Income Tax Appellate Tribunal - Mumbai
Mukund Engineers Ltd. , vs Assessee on 15 December, 2004
IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH "H", MUMBAI
BEFORE SHRI P.M.JAGTAP (A.M) AND SHRI N.V.VASUDEVAN(J.M)
ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03)
M/s. Mukund Engineers Limited, Income Tax Officer, 10(1) 1,
Bajaj Bhavan, Nariman Point, Aaykar Bhavan, MK Road,
Mumbai - 400 021. Vs. Mumbai - 20.
PAN: AAACM 4974G
(Appellant) (Respondent)
ITA NO.1810/MUM/2005(A.Y. 2001-02)
ITA NO.1215/MUM/2006(A.Y. 2002-03)
Income Tax Officer, 10(1) 1, M/s. Mukund Engineers
Aaykar Bhavan, MK Road, Limited,
Mumbai - 20. Bajaj Bhavan, Nariman Point,
Vs. Mumbai - 400 021.
PAN: AAACM 4974G
(Appellant) (Respondent)
Assessee by : Shri P.J.Pardiwala/
Ms. Vasantiben Patel
Revenue by : Shri R.S. Srivastav
ORDER
PER N.V.VASUDEVAN, J.M,
ITA No.1810/M/05 is an appeal by the Revenue and ITA
No.1905/M/05 is an appeal by the Assessee. Both these appeals are directed against the order dated 15.12.2004 of CIT(A)-X, Mumbai, relating to A.Y.01-02:
2 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03)
2. First we shall take up for consideration ITA No.1905/M/05, appeal by the Assessee. Ground No.1 to3 raised by the Assessee reads as follows:
"1. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the Assessing Officer in disallowing an amount of Rs. 39,407/- being the employer's contribution to Provident fund paid after the due date but before the end of the accounting year relevant to assessment year 2001-2002 under section 43B.
2. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the Assessing Officer in making an addition of Rs.4,484/- being the employees' contribution to provident fund paid after the due date but before the end of the financial year relevant to assessment year 2001- 2002 under section 36(1)(va) read with section 2(24)(x).
3. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the Assessing Officer in a disallowing an amount of Rs.55,825/- in respect of the employer's contribution to Employees State Insurance Corporation under section 43B."
3. It is not in dispute that the addition sustained by the CIT(A) were employers and employees contribution to Provident Fund and ESIC on the ground that the same were not paid on or before the due date as envisaged under the relevant law relating to the Provident Fund and ESIC. It is not in dispute that the payments were made on or before the due date for filing the return of income for the A.Y. in question. In CIT Vs. Alom Extrusions Ltd. 319 ITR 306 (SC), the Hon'ble Supreme Court dealt with the claim for 3 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) deduction u/s.43-B of the Act in respect of contribution to Provident Fund. Sec.43-B provides that Notwithstanding anything contained in any other provisions of the ITAct, 1961, a deduction otherwise allowable under the said Act in respect of any sum payable by the Assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of the employees shall be allowed as deduction only in computing the income referred to in section 28 of that previous year in which such sum is actually paid. Thus the above provision which are incorporated in Sec.43-B (b) applies to contribution by an Assessee of his share of contribution i.e,, employers share, to provident fund in respect of an employee. Section 4 3-B was inserted with effect from 1st April, 1984, by which with regard to tax, duty and contribution to welfare funds, it became mandatory for the assessee (s) to account for the afore- stated items not on Merchantile basis but on cash basis. In other words they had to claim deduction on account of aforesaid payments as expenditure only in the previous year in which they actual pay the tax, duty and contribution to welfare fund. This situation continued between 1st April, 1984, and 1st April, 1988, when the Parliament amended Section 4 3-B and inserted first proviso to Section 43-B. By this first proviso, it was, inter alia, laid down, any tax duty, cess or fee payable by the assessee(s) if an assessee(s) pays such tax, duty, cess or fee even after the closing of the 4 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) accounting year but before the date of filing of the Return of income under Section 139(1) of the Act, the assessee(s) would be entitled to deduction under Section 43-B on actual payment basis and such deduction would be admissible for the accounting year. This proviso, however, did not apply to the contribution made by the assessee(s) to the labour welfare funds (which were covered by provisions of clause(b) to Section 43-B of the Act). Vide Finance Act, 1988, the second proviso came to be inserted (which covered contributions to labour welfare funds by an Assessee to which provisions of clause(b) to Section 43-B of the Act applied). It reads as follows:
"Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid during the previous year on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36."
"Explanation.-- For the purposes of this clause, "due date' means the date by which the assessee is required as an employer to credit an employee's contribution to the employee's account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise."
4. The second proviso stood further amended vide Finance Act, 1989, with effect from 1st April, 1989, which reads as under:
"Provided further that no deduction shall, in respect of any sum referred to in clause (b), be allowed unless such sum has actually been paid in cash or by issue of a cheque or draft or by any other mode on or before the due date as defined in the Explanation below clause (va) of sub-section (1) of section 36, and where such payment has been 5 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) made other wise than in cash, the sum has been realised within fifteen days from the due date."
Explanation below clause (va) of sub-section (1) of Section 36 reads as follows:
"Explanation.-- For the purposes of this clause, `due date' means the date by which the assessee is required as an employer to credit an employee's contribution to the employee's account in the relevant fund under any Act, rule, order or notification issued thereunder or under any standing order, award, contract of service or otherwise."
5. The question arose before the Hon'ble Supreme Court as to whether the deletion of the said second proviso and amendment of the first proviso was retrospective or prospective. The Hon"ble Supreme Court held that the deletion had retrospective effect:
(i) The deletion of the second proviso to s. 43B, and the amendment to the first proviso, by the Finance Act, 2003 was to overcome implementation problems. Consequently, the amendments, though made applicable by Parliament only with effect from 1.4.2004, were curative in nature and would apply retrospectively w.e.f. 1.4.1988.
(ii) In Allied Motors 224 ITR 677 (SC) it was held that even though the first proviso to s. 43B was inserted w.e.f 1.4.1988, it operated retrospectively from 1.4.1984.It was held that when a proviso is inserted to remedy unintended consequences and to make the section workable it could be read retrospective in operation. This principle applies to the deletion of the second proviso as well.
(iii) if the contention of the Department that the deletion of the second proviso is prospective is accepted, there will be hardship and invidious discrimination because assessee who have paid the contributions after the 6 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) due date will be denied deduction for all times while a defaulter who pays the contribution after 1st April, 2004 would get the benefit of deduction under s.
43-B.
(iv) Though Parliament has explicitly stated that the amendment will operate w.e.f. 1.4.2004, as a principle of construction the intention should be determined from the language used by the Legislature and if strict literal construction leads to an absurd result, i.e., a result not intended to be sub- served by the object of the legislation, then if another construction should be preferred.
