Income Tax Appellate Tribunal - Mumbai
Netscribes (India) Pvt. Ltd., Mumbai vs Assessee on 14 November, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH "J", MUMBAI
BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND
SHRI SANJAY GARG, JUDICIAL MEMBER
ITA No.424/M/2011
Assessment Year: 2006-07
M/s. Netscribes (India) Pvt. Income Tax Officer Ward 7(1)-
Ltd., 4,
Poddar Centre, 85 Parel Post Aayakar Bhavan,
Office Lane, Vs. New Marine Lines,
Off Dr. Ambedkar Road, Mumbai - 400020
Parel,
Mumbai - 400 012.
PAN: AABCN1298F
(Appellant) (Respondent)
Assessee by : Shri Prakash K. Jotwarni, A.R.
Revenue by : Ms. Divya Bajpai, D.R.
Date of Hearing : 27.08.2014
Date of Pronouncement : 14.11.2014
ORDER
Per Sanjay Garg, Judicial Member:
The present appeal has been filed by the assessee against the order dated 31.07.10 of the Commissioner of Income Tax (Appeals) [(hereinafter referred to as CIT(A)] relevant to assessment year 2006-07. The assessee has taken the following grounds of appeal:
"1. On the facts and circumstances of your appellant's case and in law, the learned Commissioner of Income Tax (Appeals) erred in upholding the learned assessing officer's order with regard to disbelieving Capital expenditure of Rs34,75,000 incurred by your appellant on renovation / refurbishment to leasehold premises and treating the same as Unexplained Expenditure u/s 69 C of The Income Tax Act,1961.
2. Consequently, the learned Commissioner of Income Tax (Appeals) erred in upholding the view of the learned assessing officer in adding Rs.34,75,000 to the income of your appellant and also disallowing Rs 3.47,500 claimed by your appellant u/s 32 (1)(i )as depreciation @ 10%.ITA No.424/M/2011
2 M/s. Netscribes (India) Pvt. Ltd.
3. On the facts and circumstances of your appellant's case and in law, the learned Commissioner of Income Tax (Appeals) erred in upholding the learned assessing officer's order with regard to not allowing set off of Unabsorbed depreciation of Rs9 , 0 7 , 9 8 1 p e r t ai n i n g t o 2 0 0 1 - 2 0 0 2 a g a i n s t I n c om e f r o m O t h e r S o u r c es viz. Interest on fixed deposit with bank.
4. On the facts and circumstances of your appellant's case and in law, the learned Commissioner of Income Tax (Appeals) erred in upholding the view of the learned assessing officer in disallowing bad debts written off by your appellant aggregating to Rs.7,32,113.
6. On the facts and circumstances of your appellant's case and in law, the learned Commissioner of Income Tax (Appeals) erred in upholding the view of the learned assessing officer in disallowing depreciation u/s 32 (1)(i) of Rs 1,31,538 claimed by your appellant on additions of Rs.4,38,460 made to Software."Ground Nos.1 & 2
2. Ground Nos.1 & 2 are relating to the addition of Rs.34,75,000/- as unexplained expenditure under section 69C of the Income Tax Act. The assessee during the year claimed capital expenditure of Rs.34,75,000/- incurred on renovation/refurbishment on leasehold premises and claimed depreciation of Rs.3,47,500/-. The assessee produced the relevant documents in the shape of cash vouchers etc. to prove the payments made towards the above said work and further confirmations from the concerned parties and also evidence of TDS deducted thereupon. However, the Assessing Officer (hereinafter referred to as the AO) was not satisfied with the said details and observed that the assessee had failed to prove the incurring of expenditure for the above said work. He therefore not only disallowed the claim of depreciation but also made the addition on account of unexplained expenditure under section 69C of the Act.
2.1 The Ld. CIT(A) also confirmed the said addition. The assessee is thus in appeal before us.
3. We have heard the rival contentions of the Ld. Representatives of both the parties and have also gone through the records. We may observe that the ITA No.424/M/2011 3 M/s. Netscribes (India) Pvt. Ltd.
order of the AO as well as of the Ld. CIT(A) is self contradictory. Under section 69C of the Act, the addition can be made in respect of expenditure incurred by the assessee if the assessee is not able to offer any explanation about the source of such expenditure. In the present case, the AO on the one hand is disbelieving the incurring of expenditure thus denying the claim of depreciation and on the other hand is making addition on account of unexplained expenditure and thereby admitting the incurring of expenditure by the assessee. The AO has tried to blow hot and cold in one stream. A perusal of the assessment order as well as order of the Ld. CIT(A) reveals that the dispute before the AO was relating to the claim of depreciation. The assessee was never asked to prove the source of expenditure, rather the incurring of expenditure itself has been disbelieved by the lower authorities. Under such circumstances, no additions can be made under section 69C of the Act. Hence, the addition made on this account under section 69C is ordered to be deleted.
