Income Tax Appellate Tribunal - Chandigarh
Chandigarh Housing Board, Chandigarh vs Assessee on 15 March, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIG ARH BENCH 'B', CHANDIG ARH
BEFORE SHRI T.R. SOOD, A.M AND Ms. SUSHMA CHOWLA, JM
ITA No. 386/Chd/2012
Assessment Year : 2008-09
Chandigarh Housing V D.C.I.T. C-1(1)
Board, 8, Jan Marg Chandigarh
Sector 9D, Chandigarh
AAALC 0132 H
ITA No. 549/Chd/2012
Assessment Year : 2008-09
A.C.I.T V Chandigarh Housing
C-1(1), Chandigarh Board, Chandigarh
(Appellant) (Respondent)
Appellant by Shri Alok Mittal
Respondent by Smt. Jyoti Kumari
Date of hearing 17.10.2012
Date of Pronouncement 30.10.2012
O R D E R
PER T.R.SOOD, A.M
These are cross-appeals filed by the assessee and the Revenue and are directed against the order passed by the CIT(A), Chandigarh dated 15.3.2012.
I T A N O . 3 8 6 / C h d / 2 0 1 2 - Ap p e a l o f t h e a s s e s s e e In this appeal the assessee has raised following grounds:
" 1. That the order passed by the CIT (A) is erroneous both in law and facts.
2 That the CIT (A) has fallen in error while upholding the addition of Rs. 35,00,54,820/- in the hands of the Assessee/Appellant on account of interest received from investment of funds received as Bid Money from RGCTP Habitat Project in as much as the said amount belonged to the Chandigarh Administration and the Assessee Appellant was merely acting as a Nodal Agency duly appointed by the Chandigarh Administration. The order passed by the CIT(A) is contrary to the provisions of Section 20, 23, 63 of the Haryana Housing Board Act as extended to the Union Territory of Chandigarh.2
THAT STRICTLY IN THE ALTERNATIVE AND WITHOUT PREJUDICE TO THE ABOVE GROUND:-
3. That the CIT(A) has fallen in error in sustaining the addition of Rs.35,00,54,820/-on account of interest received from investment of funds received as Bid Money from RGCTP Habitat Project.
4. That the Commissioner of Income Tax (Appeals) has failed to consider the explicit provisions of the development agreement dated 6.10.2006 in which it has been stated clearly that the Chandigarh Housing Board is acting as a Nodal Agency on behalf of the Chandigarh Administration for development of Rajiv Gandhi Chandigarh Technological Park Project.
5. That the CIT Appeals had fallen in error in disallowing the sum of Rs.4,98,02,610/- being bank interest on overdrafts obtained against FDRs for earning high rate of interest."
2. Ground No. 1 is of general nature and does not require any separate adjudication.
3. Grounds No. 2 to 4 - Through these grounds the dispute raised is against the confirmation of addition by the ld. CIT(A) amounting to Rs. 35,00,54,820/- on account of interest received from investment of funds which were received from RGCTP Habitat Project.
4. Brief facts of the case are that there were some slum areas in the city of Chandigarh and with a view to develop such slum areas, Chandigarh City Administration invited scheme under which One Room Residential Flat were to be allotted to poor /slum dwellers on monthly licence fee. In order to develop this project the funds for the said scheme, it was decided to develop Rajiv Gandhi Chandigarh Technology Park (RGCTP) on Public Private Partnership basis. To facilitate the development of RGCTP the assessee purchased some land from Chandigarh Administration and after necessary formalities some of the plots were auctioned and through bidding M/s Pasarwnath Developers were selected as developer of RGCTP. Certain funds were received from the developer which have been invested in the form of FDR etc. on which the assessee earned interest. The contention of the assessee was that it was acting as agency on behalf of the Chandigarh Administration therefore, income from interest on these funds 3 belong to Chandigarh Administration and that is why income was not accounted for in the income-tax return. This plea was not accepted by the AO and action of the AO was confirmed by the ld. CIT(A).
5 Both the parties were heard in detail.
6 After hearing both the parties we find that identical issue came up for consideration of the Tribunal in AY 2007-08 in ITA No. 1075/Chd/2010 and 1198/Chd/2010 in assessee's own case. This issue was adjudicated vide paras 44 and 45 which are as under:-
" 44. The Id. CIT(A) has dealt with the aforesaid issue in para 32 and 33 of her Order as under:
"32. The issue involved in this ground is as to whether interest income of Rs.9,01,57,799/- on FDR created from funds received from RGCTP Habitat Project and conversion of industrial Plots to Commercial Plots belong to the Chandigarh Administration or the appellant. The appellant submitted that a sum of Rs.7,04,29,365/- was bank interest that accrued on the funds generated from the RGCTP Habitat Project and balance Rs.1,97,28,435/- was accrued on the funds that related to conversion fee on account of conversion of Industrial Plots to Commercial Plots.