6. In view of the aforesaid decision, the employers contribution paid to Provident Fund and Employees State Insurance Corporation on or before the end of the accounting year has to be allowed as a deduction. Thus ground No.1 and 3 are allowed
7. As far as Ground No.2 is concerned, In CIT vs. AIMIL Limited The Hon'ble Delhi High Court in ITA No. 1063 of 2006 ITA No.755 of 2008 ITA No. 204 of 2009 ITA No. 1214/2008 with ITA No. 1246/2008 ITA No. 50/2009 ITA No. 78/2009 judgment dated December 23, 2009 had to deal with a case of disallowance u/s.36(1)(va) of the Act. The Hon'ble Court discussed the provisions of S. 2 (24) (x) which provides that amounts received by an assessee from employees towards PF contributions etc shall be "income" and S. 36 (1) (va) which provides that if such sums are contributed to the employees account in the relevant fund on or before the 7 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) due date specified in the PF etc legislation, the assessee shall be entitled to a deduction. The Court also noticed that the second Proviso to s. 43B (b) provided that any sum paid by the assessee as an employer by way of contribution to any provident fund etc. shall be allowed as a deduction only if paid on or before the due date specified in 36(1)(va). After the omission of the second Proviso w.e.f 1.4.2004, the deduction is allowable under the first Proviso if the payment is made on or before the due date for furnishing the return of income. In Alom Extrusions 319 ITR 306 (SC), the deletion of the second Proviso has been held to be with retrospective effect. The High Court had to consider whether the benefit of s. 43B can be extended to employees' contribution as well which are paid after the due date under the PF law but before the due date for filing the return. The Hon'ble Court held that:
(i) Though the revenue has argued that a distinction is to be made between "employers' contribution" and "employees' contribution" and that employees' contribution being in the nature of trust money in the hands of the assessee cannot be allowed as a deduction if not paid on or before the due date specified in the PF etc law, the scheme of the Act is that employees' contribution is treated as income u/s 2 (24) (x) on receipt by the assessee and allowed as a deduction u/s 36 (1) (va) on making deposit with the concerned authorities. S. 43B (b) stipulates that such deduction would be permissible only on actual payment;
(ii) The question as to when actual payment should be made is answered by Vinay Cements 213 CTR 268 where the deletion of the second Proviso to s.8 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) 43B w.e.f 1.4.2004 was held applicable to earlier years as well. As the deletion of the 2nd Proviso is retrospective, the case has to be governed by the first Proviso. Dharmendra Sharma 297 ITR 320 (Del) & P.M. Electronics 313 ITR 161 (Delhi) followed;
(iii) If the employees' contribution is not deposited by the due date prescribed under the relevant Acts and is deposited late, the employer not only pays interest on delayed payment but can incur penalties also, for which specific provisions are made in the Provident Fund Act as well as the ESI Act. Therefore, the Act permits the employer to make the deposit with some delays, subject to the aforesaid consequences. Insofar as the Income-tax Act is concerned, the assessee can get the benefit if the actual payment is made before the return is filed, as per the principle laid down in Vinay Cement.
8. In view of the aforesaid decision of the Hon'ble Delhi High Court, the employees contribution to Provident Fund on or before the end of the Financial year is also directed to be allowed as a deduction. Ground No.2 of the Assessee is allowed.
9. Ground No.4 raised by the Revenue and Gr.No.2 raised by the Revenue can be conveniently decided together. These grounds read as follows:
Ground No.4 of the Assessee reads as follows:
"On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of Assessing Officer in disallowing depreciation of Rs. 1.30 crore on Intellectual Property Rights (IPR) on the ground that the said IPR comprised of skills for operation and maintenance of hardware and 9 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) software which were not covered within the meaning of intangible assets and accordingly, not eligible for depreciation under section 32."
Ground No.2 of the Revenue reads as follows:
"On the facts and in the circumstances of the case as well as in law, the Learned CIT(A) has erred in directing the Assessing Officer that depreciation on EDP equipment, application and systems software should be allowed as claimed by the assessee company without appreciating the fact that value adopted by the assessee company at Rs. 2.50 crores and Rs. 5 crores respectively for working depreciation is excessive than the value shown in the books of the sister concern and which results in excessive depreciation.
10. M/s. Mukund Ltd. had an Electronic Data Processing Department (EDP) carrying on various I.T. related activities which, inter alia, include Software Development Projects, Data Processing, Net Working, Accounting System on Enterprises Resource Planning (ERP), Implementing Computer Aided Design (CAD) and Production Planning Control system, Hardware and Software installation and maintenance, provide services to Investors such as Shareholders, Debenture Holders, Fixed Depositors. The said EDP Department was utilized by Mukund Ltd. to provide internal services and Mukund Ltd. does not generate any income from the said EDP Department. The assessee viz. Mukund Engineers Ltd. wanted to acquire this EDP Department from Mukund Ltd. in order to expand its sphere of work for its 10 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) Infotech division. Mukund Ltd. sold the EDP Department to the assessee by Sale Agreement dated 30/9/2000.
11. The EDP Department comprised inter alia:-
(i) Owned Computer Hardware, System Software, furniture, fixtures, fittings as listed in Annexure -1 to the Agreement of sale.
(ii) Leased Computer Hardware including system Software as listed in Annxure - 2 to the Agreement of sale.
(iii) Computer Hardware under Hire Purchase scheme including System Software as listed in Anneuxre-3 to the Agreement of sale.
(iv) Technology and Application Software as listed in Annexure - 4 to the Agreement of sale.
(v) Skills for operation and maintenance of Computer Hardware and Software i.e. Intellectual Property Rights.
12. The total purchase consideration for the sale and transfer of the EDP Department as a whole was Rs.11,50,00,000/- inclusive of all taxes, duties and levies. For the purpose of sale of the entire EDP Division of Mukund Ltd. a valuation report was obtained from M/s. Dalal & Shah and M/s. N.M. Raiji & Co., two well know firms of Chartered Accountants. The equipments were also valued by D.K. Nagarseth & Associates, Chartered Engineers. The amount paid for the acquisition of the said unit was accounted on the basis of a valuation report of Shri V.L.Mehta, General Manager (Information and Technology), Mukund Ltd., (hereinafter also referred to as Internal Valuation) wherein the values for the assets of the EDP Department were apportioned as follows:
11 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) S.No. Particulars Amount (Rs. In crores)
1. Owned Computer Hardware, System Software, furniture, fixtures and fittings.
2. Leased Computer Hardware including system Software. 2.50
3. Computer hardware under hire purchase scheme including system software
4. Technology and Application software 5.00
5. Skills for operation and maintenance of Computer hardware and software i.e. 5.20 Intellectual Property Rights Total 12.70 Shri V.L. Mehta also gave an itemized valuation in respect of each equipment on the basis of which the said assets were acquired and recorded in the books of account. However, the said item-wise valuation were not submitted before the Assessing Officer but filed before the CIT(A). Accordingly, in the return of income filed the assessee bifurcated the assets acquired from Mukund Ltd. into relevant 'block of assets", and claimed depreciation in respect thereof.