4. So far the claim of depreciation is concerned, the assessee has invited our attention to various documents in the shape of bills, vouchers and further details of the improvements done in the premises in question. He has further submitted that he may be given an opportunity to produce the necessary details and evidences in this respect before the AO.
On the other hand, the Ld. D.R. has contended that the assessee has failed to explain as to what exactly was purpose of the expenditure incurred.
5. After going though the record on the file and hearing the Ld. Representatives of the parties, we deem it fit to restore the issue regarding the claim of depreciation to the file of the AO to decide it afresh after giving proper opportunity to the assessee to represent its case. This issue is ITA No.424/M/2011 4 M/s. Netscribes (India) Pvt. Ltd.
accordingly allowed for statistical purposes.
Ground No.3
6. Ground No.3, as reproduced above, is with regard to not allowing of set off of unabsorbed depreciation of Rs.9,07,981/- pertaining to assessment year 2001-02 against income from other sources i.e. interest on fixed deposits with bank. The lower authorities denied the said set off observing that the current year depreciation which could not be set off against the profits and gains of business could be carried forward and adjusted only against profits and gains of business and not other heads of income. The Ld. counsel for the assessee has brought our attention to the relevant section 32(2) read with section 71 of the Act. He has further relied upon the decision of the Hon'ble Madras High Court in the case of "CIT vs. SPEL Semi Conductor Ltd." [2013] 212 Taxman 506 (Mad) wherein the Hon'ble High Court has observed that a reading of section 32(2) makes it clear that if the unabsorbed depreciation allowance cannot be wholly set off under clause (i) and clause (ii), the amount not so set off shall be set off from the income under any other head, if any, assessable for that assessment year, and that section 72(2) does not prevent such set off of carrying forward depreciation. Further, the co-ordinate bench of the Tribunal, in the case of "M/s. Suresh Industries Pvt. Ltd. vs. ACIT" in ITA No.5374/M/2011 decided on 10.10.12 while dealing with the identical issue, has observed as under:
"8. We have heard the rival submissions and perused the orders of the lower authorities and have carefully considered the relevant provisions of the Act and the Paper Book submitted by the assessee. A perusal of the statement of income for the year under consideration show that the assessee has shown Long Term capital gains at Rs. 1,30,00,000/- after claiming exemption u/s. 54EC of the Act. The assessee has also shown net loss from business before depreciation at Rs. 17,48,195/-. To this, the assessee added current year's depreciation at Rs. 2,32,059/- and unabsorbed depreciation brought forward from assessment years 1999-2000 and 2002-03 at Rs. 6,42,208/- and claimed set off amounting to Rs.ITA No.424/M/2011
5 M/s. Netscribes (India) Pvt. Ltd.
26,22,462/- from the Long Term capital gains at Rs. 1,30,00,000/-. Profit and gains of business or profession are computed in accordance with the provisions contained in Sec. 30 to 43 of the Act. Depreciation is allowed as per the provisions of Sec. 32(1) of the Act. Section 32(2) of the Act contains provisions relating to unabsorbed depreciation which is as under:
"Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for that previous year, or owing to the profits or gains chargeable being less than the allowance, then, subject to the provisions of sub-section (2) of section 72 and sub- section (3) of section 73, the allowance or the part of the allowance to which effect has not been given, as the case may be shall be added to the amount of the allowance for depreciation for the following previous year and deemed to be part of that allowance, or if there is no such allowance for that previous year, be deemed to be the allowance for that previous year, and so on for the succeeding previous years.]
9. A perusal of the aforementioned section shows that Sec. 32(2) has been subjected to the provisions of Sec. 72(2) and 73(3) of the Act. Before discussing the provisions of Sec. 72(2) let us first analyze the provisions of Sec. 32(2) of the Act prior to this amendment w.e.f. 1.4.2002 "Substituted by the Finance Act, 2001, w. e. f 1-4-2002. Prior to its substitution, sub section (2), as amended by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, w.e.f 1-4-1988, Direct Tax Laws (Amendment) Act, 1987, w.e..f 1-4-1989 and Finance Act, 1992, w.e.f 1-4- 1993, substituted by the Finance (No. 2) Act, 1996, w.e.f 1-4-1 997 and further amended by the Finance Act, 2000, w. e. f 1-4-2001, read as under:
'(2) Where in the assessment of the assessee full effect cannot be given to any allowance under clause (ii) of sub-section (1) in any previous year owing to there being no profits or gains chargeable for that previous year or owing to the profits or gains being less than the allowance, then, the allowance or the part of allowance to which effect has not been given (hereinafter referred to as unabsorbed depreciation allowance), as the case may be, -
(i) shall be set off against the profits and gains, if any of any business or profession carried on by him and assessable for that assessment year;
(ii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i), the amount not so set off shall be set off from the income under any other head, if any, assessable for that assessment year;ITA No.424/M/2011
6 M/s. Netscribes (India) Pvt. Ltd.
(iii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i) and clause (ii), the amount of allowance not so set off shall be carried forward to the following assessment year and--
(a) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year;
(b) if the unabsorbed depreciation allowance cannot be wholly so set off, the amount of unabsorbed depreciation allowance not so set off shall be carried forward to the following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed.