33. Regarding the bank interest that accrued on the funds generated from RGCTP Habitat Project, the Appellant in its support submitted that these FDRs belonged to Chandigarh Administration and, therefore, the income therein also belonged to Chandigarh Administration. I have already adjudicated the issue as to whether the income from RGCTP Habitat Project belonged to the Chandigarh Administration or to the Appellant in Ground No. 2. As per my findings and conclusions in Ground No. 2, I have held that the RGCTP Habitat Project belonged to the Appellant and it is the Appellant who sold the land to the developer and earned the income from the sale of land and other shared revenue and therefore, the funds generated from such transactions belonged to the Appellant and the Appellant did not act as an agent/Nodal Agency of Chandigarh Administration. In view of my findings and conclusions in Ground No. 2, the interest income on such f unds is the income of the Appellant not the income of Chandigarh Administration.
45. We have heard both the parties. The assessee has not credited the impugned interest income on FDRs taken out of funds lying in the RGCTP project a/c on the plea that the assessee was a mere agent of the Chandigarh Administration in so far as the RGCTP Project was concerned and hence both the interest income as well as the principal amount on which the impugned interest was received belonged to the Chandigarh Administration. We have confirmed the finding of the CIT(A) that the assessee was not an agent of the Chandigarh Administration. In this view of the matter, the order of the CIT(A) with regard to 4 taxability of the impugned interest is also confirmed. Ground No.5 is dismissed."
7 Since the facts in the current year are identical, therefore, following the above order we decide this issue against the assessee.
8 Ground No. 5 - Through this ground the assessee has raised the issue that the lower authorities have erred in not allowing interest amounting to Rs. 4,98,02,610/- being bank interest on over draft obtained against FDR's for earning high rate of interest.
9 After hearing both the parties we find that this issue has also been considered in ITAs No. 1075/Chd/2010 and 1198/Chd/2010 in assessee's own case by the Tribunal in above noted ITAs for AY 2007-08 through para 46 and the matter was decided by the Tribunal in paras 47 to 49 which reads as under:-
" 47. The Id. CIT(A) has dealt with the aforesaid issue in para 38 and 39 of her Order as under:
"38. The issue involved is that the AO disallowed a sum of Rs. 6,45,33,684/- being bank interest on overdraft obtained against FDR and taken to the balance sheet under the head work-in-progress. The Appellant submitted that the original FDRs were made at 6% interest. During the year under consideration, the rate of interest of FDRs increased from 10% to 11%. The Appellant availed overdraft against the old FDRs @ 1% above FDR rates i.e. around 7% and invested the funds so raised in the fresh FDRs bearing h i gh e r ra t e o f in t e re st o f 1 0 % -1 1 % . T h e A p p e lla n t submitted that it acted as a prudent person and the excess interest so earned had been offered for tax. On the other hand the AO made an observation that the Appellant did not provide the balance statement, cash flow statement, Bank Certificate, and other relevant documents in its support. The AO further made a finding that i n i t i a l l y the Appellant had taken a plea that overdraft against FDRs was raised for utilization on various ongoing projects of the Appellant, but later changed its stand that the overdraft against the old FDRs was utilized to make fresh FDRs for earning higher rate of interest. However, the AO made a finding that the Appellant did not file any document in its support and further that the work in progress of the Appellant had increased from Rs. 76,79,01,913/- to Rs. 1,06,96,32,995/- during the year. Due to increase, the Appellant had created additional work in progress amounting to Rs. 30.17 Crores.
39. I do not f ind any merit in the co ntentions of the Appellant in the absence of any evidence or material on record. It is a fact 5 that during the year additional work in progress amounting to Rs.30.17 Crores was created and there would be corresponding inflow of funds to fund this additional work in progress. In view of the above this ground of Appeal is dismissed."
48. We have heard both the parties. The case of the assessee as initially made out before the Departmental authorities was that the amounts taken from the overdraft a/c were utilized to fund the on-going projects. The said stand was later changed by the assessee and it was submitted original FDRs carried interest @ 6% while the rate of interest had gone up to 10-11% in the year under appeal. In order to maximize the interest income, the assessee claimed to have taken overdraft against the old FDRs with the result that it had to pay interest which was 1% higher than the rate of interest carried by the old FDRs. According to the assessee, the overdraft so taken was utilized for investment in the new FDRs which carried higher rate of interest. The assessee claimed before the Departmental authorities that it had acted wisely and decided to pay interest on overdraft in order to invest the same in the new FDRs carrying higher rate of interest. According to the assessee, it has offered the excess interest so earned to tax.