13. The claim made by the assessee for depreciation and the Assessing Officer's objection to the said claim were as follows:
I. EDP Equipments including furniture and fixture:12 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) The assessee has acquired EDP Equipments including furniture and fixtures at a valuation price of Rs. 2.50 cores as on 30/9/2000. The value of the assets as per the books of Mukund Ltd. was as under:-
S.No. Assets Value at which Book value in
acquired. Mukund Ltd.
1 Computer including application 23,688,300 11,967,502
software
2. Plant and machinery 542,700 5,565,792
3. Furniture 769,000 360605
Total 25,00,000 17,893,899
The assessee has claimed depreciation on these assets acquired from Mukund Ltd. as under:-
S.No. Assets Depreciation claimed Rate of Depreciation.
by the assessee
1. Computer excluding application 14,212,980 60% software
2. Plant and machinery 135,675 25%
3. Furniture 76,900 10% Total 14,425,555 The A.O noticed that the computer software purchased by the seller i.e. Mukund Ltd. is under lease and hire purchase agreement,. Clause 2.1.3 of the agreement for sale by which assessee acquired these assets provided:
"Seller undertakes to complete necessary documentation for transfer of computer hardware under lease and hire purchase covered in Annexure 2 & 3 in the name of the purchaser within 30 days or any other date agreed between the parties mutually of the signing of this agreement. The obligations under these lease/hire purchase agreements shall be to the account of the purchaser with effect from 1st October,2000. As the agreement of Hire Purchaser for AS-400 model 720 machine is executed recently, the purchaser also agrees to 13 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) reimburse the Seller, the margin money paid by the seller and interest till the date of assignment."
According to the AO once the lease and hire purchase agreement is transferred in the name of the assessee the assets also necessarily has to be transferred at the book value of Mukund Ltd. which was Rs. 1.70 crores. According to the AO, the assessee cannot substitute value based on non government approved valuer when the value of these assets are readily ascertainable from the hire purchase and lease agreement and also from the fixed asset register of the Mukund Ltd. The value attributable to these leased assets can at best be the purchase/market value if the assets have been acquired recently or the value as per the lease agreement or the book value in the books of account of Mukund Engineers. The A.O was also of the view that Computer is an asset on which depreciation @60% is allowed under the I.T. Act. Such a high rate of depreciation was granted for the asset computer, in view of the high rate of obsolescence and fast changing technology. In present times the software which is developed becomes obsolete very fast. The application software necessarily facilitates better and more effective use of the computer. However, the use is limited to a specific period. The assessee instead of paying less than the market value has acquired these computers at a value which is about 150% of the book value which cannot be accepted. Even the External Valuer has valued the entire 14 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) assets of the EDP division at Rs. 45 lacs while following the Net Assets Value method. In view of the above the AO held that the purchase transaction of computers is not at arm's length. He held that the depreciation can only be allowed at the value at which these assets were standing in the books of accounts of Mukund Ltd. which is Rs. 1.70 crores. Any consideration given over and above the book value was held to be not paid for business reasons. The depreciation allowable was worked by the AO as under:-
S.No. Assets Depreciation Rate of Depreciation Rate of claimed by depreciation as per WDV of depreciation the assessee Mukund Ltd.(allowable)
1. Computer excluding 14,212,980 60% 7,180,501 60% application software
2. Plant and Machinery 135,675 25% 1,391,448 25%
3. Furniture 76,900 10% 36,060 10% Total 14,425,555 8,608,009 Accordingly depreciation amounting to Rs. 14,425,555/- - Rs.8,608,008 = Rs.5,817,546/- was disallowed.
II. Application and Systems Software:
The assessee contended that it had acquired from Mukund Ltd. application and system software in running mode, valued at Rs. 5 crores. The assessee has capitalized the same in its books and claimed depreciation thereon @ of 60% amounting to Rs. 3 crores. The application software acquired by the assessee comprised of :15 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03)
- Enterprise Resource Planning (ERP)
- JD Edwards Worldsoft 7.3 cum. 10
- Manufacturing, Distribution and Finance modules.
- 60 concurrent users.
The assessee's claim of depreciation of Rs. 3 crores on the ERP package was rejected by the AO for the following reasons:
(i) The ERP package is not freely tradeable in the open market since it is a patented software which can be acquired only from a Registered Dealer. Mukund Ltd. had acquired this software in the year 1994 and in the same year the entire cost of acquisition was claimed as a revenue expenditure.
(ii) The agreement of sale under which the assessee purchased the software also clearly stipulates, that the ERP software will be used exclusively for Mukund Ltd. The assessee had contended that the application and systems software which has a book value of Rs.
NIL in the books of accounts of Mukund Ltd. has been agreed at Hi-tech price of Rs. 5 crores by the assessee to expand its sphere of work for its Infotech Division.
(iii) The EDP division was an integral part of functioning of Mukund Ltd. as it undertook the processing of data for the company. In the year 1995, IBM AS/ 400 mid range computer system was installed along with the ERP solution JD Edwards, which is the total 16 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) solution for a company's major commercial application and the ERP system was in the F.Y. 2000-01 in the process of implementing other systems for Mukund Ltd. It was also, in the process of establishing leased line connectivity between two different units of Mukund Ltd. This clearly implies that the entire performance of Mukund Ltd. is heavily dependent on the ERP package and this transaction to transfer the ERP package to the assessee can only be a paper transaction to reduce the profits of the assessee as this ERP package has to be utilized exclusively by Mukund Ltd. even after this paper transfer of the software.
(iv) Looking at the above facts, the AO was of the view that the payment of Rs. 5 crores to acquire this ERP package from Mukund Ltd. for the sole use of the latter is not governed by any prudent business agency. The ERP package is not for use in the assessee's infotech business but can be only used exclusively for as an accounting package, for maintaining the accounts of Mukund Ltd. According to the AO the assessee has indulged in a paper transaction to claim higher depreciation in order to reduce its business income. The entire transaction is not at arms length but done with the sole intention to reduce the tax liability.
17 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03)
(v) The value of the ERP package as per books of Mukund Ltd. on the date of sale was Nil and the sum of Rs.5 crores paid over and above the WDV was held by the AO to be paid for consideration other than business. Accordingly the claim of depreciation of Rs. 3 crores was disallowed.