Provided that the time limit of eight assessment years specified in sub-clause (b) shall not apply in the case of a company for the assessment year beginning with the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year relevant to the previous year in which the entire net worth of such company becomes equal to or exceeds the accumulated losses."
10. A comparative study of pre-amendment and post amendment provisions of Sec. 32(2) suggests that prior to the amendment, the set off was restricted to the profits and gains, if any, of any business or profession whereas post amendment (i.e. the law applicable for the year under consideration) the set off is available from profits or gains chargeable for the previous year. The claim of the lower authorities that profits or gains so mentioned should be restricted to profits or gains of business or profession cannot be accepted because had that been the intention of the legislature it would not have deleted phrase "of any business or profession in the post amended provisions of Sec. 32(2). The law regarding set off of unabsorbed depreciation upto 1.4.1996 was very liberal and set off was allowable against any income. This was also upheld by the Hon'ble Supreme Court in the case of CIT Vs CIT Vs Virmani Indus. Pvt. Ltd & Ors 216 ITR 607 (SC) (supra). However, the law regarding such set off was changed by the Finance Act No. 2 of 1996 and from A.Y. 1997-98 to 2002-03 the unabsorbed depreciation was put at par with business losses u/s. 72. However the status quo have been restored from A.Y. 2003-04 and therefore the ratio laid down by the Hon'ble Supreme Court in the case of CIT Vs Virmani Indus. Pvt. Ltd & Ors 216 ITR 607 (SC) (supra) once again hold good and so now unabsorbed depreciation can be set off against any income. Thus, the claim of current year's depreciation of Rs. 2,32,059/- is directed to be set off against the income under the head ITA No.424/M/2011 7 M/s. Netscribes (India) Pvt. Ltd.
"Capital gains". Accordingly, ground No. 1 of the appeal is allowed.
11.Having considered the provisions of Sec. 32(2), it is also clear that if the current year's depreciation cannot be set off owing to the profits or gains chargeable being less than the allowance, the allowance or the part of the allowance to which effect has not been given shall be added to the amount of allowance for depreciation for the following previous year and deemed to be part of the allowance which means that brought forward depreciation merges with the current year's depreciation because of the legal fiction created by provisions of Sec. 32(2) of the Act. However, this fiction has been subjected to the provisions of Sec. 72(2) and 73(3) of the Act."
7. The law is thus settled on this issue to the effect that the unabsorbed depreciation is to be added to the account of allowance of depreciation of the next year and as such merges with next year's depreciation allowance because of the legal fiction created by provisions of section 32(2) of the Act and further that as per the provisions of section 71 of the Act such depreciation allowance can be set off from income from other heads and further that section 72 does not create any bar to it. In view of the above, this issue is accordingly decided in favour of the assessee.
Ground No.4
8. Ground No.4 is in relation to disallowance of bad debts written off of amounting to Rs.7,32,113/-. The AO noticed that the assessee had created in the profit and loss account provision for doubtful debts utilized for Rs.10,01,113/-. On being asked to clarify the same, the assessee failed to give any satisfactory explanation. Hence, he disallowed the said provision and added back the same to the income of the assessee. The assessee submitted before the Ld. CIT(A) the required details in this respect. The assessee further submitted that against the provision of Rs.10,01,113/-, amount of Rs.2,69,000/- was added back by the assessee suo-motto and thus making the provision for bad debts written off amounting to Rs.7,32,113/-. The Ld. CIT(A), however, observed that the assessee had failed to prove that the said ITA No.424/M/2011 8 M/s. Netscribes (India) Pvt. Ltd.
debts had actually become bad. He therefore disallowed the claim of bad debts written off.
9. Before us, the Ld. A.R. of the assessee has brought our attention to pages 98 to 101 showing the details of the parties, the amount as well as the explanation for which the said debts are to be treated as bad debts. He has further relied upon the documents showing relevant details as well as computation sheet and copy of return of income for the earlier years in support of the said claim. The Ld. A.R. of the assessee has explained from the said documents that said debts are past period debts wherein the respective parties either have refused to make the payment or there were no chances of recovery of the same.
