Income Tax Appellate Tribunal - Ahmedabad
Eimco Elecon (India) Ltd.,, Anand vs Assessee on 16 July, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL,
" D" BENCH, AHMEDABAD
Before Shri A. K. GARODIA, ACCOUNTANT MEMBER
and Shri KUL BHARAT, JUDICIAL MEMBER
I.T.A. No. 931/ Ahd/2010
(Assessment year 2007-08)
Eimco Elecon (India) Ltd., Vs. Addl. CIT, Anand Range,
Anand Sojitra Road, Anand
Vallabh Vidyanagar,
Tal.&Dist. Anand
PAN/GIR No. : AAACE4645C
(APPELLANT) .. (RESPONDENT)
Appellant by: Shri Sunil Talati, AR
Respondent by: Shri B L Yadav, Sr. DR
Date of hearing: 16.07.2012
Date of pronouncement: 21.09.2012
ORDER
PER SHRI A. K. GARODIA, AM:-
This is assessee's appeal directed against the order of Ld. CIT(A) IV, Baroda dated 26.02.2010.
2. Ground No.1 is general.
3. Ground No.2 reads as under:
"2. The Hon'ble CIT (A) has erred in confirming the disallowance of Rs.8,58,452/- being provision made for leave encashment. It is submitted your appellant is following mercantile system of accounting and the provision for leave encashment was made on actuarial basis. The same be allowed on actual payment basis paid during the year."2 I.T.A.No.931 /Ahd/2010
3.1 It was submitted by the Ld. A.R. that the disallowance was made by the A.O. by invoking the provisions of clause (f) of Section 43B. He submitted that as per the decision of Hon'ble Apex Court rendered in the case of Bharat Earth Movers as reported in 241 ITR 428 and also as per the judgement of Hon'ble Calcutta High Court rendered in the case of Exide Industries Ltd. and Another Vs UOI and Others as reported in 292 IT 470 (Cal.), disallowance of leave encashment is not justified. He submitted that in the first case, it was held by the Hon'ble Apex Court that leave encashment is not a contingent liability if the provision is made on some scientific basis. He also submitted that in the second case, Hon'ble Calcutta High court has duly considered the provisions of clause
(f) of Section 43B and it was held that the amendment as per which this clause (f) was inserted by the Finance Act 2001 w.e.f. 01.04.2002 is held to be as arbitrary by Hon'ble Calcutta High Court and, therefore, the same was struck down by Hon'ble Calcutta High court being arbitrary, unconscionable and dehorse the Hon'ble Supreme Court decision. He submitted that in view of this judgement of Hon'ble Calcutta High Court, disallowance made by the A.O. is not justified. Ld. D.R. supported the orders of authorities below.
3.2 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgement of Hon'ble Calcutta High Court rendered in the case of Exide Industries Ltd. (supra). We find that the A.O. has made disallowance by invoking the provisions of clause (f) of Section 43B and the same was confirmed by Ld. CIT(A) also on the basis of Section 43B. As per the judgement of Hon'ble Calcutta High Court rendered in the case of Exide Industries Ltd. (supra), it was held that clause (f) of Section 43B is arbitrary, unconscionable and dehorse of the Hon'ble Supreme Court 3 I.T.A.No.931 /Ahd/2010 decision and, therefore, not valid. In view of this, clause (f) of Section 43B is not valid and, therefore, disallowance made by the A.O. on the basis of clause (f) of Section 43B cannot be sustained. We therefore delete the same.
4. Ground No.3 of the assessee's appeal reads as under:
"3. The Hon'ble CIT(A) has erred in confirming the disallowance of Rs.4,61,160/-u/s 14A of the Income Tax Act, 1961 read with Rule 8D of the Rules without proving the nexus of investment and appreciating the facts submitted during hearing. It is submitted that the disallowance is uncalled for and be directed to be deleted."