III. Intellectual property rights comprised of all technical skill for operation and maintenance of hardware and software. The assessee had claimed depreciation on this human resources @ 25% amounting to Rs. 1.30 cores. As per clause 3.1 of the agreement for sale under which the Assessee purchased the EDP division from Mukund Ltd., it was provided as follows:
"The parties agree that it is an essential term of this agreement that the skills required for the operation and maintenance of the Hardware and Software shall be made available to the purchaser within 30 days or any other date agreed between the parties mutually of the signing of this agreement at cost, that is to say on no profit no loss basis."
The assessee contended that it has taken over the services of approximately 30 to 35 employees who are erstwhile employees of Mukund Ltd. The Assessee claimed that these employees were computer trained. The skills of the erstwhile employees of Mukund Ltd. have been assessed and valued by the assessee, by its own internal valuer Mr. K.L. Mehta at Rs. 5.20 crores. The assessee has further stated that these employees are having experience of about 30 to 35 years and are a great asset to the organization. 18 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) The claim of the assessee was not accepted by the AO for the following reasons.
(i) Depreciation can be allowed under the I.T. Act only if conditions stated in Sec. 32 of the I.T. Act are satisfied. Section 32 of the Income-tax Act, 1961 Clause (b) below explanation (3) to section 32(1) defines intangible assets as Intangible assets, being know-how, patents, copy rights, trade marks, licences, franchises or any other business or commercial rights of similar nature.
Explanation 4 further clarifies that for the purpose of these subsection the expression "know-how" means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil well or other sources of mineral deposits "including searching or discovery or testing of deposits for the winning of access"
From the plain reading of the above provisions it is clear that human resources can by no stretch of imagination qualify for intangible assets as defined in Sec. 32(1) of the I.T. Act and are hence not eligible for depreciation.19 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03)
(ii) The term 'technical know-how' used in section 32 referred above is not the same thing as operation skills of employees alleged to be acquired by the assessee.
(iii) The skills for operation and maintenance of hardware and software belongs to the human employees of Mukund Ltd. It is a personal individual asset of a human being. It is not capable of being owned and capitalized by a company.
(iv) There is no provision in the Income-tax Act, 1961 to allow depreciation on skilled manpower.
(v) What has been acquired is not an Intellectual property right, there is no tangible or intangible asset as defined in the I.T. Act which has been acquired by the assessee. What has been acquired can at best be said to be services of the skilled workers, previously employed by Mukund Ltd., and it is only the salary and other perquisites which at best can be paid and claimed by the assessee as a revenue expenditure.
(vi) The foremost precondition for grant of claiming depreciation is that the asset must be owned by the company. The employees cannot be said to be owned by the assessee.20 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03)
(vii) The assessee has not obtained any bond, restricting these employees from leaving its service, or stipulating the period of service.
(viii) The assessee has taken over employees of M/s. Mukund ltd. and assigned value to them. Employees are manpower and are paid higher salary to compensate for their skills and better experience rendered by them. The technical skills of human resources for operation and maintenance of hardware and software are such that these items can not be capitalized in the books of accounts. In fact when these employees were working for M/s. Mukund Ltd., no such value was assigned to them. What these employees were receiving was only salary and this was the only revenue expenditure claimed by M/s. Mukund Ltd.
As the manpower resources are not covered within the meaning of intangible asset as defined in sec. 32 of the Act and are not depreciable assets, the claim of allowance of depreciation u/s. 32 of the Act on these human resources were disallowed amounting to Rs. 1.3 crores. Thus the total disallowance on account of depreciation as discussed in the paragraphs above was as under:-
21 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) S.No. Particulars Amount (Rs.)
1. EDP Equipment (including furniture and 5,817,546 fixture)
2. Application and systems software in 30,000,000 running mode.
3. Intellectual property rights comprising of 13,000,000 technical skills Total 48,817,546
14. Before CIT(A), the assessee submitted that:
(1) the surplus on sale of EDP Division has been offered to for by Mukund Ltd., the seller by reducing the value of the assets and sold from the respective block of assets.
(2) The assessee after acquiring the EDP Division from Mukund Ltd. was rendering infotech services to Mukund Ltd., and was getting Rs. 30 lacs per month from them towards EDP services rendered. The assessee had between the period from Oct. 2000 to July 2004 received an aggregate amount of Rs. 13.80 crores from Mukund Ltd. towards EDP charges as against Rs. 12.70 crores paid by the assessee to acquire the EDP Division from M/s. Mukund Ltd. Thus the assessee pointed out that the allegation of the Assessing Officer that the transaction of sale by Mukund Ltd. to the assessee of the EDP Division was only a paper transaction to reduce tax liability by claiming higher depreciation is not true. The allegation of the 22 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) Assessing Officer that the transaction was not a prudent business transaction is also not correct.
(3) With regard to disallowance of depreciation on EDP equipments including furniture and fixtures, the assessee pointed out that the assessee assigned value of Rs. 2.5 crores to these assets. The internal valuer of the assessee had given an item wise valuation and on that basis the values recorded in the books of accounts of the assessee. The value assigned by the External Values was the book value but the value assigned by the internal valuer is the market value. No fault has been found in such valuation by the Assessing Officer. It was further pointed out that for the purpose of allowing depreciation the Assessing Officer has to look at the provisions of Sec. 43(1) which define "Actual Cost" as the cost of Assets to the assessee. It was submitted that the cost as recorded by the assessee in its books based on the valuation by the valuer was its cost. The WDV of the Assets in the books of the seller is irrelevant. It was argued that if the Assessing Officer disputed the valuation i.e. the Actual Cost as recorded by the assessee in its books he ought to have resorted to the provisions of Explanation-3 to Sec. 43(1) which casts a duty on the Assessing Officer to establish that the purpose of transfer of assets was to reduce tax liability of the assessee by claiming higher depreciation.23 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) (4) With regard to disallowance of depreciation on Application Software System, the assessee submitted that the Assessing Officer made the disallowance of depreciation on the ground that almost all software are not freely tradeable in the open market and normally are patented. Software also comes with a condition that it would only be exclusively used on a particular system where installed. Even simple packages like Microsoft Office and Windows are not tradeable in the open market and can be only exclusively used in the computer in which they are installed. In fact what is purchased by paying for the software is the right to use. The assessee invited attention to Appendix I to the Income-tax Rules, 1962 which g gives the rates at which depreciation is allowable where in item III(5) refers to computers including computer software. Note No.7 to the said Appendix clarifies that "Computer Software" means any computer programme recorded on any disc, tape, perforated media or other information storage device. when the entire EDP Department was purchased, the said purchase would be meaningless if the associated software is not purchased together. As regard the allegation that the transaction is only a paper transaction the assessee submitted that they were planning to go in a very big way into infotech business to take advantage of the software boom at that time. In fact, they had already associated themselves with IBM, one of the leading brands in computer, and had set up an IBM Authorised Training Centre at 24 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) Kurla for high end computer training and also for ERP Training. It was felt that if the company concentrates on the computer and software segment it would be able to establish itself as one of the leading companies in the sector. Accordingly, the entire EDP division of Mukund Ltd. was acquired including its trained manpower which would give the assessee a head start into this activity. Both the companies involved are public limited companies and though they may be belonging to the same group, the transaction has been carried out at arms length and the consideration has been determined on the basis of the valuation report of M/s. Dalal & Shah and M/s. N.M. Raiji & Co., two very reputed firms of Chartered Accountants. The assessee further submitted that they are receiving an amount of Rs. 30 lacs a month from Mukund Ltd. towards EDP services and accordingly an amount of Rs. 3.60 crores is received annually.