10. After going through the documents relied upon by the Ld. A.R. and after hearing the Ld. Representatives of the parties, we are of the view that this issue requires adjudication afresh by the AO. We accordingly restore this issue to the file of the AO for decision afresh. Needless to say that the AO will give proper opportunity to the assessee to present its case and produce the necessary evidence and thereafter to decide the same by way of speaking order.
Ground No.6
11. Ground No.6 is relating to disallowance of depreciation of Rs.1,31,538/- on software expenses. The assessee during the year incurred expenses on purchase of software amounting to Rs.4,38,460/-. The assessee claimed depreciation at the rate of 30%. The AO, however, observed that the assessee had put for use the said software for less than 180 days. He also observed that as per section 32(1)(ii) the said software would fall in the definition of intangible assets and as per the rules, the assessee was entitled to ITA No.424/M/2011 9 M/s. Netscribes (India) Pvt. Ltd.
depreciation at the rate of 25% for a year. However, since the assessee had used the software for less than 180 days, he therefore allowed depreciation at the rate of 12.5% only at Rs.54,808/- and disallowed the remaining claim of depreciation.
12. In first appeal before the Ld. CIT(A), the assessee claimed that it was entitled to 60% depreciation on the cost of software. However, the Ld. CIT(A) observed that as per Rule 5 of the Income Tax Rules "Computers including software" are eligible for depreciation at the rate of 60%. He interpreted the said Rule as that if the software is purchased along with computer then the depreciation will be allowable at the rate of 60%. However, if only software is purchased separately and independent from computers, then it would fall in the definition of intangible assets being a license to use the said software, hence would be eligible for depreciation at the rate of 25%. He therefore upheld the finding of the AO in this respect.
13. Before us, the Ld. A.R. of the assessee has submitted that the assessee during the year had purchased antivirus software which remains valid for a limited period, hence the assessee as per rules was entitled to claim depreciation at the rate of 60%.
On the other hand, the Ld. D.R. has relied upon the lower authorities.
14. We have considered the rival submissions and have also gone through the records. It may be noted that Rule 5 of the Income Tax Rules, 1962 provides that the depreciation on certain assets is to be calculated as provided in the Appendix-I to the said Rules. A perusal of Appendix-I reveals that "computers including computer software" have been mentioned under the heading "machinery and plant" and the rate of depreciation has been provided under the said rules at the rate of 60%. In note 7 to Appendix-I, 'Computer ITA No.424/M/2011 10 M/s. Netscribes (India) Pvt. Ltd.
software' has been defined as under:
"7. "Computer software" means any computer program recorded on any disc, tape, perforated media or other information storage device."
15. The Ld. CIT(A) has interpreted the said Rule 5 along with Appendix-I in the manner that the depreciation at the rate of 60% is available only if the software is purchased along with the computer and not otherwise. We may find that no such condition has been mentioned therein in rule 5 or Appendix- I. When the statute specifically provides a certain percentage of depreciation to be allowed on a particular item, any other interpretation cannot be made or held to be justified in law. Computer software is necessarily required to be used for the running and operation of computer and without software the computer would be a useless machine. Software is an essential part for the use of the computer. From time to time, new softwares are developed. For the proper functioning, improvement, betterment and administration of business, the softwares are purchased and when they are loaded/installed in the computer, it becomes part of the computer. The term 'Computer software' has been separately defined in note to the Appendix-I and there is nothing mentioned in the relevant provisions that computer software cannot be purchased separately or independent of computer machine.
15.1 In our view, it is immaterial as to whether the software was purchased along with the computer or thereafter. The interpretation of the Ld. CIT(A) that the assessee will be eligible for depreciation at the rate of 60% only when the software is purchased along with the computer, in our view, is wrong.
16. As observed above, when the statute has provided a specific percentage to be allowed on a particular thing, no different view can be adopted. Since the statute has provided a depreciation allowance at the rate of 60% on computer as well as computer software, hence we hold that the assessee is ITA No.424/M/2011 11 M/s. Netscribes (India) Pvt. Ltd.
entitled to depreciation at the rate of 60% on purchase of computer software. This issue is accordingly allowed in favour of the assessee.
17. In the result, subject to our above observations, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court on 14.11.2014.
Sd/- Sd/-
(R.C. Sharma) (Sanjay Garg)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated: 14.11.2014.
* Kishore, Sr. P.S.
Copy to: The Appellant
The Respondent
The CIT, Concerned, Mumbai
The CIT (A) Concerned, Mumbai
The DR Concerned Bench
//True Copy// [
By Order
Dy/Asstt. Registrar, ITAT, Mumbai.