result, the appeal filed by the Revenue is dismissed.
यह आदे श खुले Ûयायालय मɅ सुनाया गया है This order is pronounced in open Court on 11.02.2011.
Sd/- Sd/-
सी.
सी.डȣ.
(सी डȣ.राव)
राव लेखा सदःय ौी बी
(ौी बी.. आर.
आर. मीƣल)् Ûयायीक सदःय
(C.D.Rao), Accountant Member (B.R.Mittal), Judicial Member
(तारȣख)
तारȣख) Date: 11-02-2011
आदे श कȧ ूितिलǒप अमेǒषतः-
Copy of the order forwarded to:
1. अपीलाथȸ / The Appellant : A.C.I.T., Circle-7, Kolkata.
2 ू×यथȸ / The Respondent : M/s.Britannia Industries Ltd., 5/1A, Hungerford
Street, Kolkata-700 017.
3. आयकर किमशनर (अपील) : The CIT(A)-VIII, Kolkata.
4. आयकर किमशनर/The CIT, Kol-
5. वभािगय ूितनीधी / DR, ITAT, Kolkata Benches, Kolkata
6. Guard file.
स×याǒपत ूित/True Copy, आदे शानुसार/ By order,
(dkp)
उप पंजीकार/Dy/Asstt. Registrar.
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