4.1 Brief facts of the case till the assessment stage are noted by Ld. CIT(A) in para 3 of his order which is reproduced below:
"Next ground of appeal is regarding disallowance u/s 14A of Rs.4,61,160/-. A.O. noted that the appellant had made investment in shares to the extent of Rs.2.37 crores, from which dividend of Rs.5,19,808/- was earned. Further, the A.O. noticed from the balance sheet as on 31.3.2007 that appellant's own funds were to the extent of Rs.96.15 crore and borrowed funds were Rs.3.48 crore, whereas total interest expenses debited in the P&L A/c. were Rs.2.73 crore. In response to A.O.'s proposal to made disallowance U/S.14A, appellant's submission was that during the year, additional investments of Rs.27.2 Lac only had been made and all other investments of Rs.209.96 Lac had been made in earlier years. Appellant submitted date of purchase of various shares and claimed that the entire investment in shares of Rs.2.37 crores was out of its revenues and internal accruals. Appellant contended that the borrowed funds were utilized for the purpose of business only and no borrowing or interest paid should be allocated for acquiring aforesaid investments. Appellant denied applicability of provisions of section 14A read with Rule 8D by placing reliance on the decision of Punjab & Haryana High Court in the case of CIT vs. Hero Cycle holding that disallowance could only be made, if there was actual nexus between tax free income and expenditure. A.O. did not accept appellant's contention that no expenses were incurred in relation to earning of tax free income on the 4 I.T.A.No.931 /Ahd/2010 ground that appellant had not maintained separate details of expenses attributable to exempt income. A.O, held that provisions of section 14A(2) were attracted and made disallowance of Rs.4,61,160/- U/S.14A read with Rule 8D."
4.2 Being aggrieved, the assessee carried the matter in appeal before Ld. CIT(A) who has confirmed the same and now, the assessee is in further appeal before us. It was submitted by the Ld. A.R. that the similar issue was considered and decided by the tribunal in assessee's own case for the assessment year 2006-07 in I.T.A.No. 3254/Ahd/2009 dated 31.05.2012, copy of which is available on pages 9-20 of the paper book and our attention was drawn to para 4.2.3 of this tribunal order wherein, it was held that no disallowance is justified out of interest expenditure and out of administrative expenses of Rs.1.02 lacs, disallowance of Rs.50,000/- was confirmed in that year. He submitted that in the present year also, no disallowance is justified on account of interest expenditure because the own funds in the present year is also many times more than investment in shares beings Rs.96.15 crores as against investment of Rs.2.37 crores. Ld. D.R. supported the orders of authorities below. 4.3 We have considered the rival submissions, perused the material on record sand have gone through the orders of authorities below and the tribunal decision in assessee's own case for the assessment year 2006-07 cited by the Ld. A.R. After examining the facts of the present year as well as that of the assessment year 2006-07, we are satisfied that no disallowance is called for u/s 14A out of interest expenditure because own funds of the assessee were many times more than the amount invested in shares and no direct nexus is established by the A.O. between investment and interest bearing borrowing funds. But we find that some disallowance is justified out of administrative expenses. In assessment 5 I.T.A.No.931 /Ahd/2010 year 2006-07, disallowance of Rs.1 lacs was made by the A.O. out of administrative expenses out of which the tribunal confirmed the disallowance of Rs.50,000/- only. In the present year, disallowance of Rs.4,61,160/- was made by the A.O. as per the calculation submitted by the assessee before him as per Rule 8D of the I.T. Rules 1962. As per the judgement of Hon'ble Bombay High Court rendered in the case of Godrej & Boyce Manufacturing Co. Ltd. Vs DCIT as reported in 194 Taxman 203 (Mum.), Rule 8D is not applicable in the present case because the assessment year involved is 2007-08. The working submitted by the assessee before the A.O. as per rule 8D is also not made available to us and hence, we cannot find as to out of this working of disallowance as per Rule 8D of Rs.4,61,160/-, how much is interest expenditure element and how much is the element regarding administrative expenditure. In assessment year 2006-07, this working was made available before the Tribunal and it was shown that out of total disallowance of Rs.45,42,207/-, disallowance on account of administrative expenditure was only Rs.1,02,984/- and on this basis, the tribunal confirmed the disallowance of Rs.50,000/- out of Rs.1.02 lacs being the disallowance made by the A.O. in that year out of administrative expenditure. In the absence of this working for the present year, we feel that the disallowance of Rupees one lac will meet the ends of justice. We hold accordingly. The A.O. is directed to restrict the disallowance u/s 14A to Rs. 1 lac. This ground is partly allowed.
5. Ground No.4 is as under:
"4. The Hon'ble CIT (A) has erred in confirming the disallowance of Rs.20,47,000/-being the software license fees claimed as revenue expenditure & treating the same as of capital in nature. During the year the company has paid Rs. 51.18 Lacs to GTL Ltd. for Oracle Product towards license fees for user of Finance, 6 I.T.A.No.931 /Ahd/2010 Purchasing, Order Management and Manufacturing users. The Software license fees paid is of revenue in nature. It be held so now and the AO be directed accordingly."