(5)With regard to disallowance of depreciation on technical skills purchased on the ground that they were intellectual property rights, the assessee submitted that the said payment is more in the nature of technical know- how which is received in the form of skilled manpower and the same would be covered as an intangible asset as a commercial right.
15. The CIT(A) on consideration of the above submissions held that under "Section 43(1) of the I.T. Act, defines "actual cost" means 'actual cost' of the 25 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) asset to the assessee reduced by that portion of the cost thereof, if any, as has been made directly or indirectly by any person or authority. The aforesaid provisions of the I.T.Act has got one exception in the form of Explanation 3 to section 43(1) of the I.T. Act, which reads as under:-
Explanation 3.--Where, before the date of acquisition by the assessee, the assets were at any time used by any other person for the purposes of his business or profession and the [Assessing] Officer is satisfied that the main purpose of the transfer of such assets, directly or indirectly to the assessee, was the reduction of a liability to income-tax (by claiming depreciation with reference to an enhanced cost), the actual cost to the assessee shall be such an amount as the [Assessing] Officer may, with the previous approval of the [Joint Commissioner], determine having regard to all the circumstances of the case."
The CIT(A) found that independent valuations of EDP divisions have been carried out and the AO has not pinpointed any specific defect in the valuation of assets of EDP division. He was of the view that the AO has not established that the main purpose of the transfer of EDP division directly or indirectly to the appellant, was reduction of liability of income-tax by claiming depreciation with reference to an enhanced cost. He also noticed that the Assessee was getting Rs. 30.00 lacs per month from M/s. Mukund Ltd. for rendering the services of EDP division and total receipts till July, 2004 amounted to Rs. 13.80 crores. In the light of the above findings as he considered the claim for depreciation made by the Assessee:26 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) I. EDP Equipments including furniture and fixture: As regards to the assets of the EDP division referred to in the order of the AO and valued at Rs./2.50 crores by the Assessee on which it claimed depreciation, the CIT(A) was of the view that the Assessee company has assigned the value of these assets as Rs. 2.50 crores in its books of account. The valuation was based on the itemized valuation of each and every asset. He held that these assets are "tangible assets", which are entitled for depreciation u/s. 32 of the Income-tax Act. He found that these assets have been transferred to the assessee by M/s. Mukund Ltd. He held that the WDV of these assets, as standing in the books of M/s. Mukund Ltd. does not represent the market value of these assets. The actual market value of these assets have been determined and assigned at Rs. 2.50 crores in the books of Assessee. He held that the AO has not pin pointed any specific defect in the valuation of these tangible assets. In view of the above, he directed the AO to consider the value of these assets at Rs. 2.50 crores and allow depreciation of the same in accordance with law.
II. Application and Systems Software: As regard to the technology application software, the CIT(A) found that a value of Rs. 5 crores had been assigned to these item of assets. The items have been specified at Annexure IV of the agreement dated 30/09/2000. He held that these assets were in 27 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) the nature of ' intangible assets', i.e. in the nature of rights, which appellant got due to acquisition of EDP division. The intangible assets i.e. rights are required to be assigned some value at the time of acquisition of EDP division. These assets includes the following:
"Application software.
Enterprises Resource Planning (ERP) JD Edwards Worldsoft 7.3 cum.
*Manufacturing, Distribution & finance modules. *60 concurrent users.
The application software considered in the officer.
*Customised JD Edwards ERP software.
*Purchase Stores.
*Accounts Receivable, Accounts Payable, General Ledger *Other Platforms *Payrolls,Personnel, Provident Fund.
*Share Accounting-Normal/Demat NSDL/CDSL, Fixed deposits.
*Marketing, Despatch, Excise.
*Attendance Recording.
*PPC Maintenance.
*Finished Goods Inventory, Finished Goods warehouse.
*Quality Control, Off-loading *Marketing, Despatch and stock systems at stockyards.
*Computer Aided designs of products"
The CIT(A) found that in the assessment order the AO has also mentioned that softwares are not freely tradeable in the open market and are normally patented. He found that, the software mentioned above are used exclusively 28 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) on a particular system where it was installed. Those system were itself transferred to the Assessee. He also found that Assessee was earning income, due to acquisition of these "intangible assets", in the form of technology and application software. The assessee was getting Rs. 30.00 lacs per month from M/s. Mukund Ltd. as a result of providing services of EDP division. He was of the view that without these rights i.e. in software, the assessee could not operate the hardware and the work of data processing could not be carried out. The fact that value of these "intangible assets" in the books of M/s. Mukund Ltd. was "NIL" in his opinion was of no consequence. He also held that when the entire EDP division is transferred, then all tangible and intangible assets are required to be assigned some value. According to him the assignment of value to such intangible rights was considered further justified, as assessee was earning income by use of these softwares. He held that the value of Rs. 5 crores earmarked to the software which in fact is a price paid for using the software, which is installed in the system. In view of the above, the CIT(A) directed the AO to allow depreciation on the computer software @ 60% as claimed in the return. III. Intellectual property rights: The assessee has also accounted for Rs. 5.20 croes in its books of accounts as value of the IPR which it received from M/s. Mukund Ltd. The rights mentioned therein are technical skills of 29 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) operation, maintenance of hardware and software. The CIT(A) held that such Intellectual Property Rights(IPR) does not quality for depreciation u/s. 32 of the I.T. Act. According to him under the Act such rights and its depreciable character are not recognized. In his opinion, over the years, such IPRs appreciates. In view of the above, the CIT(A) held that the amount of Rs. 5.20 crores, assigned as the value of he IPR acquired from M/s.
Mukund Ltd. would not be entitled for any depreciation.
16. Aggrieved by the relief allowed by the CIT(A), the revenue has raised Ground No.2 in its appeal. Aggrieved by the order of CIT(A) sustaining disallowance of depreciation on Intellectual Property Rights(IPR) the assessee is in appeal before the Tribunal.