49. Perusal of para 28.9 of the assessment order shows that the assessee had first submitted before the AO that the funds overdrawn were utilized for funding various works. The assessee changed its stand later and submitted that the funds overdrawn were utilized for investments in new FDRs. Perusal of para 38 of the appellate order passed by the CIT(A) shows that neither relevant details in support of the claim were provided by the assessee to the AO nor did it substantiate its claim before him.
Both the AO and the CIT(A) have recorded a finding of fact that additional work-in-progress undertaken by the assessee in the year under appeal would have required corresponding inflow of funds, meaning thereby that the amounts drawn from the overdraft account were utilized for meeting the expenses on additional work-in-progress. It is not that the AO has disallowed interest payments. He has carried the same to the work-in-progress a/c as per the regular method of accounting followed by the assessee. In this view of the matter, the order passed by the CIT(A) in this behalf is confirmed. Ground No.6 is dismissed."
10 Since the facts are identical therefore, this issue is also decided against the assessee.
11 In the result, appeal in ITA No. 386/Chd/2010 filed by the assessee is dismissed.
ITA No. 549/Chd/2012 - Revenue's appeal 612 In this appeal the Revenue has raised the following grounds:
"1 On the facts and circumstances of the case and in law the ld. CIT(A) has erred in deleting the addition of Rs. 3,03,51,231/- which was made by the AO on account of accrued interest on the funds relating to conversion fee.
2. On the facts and circumstances of the case and in law the ld. CIT(A) has erred in deleting the disallowance of Rs. 74,06,921/- and in not treating the expenditure of Rs. 79,00,904/- as capital expenditure though it w as incurred on computerization of office yielding enduring benefits to the assessee."
13 Ground No. 1 - After hearing both the parties we find that this issue was also considered as Ground No. 1 of Department's appeal in ITA No. 1198/Chd/2010 and the issue was adjudicated vide paras 51 to 56.
14 Both the parties had agreed that the facts of this case are identical to the facts involved in ITA No. 1198/Chd/2010, therefore, following the above order, we set aside the order of the ld. CIT(A) and restore the matter back to his file for fresh adjudication in terms of the observations made by the Tribunal for AY 2007-08.
`15 Ground No. 2 - After hearing both the parties we find that during assessment proceedings the AO noticed that the assessee has claimed a sum of Rs. 96,42,839/- towards computerization. Out of this a sum of Rs. 79,00,904/- was under the head "computerization of CHB Office" and Rs. 17,41,931/- was under the head "Consultancy charges". In response to the query the assessee submitted written submissions dated 20.10.2010 which have been reproduced at para 9.2 of AO's order and reads as under:
"9.2 In response to this assessee vide its reply dated 20.10.2010 has submitted the written submissions on this issue which re reproduced below:
1. The copy of account head "Computerization of CHB Office' is enclosed as Flag 2. This expenditure represents data entry charges of complete records of over 40,000 allottees of Chandigarh Housing Board by Axis Bank.7
It is submitted that earlier the Chandigarh Housing Board used to pen separate bank account for collection of installments from allottees or each of the Housing Scheme separately. On monthly basis the staff of CHB used to procure statements of account of each Housing Scheme from the banks and post the relevant installments in the ledger account of each allottee manually.
However, in order to take advantage of the latest technology and simply the voluminous work, it was decided that the accounts of all allottees of dwelling units of CHB be got computerized and that instead of several banks only one bank be authorized to receive the monthly installments from all allottees of all the Housing Schemes.
Thereafter, Axis Bank performed the task of computerization of total records of over 40,000 allottees of dwelling units spread over various sectors in Chandigarh.
Besdies, SPIC (Society for Promotion of Information Technology in Chandigarh) a unit of Chandigarh Administration was engaged for development and installation of the relevant software to be used by Axis Bank for collection of installments from the allottees. The expenditure of Rs. 79,00,904/- represents the data entry charges paid to Axis Bank and software development charges paid to SPIC.
5. The copy of head of account "Consultancy expenses' is enclosed as Flag-5. The Chandigarh Housing Board appointed 3i Infotech, an IT company as consultant for development and implementation of the relevant software for collection of installments from allottees by Axis Bank as well as to oversee the work of computerization of allottees records by Axis Bank. Besides the sum of Rs. 17,41,935/- was paid to M/s Feed Back Ventures who were engaged in order to suggest improvement in the work and procedures being deployed by Chandigarh Housing Board viz., preparation and finalization of project budget, cost monitoring, assistance in finalization of procurement strategy and works packaging, preparation and distribution of PQ documents, preparation of general and special conditions of contract and other related works."