5.1 Brief facts till the assessment stage are noted by Ld. CIT(A) in para 5 of his order which is reproduced below:
"5. Next ground of appeal is regarding disallowance of software license fees of Rs.20,47,000/-. Appellant had paid software licenses fees of Rs.51,18,588/- for Oracle product licenses for finance, purchase order, management and manufacturing. A.O. observed that lumpsum payment for purchase of Oracle licenses, made for the first time could not be in the nature of revenue expenditure and even though the benefit derived by incurring such expenditure may not be for ever, it was spread over several years and it thus fell into the category of benefit of enduring nature. By relying on the decision of Aravalli Constructions Co. Pvt. Ltd. 359 ITR 30 (Raj.) and by distinguishing cases cited by the appellant, A.O. held the expenditure to be in the nature of capital expenditure."
5.2 Being aggrieved, the assessee carried the matter in appeal before Ld. CIT(A) but without success and now, the assessee is in further appeal before us.
5.3 It was submitted by the Ld. A.R. before us that the entire software is with regard to oracle and consultation of software and there was no hardware. He placed reliance on the decision of Special bench of the Tribunal rendered in the case of Amway India Enterprise Vs DCIT as reported in 111 ITD 112 (114 TTJ 476) (Del.)S.B. Ld. D.R. supported the orders of authorities below.
5.4 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgement of Special bench of the Tribunal cited by the Ld. A.R. We find that's the assessee is engaged in the business of manufacturing of mining machinery and the software for which this expenditure of Rs.62,30,245/-
7 I.T.A.No.931 /Ahd/2010was incurred by the assessee is not for a profit making apparatus. One expenditure is in respect of oracle extract license for business, purchase order management and manufacturing. Rs.51,18,588/- was paid by the assessee for this software. Second software in dispute is oracle product annual technical support and for purchase, order management and manufacturing. For this, an amount of 11,11,657/- was incurred by the assessee. From this narration noted by the A.O. on page 6 of the assessment order, we find that 2nd expenditure is annual technical support only and not for software. The second payment is for Annual Technical support for the maintaining of software, purchased by the assessee, which is for finance and purchase order management and manufacturing. As per the decision of Special bench of the Tribunal rendered in the case of Amway India Enterprise (supra), the most important test is the functional test and if it is found that the function being carried out with the help of the software is such which can be said to be a part of profit making apparatus of the assessee then the same has to be considered as capital expenditure and if it is only for increasing the organizational efficiency, the same cannot be treated as forming part of the profit making apparatus of the assessee company and should be treated as revenue expenditure. In the present case, we have already noted that the assessee is in the business of manufacturing of mining machinery and the software in question is for the purpose of finance, purchase order management and manufacturing. In our considered opinion, this software will help the assessee in increasing the efficiency but the same cannot be treated as forming part of profit making apparatus of the assessee company and, therefore, the expenditure on this software cannot be treated as capital expenditure. Out of this total expenditure of Rs.62,30,245/- claimed by the assessee as revenue expenditure, the A.O. has already allowed deduction of Rs.51.18 8 I.T.A.No.931 /Ahd/2010 lacs being depreciation @ 60% and disallowance is amounting to Rs.20.47 lacs being the 40% of such expenditure and since we are holding that it is not a capital expenditure, we delete this disallowance. This ground is allowed.