17. We have heard the rival submissions. We shall take up for consideration ground No.2 raised by the revenue in its appeal. As far as aforesaid ground of appeal of the revenue is concerned the ld. D.R relied on the order of the Assessing Officer. The ld. Counsel for the assessee reiterated the submissions as were made before the CIT(A). He drew our attention to the order of the Assessing Officer, wherein the Assessing Officer has referred to the fact that the assets of the EDP Division were valued by the external valuer at Rs. 45.00 lacs while determining the valuation by 30 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) following net assets valuing method. In this regard he drew our attention to the report of Mr.D.K. Nagarseth, an external valuer appointed for the purpose of valuation of EDP Equipments. A copy of which is at page 28 to 36 of the assessee's paper book. He pointed out that as far as the value of the assets of the EDP Division is concerned the value has been arrived at a sum of Rs. 2,47,93,000/-. He pointed out that this valuation is based on individualized items. He reiterated the fact that the Assessing Officer did not dispute this valuation. The aforesaid valuation is being the market value as on the date of transfer was rightly adopted by assessee as actual cost for the purpose of claiming depreciation. With regard to the disallowance of depreciation on application of software system he relied on the order of the CIT(A).
18. We have considered the rivals submissions. In our view the order of the CIT(A) on this issue deserves to be upheld. As far as the disallowance of depreciation on EDP Equipment including furniture and fixtures is concerned the main objection of the Assessing Officer appears to be that WDV of these assets as per the books of Mukund Ltd. should have been adopted as actual cost by the assessee while claiming depreciation. One of the reasons assigned by the Assessing Officer is that these assets were purchased by Mukund Ltd. under a lease and hire purchase agreement and 31 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) the value as per this agreement should hold good for all purposes. In our view this was not the proper approach. The value adopted by the assessee is duly supported by the report of a valuer, who has certified that the value adopted by the assessee is the market value of the assets on the date of transfer. This valuation has not been found to be incorrect by the Assessing Officer. Besides the above, as far as the assessee is concerned, it was justified in adopting the value it paid for acquiring these assets from Mukund Limited because that was the actual cost which it had paid for acquiring these assets. The action of the assessee is in accordance with the provisions of section 43(1) of the Act. The Assessing Officer could have made out the case by invoking Explanation-3 to section 43(1) of the Act which he had not done. In these circumstances we are of the view that the CIT(A) was right in directing the Assessing Officer to allow depreciation on EDP Equipment including furniture and fixtures as claimed by the assessee.
19. As far as depreciation on application and system software is concerned we are of the view that the fact that the ERP package was licensed for used by Mukund Limited cannot be the reason to hold that the assessee is not a licensed user of the said software on which depreciation can be allowed. The assessee by paying a sum of Rs. 5 crores for acquiring the right to use ERP package has used the said license and earned income. The said income was 32 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) offered to tax by the assessee. But for the license to use ERP software the assessee would not have earned this income. The fact that these software were used by Mukund Limited and because of claim of depreciation over the year, their book value was nil as per the books of Mukund Limited, cannot be the reason to hold that the right acquired by the assessee to use these ERP package has no value. In our view the CIT(A) was, therefore, right in directing the Assessing Officer to allow depreciation on the value of the application and system software as claimed by the assessee. For the reasons stated above the ground No.2 raised by the revenue is dismissed.
20. We shall now take up for consideration the Ground No.4 raised by the assessee in its appeal. As far as the claim of the assessee for depreciation on IPR is concerned the ld. Counsel for the assessee reiterated the stand of the assessee on this issue as was made before the revenue authorities. His alternative claim was that the said expenditure had to be allowed as revenue expenditure and in this regard relied on the decision of the Hon'ble ITAT, Bangalore Bench in the case of IBM Global Services India Pvt. Ltd. vs. DCIT, 114 ITD 264(Bang). The ld. D.R relied on the order of the Assessing Officer.
21. We have considered the rival submissions. As far as the claim of the assessee that depreciation has to be allowed on the IPR we are of the view 33 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) that the claim cannot be accepted. The ld. Counsel for the assessee submitted that the right which the assessee acquired could be considered as a business or commercial right as laid down u/s. 32(1)(ii) of the Act. In our view the reasons given by the Assessing Officer for rejecting this claim are proper and calls for no interference. As far as alternative claim of the assessee is concerned we find that facts in the case before the Bangalore Bench of the ITAT in the case of IBM Global Services India Pvt. Ltd.(supra) were the assessee-company in that case was incorporated during the financial year 1997-98. Originally, there was a company jointly promoted by Tata and IBM, which were known as Tata-IBM. During the financial year 1997-98, it was mutually agreed between the two promoters to bifurcate the business activities into separate entities viz. IBM Global Services India Private Limited (the assessee-company) and Tata-IBM. As per the agreement entered into, various assets of the erstwhile Tata-IBM were transferred to the assessee-company for a certain consideration. As mutually agreed, the assessee-company has paid amounts of Rs. 9,38,57,925 and Rs. 5.3 crores on account of transfer of certain employees to the assessee-company and on account of transfer of the data base of the domestic business. The assessee- company actually paid a sum of Rs. 18.4 crores for the transfer of the employees to the assessee-company but claimed an expenditure of Rs. 9,38,57,925 as the remaining sum of around Rs. 9.01 crores was 34 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) attributable to STP Unit, income of which was exempt. No report of valuer was filed to justify the valuation attributed to the personnel transferred from Tata-IBM to the assessee-company. The Assessing Officer felt that the methodology followed by the assessee indicates that a sum of Rs. 5.24 crore was considered as expenditure incurred by Tata-IBM towards training- related expenses of the transferred employees. Salaries paid for the transferred employees for a period of six months by Tata-IBM during the period of their services with Tata-IBM was also added to arrive at the valuation of the employees transferred. Before the Assessing Officer, it was submitted that such expenditure was incurred in getting the trained and skilled employees from Tata-IBM. Thus, the assessee-company was not required to incur any expenditure on recruitment and training of the employees. It was argued that the expenditure incurred is towards revenue field. The Assessing Officer concluded that the working lacks objective and rational basis. The employees transferred to the assessee-company are to be considered as valuable asset, which would give an enduring advantage to the company over a long period of time. In case such employees are not viewed as valuable asset, there would not have been any necessity to pay such huge compensation towards an arrangement of their transfer to the assessee- company. Actually business run by Tata-IBM has been bifurcated and part of the business activities have been taken over by the assessee. The business 35 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) activity, which has been taken over by the assessee-company, is having high revenue earning potential and, therefore, the payments are in the nature of premium for taking over the software business segments of the erstwhile Tata-IBM. The AO held that the transaction has not been presented in true perspective but has been camouflaged to gain an advantage by claiming it as revenue expenditure. The Assessing Officer, therefore, treated the compensation paid by the assessee-company to Tata-IBM towards the so called transfer of human skills and the so called customer database as part and parcel of overall consideration mutually agreed to the taking over of the software segment of the business of the erstwhile Tata-IBM. The Assessing Officer, therefore, disallowed the expenditure claimed as revenue. The Tribunal on the above issue found that the agreement between the parties at the time of segregation of business contained the following terms:
"1. Tata IBM agreed to do the following :-
(a) Sell all maintenance spares and accessories comprising inventory of Tata IBM relating to IBM computers;
(b) Facilitate transfer of its personnel of Tata IBM set out in Annexure I; and
(c) Share the database relating to Tata IBM's clients and customers, list whereof is set out in Annexure III hereto.