16 After considering the submissions the AO observed that the above claim of the assessee had three components namely consultancy charges paid 3i Infotech (ii) Data entry charges paid, Axis Bank and Software development paid to SPIC. According to the AO whole expenditure was of capital nature and after discussing the case laws particularly the decision of Hon'ble Supreme Court in case of CIT V. Madras Auto Service (P) Ltd., 233 ITR 468 and Arvind Mills Ltd., V. CIT, 197 ITR 8 422, the expenditure was held to be of capital nature and only depreciation of 25% was allowed.
17 On appeal, similar submissions were made before the ld. CIT(A).
18 The ld. CIT(A) allowed the expenditure of Rs. 79,00,904/- vide para 5.3.1 which reads as under:
"5.3.1 The expenditure under the head "computerization of CHB Office" represents data entry charges and software development charges paid for digitization of complete records of over 40,000 allottees of CHB by Axis Bank. The expenditure was incurred to simplify voluminous work by taking advantage of computerization. The appellant has produced a copy of Master Service Agreement between the appellant and UTI Bank, the Principal Banker for management of allottee accounts in the appellate proceedings. A perusal of this document reveals that the charges to be paid per record are only Rs. 435/- per record reconciled (inclusive of taxes), which is quite reasonable. In my considered view, the AO is not right in treating this expenditure as capital expenditure, since it was incurred towards data entry cha4rges for digitization and software development.
Moreover the expenses made on computerization of office records cannot be treated as capital expenditure. Hence, the addition made of Rs. 79,00,904/- by treating it as capital expenditure is deleted."
19 However, the expenditure on account of consultancy charges was held to be as capital expenditure vide para 5.3.2 and 5.3.3 which read as under:
"5.3.2 Regarding the expenditure made of Rs.
17,41,935/- on account of consultancy charges the appellant had only produced a copy of agreement with M/s Feedback Adventures. As per this agreement, M/s Feedback Adventures was engaged to suggest improvement in the work and procedure being deployed by the appellant. It has seen that the improvement to be suggested were in respect of various procedures deployed by the CHB and so these expenses would result into enduring benefits to the appellant. Hence, it is held that the AO has rightly treated the expenditure incurred of Rs. 17,41,935/- on account of consultancy charges as capital expenditure and his action in this regard is upheld.
5.3.3 In view of the above, the addition confirmed would work out to Rs. 13,06,451/- (17,41,935 - depreciation @ 25% of Rs. 4,35,484). The appellant gets relief of Rs. 61,00,470/- (74,06,921 - 13,06,451). Ground of appeal No. 4 is partly allowed."9
20 Before us the ld. DR for the revenue strongly supported the order of AO and submitted that various components of this expenditure will have enduring benefit and therefore, consultancy charges have rightly been treated as capital expenditure of AO.
21 On the other hand, the ld. counsel of the assessee submitted that the expenditure of Rs. 79,00,904/- mainly consist of data entry charges and software development for the same. He pointed out that earlier the assessee was maintaining separate bank account for collection of installment of each allottee and later on to take benefit of the technology it was decided to develop a software and then to transform manual records of the allottees into digital record. For this work of data entry for digitization of accounts of all allottees was given to Axis Bank and Software for the same was got designed from SPIC. He further submitted that data entry charges in any case are required to be treated as revenue expenditure because no separate benefit would accrue to the assessee and it would lead only to savings in over heads. Similarly software expenses are to be treated as revenue expenditure and in this regard he relied on the decision of CIT V. Amway India Enterprises, 346 ITR 341(Delhi).