6. Ground No.5 is as under:
"5. The Hon'ble CIT (A) has erred in confirming the disallowance of Rs. 10,34,388/-u/s 40(a)(ia) being the reimbursement of expenses paid to clearing & forwarding Agents reimbursed towards stamp charges, documentation charges for customs, loading & unloading charges and other miscellaneous expenses. The said expenses incurred are in respect of reimbursement and hence not subjected to TDS. In view of this, the action of AO to invoke {provisions of Sec. 40(a)(ia) is unjust and unconfirmed. It be held so now and JAO be directed to delete the addition.' 6.1 Brief facts of the issue till the assessment stage are noted by Ld. CIT(A) in para 6 of his order which is reproduced below:
"6. Next ground of appeal is regarding disallowance of Rs.29,62,200/- u/s.40(a)(ia). Appellant had made payment of Rs.49.37 lakh to Aakash Mechatronics Limited (AML) for maintenance and service of its various machineries and also entered into annual maintenance contract with the said company. TDS U/S.194C was deducted by the appellant from the payments made. A.O. was of the view that as per terms of the agreement, services rendered by AML were in the nature of technical services fitting into the definition of 'fees for technical services' as appearing in Explanation 2 to clause (vii) of section 9(1). A.O. observed that AML was rendering various types of special services also and such activity could not be held as routine maintenance contract. A.O, also observed that Elecon Engg. Co. Ltd, a company of the same group was deducting TDS on the same services of Aakaish Mechatronics Limited u/s. 194J instead of section 194C. A.O. referred to CBDT Circular No.715 dated 8.8.95 that it is a routine maintenance contract only, which would be covered U/S.194C and in the said Circular, it had been clarified that where technical services are rendered in connection with maintenance contracts, provisions of section 194J will apply. A.O. held that appellant failed to deduct tax at 9 I.T.A.No.931 /Ahd/2010 source U/S.194J from payments made to AML and amount paid without deducting tax at source is liable to be disallowed u/s.40(a)(ia)."
6.2 Being aggrieved, the assessee carried the matter in appeal before Ld. CIT(A) but without success and now, the assessee is in further appeal before us.
6.3 It was submitted by the Ld. A.R. that this payment is regarding reimbursement of expenses of C&F agents and, therefore, no TDS was required to be deducted and no disallowance u/s 40(a)(ia) is justified. In support of this contention, reliance was placed on the tribunal decision rendered in the case of Satender Jhujhunwala in I.T.A.No. 1088/Cal/2009 dated 11.11.2011 and also on another tribunal decision rendered in the case of Utility Powertech Ltd. Vs ACIT in I.T.A.No. 2561/Mum/2009 dated 19.04.2010. He also placed reliance on the tribunal decision rendered in the case of Om Satya Axim pvt. Ltd. vs ITO in I.T.A.No. 1335/Ahd/2010 dated 13.05.2011. He submitted a copy of all these three Tribunal orders which are available in the paper book. Ld. D.R. supported the orders of authorities below.
6.4 We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the decision cited by the Ld. A.R. In the case of Om Satya Exim Pvt. Ltd. (supra), it was held by the Tribunal that if bills for reimbursement of expenditure have been raised by the commission agent separately, TDS was not required to be deducted for reimbursement and as a consequence, section 40(a)(ia) is not applicable with regard to such reimbursement. In the present case, such details are not available before us as to whether the amount of reimbursement is exact amount of expenditure incurred by the C&F agent and whether separate bills were raised by the C& F agents in 10 I.T.A.No.931 /Ahd/2010 respect of reimbursement of expenditure and in respect of service charges payable to them. We, therefore, feel that in the interest of justice, this matter should go back to the file of the A.O. for a fresh decision. We order accordingly. The assessee shall bring on record the relevant bills raised by each C&F agent and it has to be shown that exact amount of expenditure incurred by each agent was reimbursed by the assessee and bills were separately raised by the C&F agent for the reimbursement of each expenditure and for service charges payable to them and if the assessee is able to establish these two ingredients then Section 40(a)(ia) is not applicable in respect of reimbursement of expenditure and the A.O. shall decide this issue afresh and pass necessary order as per law as per above discussion after providing adequate opportunity of being heard to the assessee. This ground is allowed for statistical purposes.
7. In the result, this appeal of the assessee is partly allowed in terms indicated above.
8. Order pronounced in the open court on the date mentioned hereinabove.
Sd./- Sd./-
(KUL BHARAT) (A. K. GARODIA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Sp
Copy of the Order forwarded to:
1. The applicant
2. The Respondent
3. The CIT Concerned
4. The Ld. CIT (Appeals)
5. The DR, Ahmedabad By order
6. The Guard File
AR,ITAT,Ahmedabad
11 I.T.A.No.931 /Ahd/2010
1. Date of dictation...03/09/12
2. Date on which the typed draft is placed before the Dictating Member......10/09/2012.Other Member ............
3. Date on which the approved draft comes to the Sr. P.S./P.S.
4. Date on which the fair order is placed before the Dictating Member for pronouncement ......21/09/2012
5. Date on which the fair order comes back to the Sr. P.S./P.S.21/9/12
6. Date on which the file goes to the Bench Clerk ......21/09/2012
7. Date on which the file goes to the Head Clerk .......................
8. The date on which the file goes to the Assistant Registrar for signature on the order .........................
9. Date of Despatch of the order. ......................