1 The transfer aforesaid shall be effective from the twenty fifth day of August, 1997.
2 In consideration of the transfer aforesaid, IBM Global shall pay to Tata-IBM a sum of :-
(a) Rs. 28.6 crores for the transfer of the maintenance spares and accessories set out in Annexure I, comprising Tata IBM's inventory relating to IBM computers; provided however that (i) this amount is 36 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) subject to adjustment according to the physical inventory as on 31-3-
1997 and (ii) IBM Global's obligation to pay this amount (or the adjusted amount) is subject to the condition that Tata IBM has fully paid IBM or its subsidiaries for all and any sums due to them in respect of the spares supplied by them. Fifty per cent (50 per cent) of the amount payable under clause 3(a) will be remitted to Tata IBM within seven (7) days of the date of receipt of Government of India ('GOI') approvals of the application as proposed, for the commencement of activities in India by IBM Global and the remaining fifty per cent (50 per cent) within thirty (30) days thereafter;
(b) Rs.18.4 crores, being consideration for the value which inheres in the human resources, by reason of training, skills, practical experience and work culture for the transfer of the personnel listed in Annexure II hereto, to be remitted within ninety (90) days of the date of receipt of GOI approvals of the application as proposed; and
(c) Rs. 5.3 crores for the transfer of the database relating to Tata IBM's clients and customers, including installation and warranty data, the list of which is maintained in the files of Tata IBM, to be remitted within ninety (90) days of the date of receipt of GOI approvals of the application as proposed.
4.Tata IBM shall, prior to the transfer of its personnel as aforesaid, secure prior written consent of such personnel to be transferred in terms hereof and agreed to be employed by IBM Global. IBM Global agrees to give due credit to all the transferred personnel who have opted for employment with IBM Global for their past service in Tata IBM. If substantially all of the personnel listed in Annexure II accept offers of employment by IBM Global shall assume responsibility for payment of severance compensation legally required of Tata IBM or approved by the Board of Directors of Tata IBM to those personnel listed in Annexure II who did not accept offers of employment from IBM Global and who services with Tata IBM is terminated by Tata IBM."
Thereafter the Tribunal held as follows:
"In respect of payment made for transfer of human skill, it is clear that the expenditure has been incurred to save the expenses on training 37 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) and on recruitment. Such expenses were under revenue field and, therefore, payments have been made to save such revenue expenses. The payments have been made as per the agreement. In case the transaction is in accordance with some deed, then proper construction of the deed is necessary to see the allowability of the expenses. The true nature of the transaction is to be collected from the entire document. As per clause C(3)(d), the assessee-company agreed to give due credit to all the transferred personnel who have opted for employment with IBM Global for their past services in Tata-IBM. Such employees rendered services to the Tata-IBM and the amounts, if any, which were to be paid to such employees for rendering services to Tata-IBM, were agreed to be paid by the assessee. Such expenditure cannot be termed as an expenditure laid for carrying on the business. The advantages were obtained by Tata-IBM as services were rendered by those employees to Tata-IBM. It is not the case of the assessee that as and when such employees will leave the assessee-company, the assessee will not claim expenditure in respect of payments made to such employees after considering the credit of services given by such employees to Tata-IBM. The Assessing Officer has mentioned that for valuing the amount paid for transfer of human skills, salary of six months paid by Tata-IBM has been added for arriving at the valuation of the employees transferred. Though it is not clear from the order that such quantum was attributable in respect of the credit to be given for the past services rendered to Tata-IBM by the employees transferred to the assessee-company. However, it is held that the expenditure included in the valuation of transfer of human skills and representing the credit to be given to the transferred employees in respect of their services to Tata-IBM, is not allow-able, as the same expenditure will be claimed by the assessee-company as and when such employees leave their organization. The assessee cannot be allowed double benefit of such expenditure. The Assessing Officer will determine the amount representing the cost to the assessee in respect of credit to be given to these employees in respect of services rendered to Tata-IBM. The balance expenditure is held as allowable as it has been incurred by the assessee-company to free itself in making recurring revenue expenditure. The amount so disallowed will not be entitled to depreciation as it does not result into an intangible asset entitled for depreciation."38 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03)
22. As can be seen from the facts of the above case, it was a case of one unit which was split into two units and personnel of the erstwhile single unit became employees of one of the two split units. In the present case we find that under Clause-3 of the agreement, Mukund Limited has agreed to provide skills required for operation and maintenance of the hardware and software within 30 days from the date of the agreement. Such skills have to be provided on cost i.e. to say on the basis of no profit or no loss. It is significant to note that the assessee as a matter of right could not compel the employees of Mukund Limited to render services to them. In the case of IBM Global Services India Pvt. Ltd. (supra) the agreement specifically provided that the employees will give consent for serving in the transferee company. Further it was also agreed that the transferee will give due credit to the transferred personnel for benefits for past services rendered to the transferor. It was in those circumstances that the expenditure was considered as revenue expenditure. In the aforesaid decision the Tribunal also made it clear that the expenditure included in the valuation of transfer of human skills and representing the credit to be given to the transferred employees in respect of their services to Tata-IBM, is not allow-able, as the same expenditure will be claimed by the assessee-company as and when 39 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) such employees leave their organization. The Assessing Officer was directed to determine the amount representing the cost to the assessee in respect of credit to be given to these employees in respect of services rendered to Tata- IBM. The balance expenditure was held as allowable as it has been incurred by the assessee-company to free itself in making recurring revenue expenditure. The amount disallowed was also held to be not entitled to depreciation as it does not result into an intangible asset entitled for depreciation. In the present case we find that there are no terms agreed between the parties as was the facts in the case of IBM Global Services India Pvt. Ltd.(supra). The Assessing Officer in the order of assessment has clearly brought out the fact that the assessee did not have any right to call upon the employees of Mukund Limited to render services to them. We are, therefore, of the view that the claim for deduction for the aforesaid expenditure as a revenue expenditure cannot be allowed. The cost paid by the Assessee was part of acquiring the EDP division which by its very nature was capital expenditure. The benefit of getting skilled employees is an associated benefits from such acquisition and any cost attributed to the same will have to be necessarily considered as capital expenditure. For the reasons given above, Ground No.4 of the assessee is dismissed. 40 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03)
23. Ground No.5 was not pressed and the same is dismissed as not pressed.
24. Ground No.6 raised by the assessee reads as follows:
"On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the assessing office in levying interest under section 234D amounting to Rs. 16,70,807/- and ignoring the fact that the major portion of the refund on which interest was levied under section 234D was received before 1st June, 2003."