22 W e have heard the rival submissions carefully. As far as expenditure of Rs. 79,00,904/- is concerned, the same relates to development of software and maintaining of accounts of allottees in a combined form as well as data entry charges for such accounts. No doubt as far as data entry charges is concerned, it has to be treated as revenue expenditure because no separate enduring benefit would accrue to the assessee because these accounts were already being maintained manually which required lot of administrative over heads and which has now been digitized/computerized. Therefore, entry of data has to be treated as revenue expenditure and to this extent we agree with the order of ld. CIT(A). However, as far as software development charges are concerned, the same cannot be held to be of revenue nature. There was lot of controversy regarding software charges whether the same should be treated as revenue expenditure or 10 capital expenditure. In fact a Special Bench was constituted by the Tribunal in case of Amway India Enterprises V DCIT, 111 ITD 112. In this case it was observed as under:
" H e a d n o t e - "Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment years 1998-99, 2001-02 and 2002-03 - W hether in order to decide nature of expenditure as to whether it is capital or revenue, three tests, i.e., ownership test, enduring benefit test and functional test have to applied - Held, yes - Whether by applying said, tests, expenditure is treated as capital expenditure either when it results in acquisition of capital asset by assesses as owner thereof or when it results in accrual of advantage of enduring nature to assessee in capital field - Held, yes - Whether when assessee acquires a computer software or for that matter licence to use such software, he acquires a tangible asset and becomes owner thereof but, question as to whether expenditure on acquiring computer software is capital or revenue cannot be decided on basis of ownership test alone but has to be seen from point of its utility to businessman and how important an economic or functional role it plays in his business - Held, yes - Whether since computer software becomes obsolete with technological innovation and advancement within a short span of time, it can be said that where life of computer software is shorter (say less than 2 years), it may be treated as revenue expenditure; any software having utility to assessee for a period beyond two years can be considered as accrual of benefit of enduring nature, however, that by itself will not make expenditure incurred on software as capital in nature and functional test also needs to be satisfied - Held, yes - Whether for applicability of functional test, advantage which an assessee derives from use of computer software has to be seen in a commercial sense; if advantage is in capital field, then same would be capital and, if advantage consists merely in facilitating assessee's trading operations or enabling management and conduct of assessee's business to be carried on more efficiently or more profitably, while leaving fixed capital untouched, expenditure would be on Revenue account - Held, yes- Whether these criteria are required to be applied to determine exact nature of expenditure incurred by an assessee for acquiring different computer softwares - Held, yes.
Section 32 of the Income Tax Act, 1961 - depreciation - Allowance / rate of - Assessment years 1998-99, 2001-02 and 2002-03 - whether since computer software contained in a disk is tangible property by itself, use by assessee of such software in his business is enough to allow claim for depreciation under section 32(1)(i) at rate of 25 per cent - Held, yes - Whether, However, since with effect from .4.2003, computer software has been classified as a tangible asset under heading 'Plant' in Appendix-I to Income-tax Rules, 1962, assessee would be entitled to depreciation at rate of 60 per cent from said date
- Held, yes - whether said amendment is prospective and not clarificatory - Held, yes."
23 The above clearly shows that there was controversy whether the usage of software would constitute revenue expenditure or capital expenditure. In that case the matter was 11 remanded to the file of AO to see what kind of advantage was being derived by the assessee. This matter traveled to the Hon'ble Delhi High Court and the same was decided in favour of the assessee by the observation that it stands covered in favour of the assessee by the decision of Hon'ble Delhi High Court in case of CIT V. Asahi India Safety Glass Ltd., 346 ITR
329. Looking at the latter decision the same shows that the same pertains to AY 1996-97 and 1997-98. It is to be noted that appendix I to the Income-tax Rules which provides rates of depreciation was amended by income-tax (24th Amendment) Rules w.e.f .1.4.2003 effective from AY 2003-04. By this amendment rate of depreciation for computers was made to read "Computers including computer software (See note 7 of the Table). The relevant note 7 of the Table reads as under:-
"Computer software" means any computer program recorded on any disc., tape, perforated media or other information storage device.
24 From above it is clear that legislature itself has recognized that computer as well as software technology is changing very fast and that is why high or accelerated rate of 60% depreciation has been provided. Once computer software stands covered with the definition of computer given in Appendix I to the Income-tax Rules that means the same has to be treated as capital expenditure. However, at the same time computer software depreciation has to be allowed at 60%. Therefore, we set aside the order of the ld. CIT(A) and restore the matter back to the file of AO with a direction to segregate computerization of CHB Office into separate items i.e. that data entry charges and computer software charges. As far as data entry charges are concerned same should be allowed as per observations given earlier and as far as software development charges are concerned, they should be held to be capital nature and depreciation should be allowed @ 60%.
25 As far as payment of Rs. 17,41,935/- for consultancy charges is concerned neither any further arguments were made by the ld. counsel of the assessee nor any details have been filed, therefore, we are constrained to confirmed the order of the ld. CIT(A).12
26 In the result, appeal in ITA No. 549/Chd/2012 of the revenue is partly allowed.
Order pronounced on 30.10.2012
Sd/- Sd/-
(SUSHMA CHOWLA) (T.R. SOOD)
JUDICI AL MEMBER ACCOUNTANT MEMBER
Dated : 30.10. 2012
SURESH
Copy to: The Appellant/The Respondent/The CIT/The CIT(A)/The DR 13