25. An amount of Rs. 1,95,21,537/- was refunded to the assessee vide the following refund orders.
Date Amount (Rs.)
8thJanuary, 2003 1,86,06,689
th
27 June, 2003 6,66,072
24th September, 2003 2,48,776
1,95,21,537
The said refund comprised of prepaid taxes amounting to Rs. 1,66,54,765/- and interest thereon under section 244A amounting to Rs. 28,66,772/-. In the order passed under section 143(3) of the Act, interest under section 234D amounting to Rs. 16,70,807/- was been levied.
26. Sub-section (1) of Section 234D enjoins that where any refund is granted to the assessee under sub-section (1) of Section 143 and no refund 41 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) is due on regular assessment or the amount refunded under sub-section (1) of Section 143 exceeds the amount refundable on regular assessment, then the assessee shall be liable to pay simple interest at the given rate, on the whole or the excess amount so refunded for every month or part of a month comprised in the period from the date of grant of refund to the date of such regular assessment. Sub-section (2) provides that where as a result of an order under section 154 or section 155 or section 250 or section 254 or section 260 or section 262 or section 263 or section 264 or an order of the Settlement Commission under sub-section (4) of section 245D of Income-tax Act, the amount of refund granted under sub-section (1) of section 143 is held to be correctly allowed, either in whole or in part, as the case may be, then, the interest chargeable, if any under sub-section (1) shall be reduced accordingly. According to the Explanation, an assessment made for the first time under section 147 or section 153A shall be regarded as a regular assessment for the purpose of this section.
27. The AO levied interest u/s.143(3) of the Act consequent to the regular assessment. The legality of the same is in challenge before the Tribunal. Recently, the Special Bench of the Delhi Tribunal, in the ITO New Delhi vs Ekta Promoters Pvt Ltd (ITA Nos 2551, 2552 and 2553/Del/2006 dated July 42 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) 11, 2008) case, had to consider whether the levy of interest under Section 234D of the Act from June 1, 2003, will have retrospective application.
28. The Bench reasoned that "there is no dispute to the proposition that a court cannot read anything into a statutory provision which is plain and unambiguous. A statute is the edict of the legislature. The language employed in a statute is determinative of the legislative intent and according to the first and primary rule of construction, the intention of the legislation must be found in the words used by the legislature itself and the function of the court is only to interpret the law and the court cannot legislate. If a provision of law is misused and subjected to the abuse of the process of law, it is for the legislature to amend, modify or repeal it, if deemed necessary.
"Legislative causus omissus cannot be supplied by judicial interpretative course. Thus, on the basis of argument that legislature has brought this provision just to fill the lacuna in the law and therefore these provisions should be construed retrospective cannot be accepted more particularly when these provisions have been inserted on the statute w.e.f. June 1, 2003, and not with retrospective effect. The legislature has specifically mentioned the date of applicability, that is, June 1, 2003, and the legislator was not incompetent to make retrospective provision, if it was so intended. Therefore, merely on the basis of interpretation, retrospective effect cannot be given to the provisions of Section 234D."
Accordingly, the Special Bench held that the levy on interest under Section 234D of the Act can only be prospective i.e., from AY 2004-05 onwards. The Hon'ble Kerala High Court in the case of CIT Vs. Kerala Chemicals & 43 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) Proteins Ltd. 233 ITR 584 (Ker) has taken the view that interest u/s.234-D is chargeable from 1-6-2003 till completion of regular assessment where the refund is granted prior to 1-6-2003 while sending intimation u/s.143(1) and regular assessment was completed converting the refund into demand of tax. The Hon'ble Bombay High Court in the case of Bajaj Hindustan Ltd. ITA No.198 of 2009 (order dated 15.4.2009) dealt with the following question of law: "Whether in the facts and circumstances of the case and in law the ITAT was right in holding that the interest u/s.234D cannot be charged in respect of refunds granted prior to 1-6-2003"?. The Court answered the question as follows:
" 5. So far as the last question is concerned, it is seen that the subject provision came on the statute book w.e.f.1-6-2003. If that be so, the said provision does not have retrospective effect. In this view of the matter, we do not see appeal giving rise to any substantial question of law. Appeal is, therefore, dismissed in limine with no order as to costs."
In view of the aforesaid decision of the Hon'ble Bombay High Court, which is the jurisdictional High Court, we are of the view that in respect of refund granted prior to 1-6-2003, the provisions of Sec.234-D cannot be applied. We hold accordingly. In respect of refund granted after 1-6-2003, we find the decision of the Special Bench of ITAT in the case of Ekta Promoters (supra0 has held that the provisions can be applied only for and from AY 04-05. The Hon'ble Kerala High Court has however held that from 1-6-2003 interest 44 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) u/s.234-D is chargeable from the date of refund till date of regular assessment where the refund was granted prior to 1-6-2003. By implication, the Hon'ble Bombay High Court has held that in respect of refunds granted after 1-6-2003, provisions of Sec.234-D will apply and interest has to be charged from the date of refund till making of regular assessment. We accordingly hold that in respect of refund granted after 1-6-2003, interest u/s.234-D can be levied from the date of refund till making of regular assessment. Thus Ground No.6 is partly allowed.
29. Ground No.7 raised by the assessee reads as follows.:
"On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in not giving any finding in respect of ground relating to short granting of credit in respect of tax deducted at source to the extent of Rs.6,82,924/-."
30. We deem it appropriate to direct the AO to grant credit in respect of tax deducted at source after verification on the basis of certificate filed.
31. In the result, the appeal of the assessee is partly allowed.
32. As far as the appeal of the revenue is concerned Ground No.1 raised by the revenues reads as follows:
"1. On the facts and in the circumstances of the case as well as in law, the Learned CIT(A) has erred in deleting disallowance of liaisoning expenses of Rs. 3,72,000 paid to the sister concern namely M/s.45 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) Mukund Ltd. for liaisoning work done at Delhi, Calcutta and Chennai without appreciating the fact that no documentary evidence in support of these expenses except filing of Xerox copies of self made debit notes were furnished before the Assessing Officer."
33. The assessee debited a sum of Rs.3,72,000/- under the head liaisoning expenses. The assessee explained that the aforesaid sum was paid to M/s. Mukund Ltd. for liaisoning work done by them at their branch office at Delhi, Chennai and Calcutta. The assessee furnished the debit note in respect of the aforesaid expenses which showed the description "being liaison work done on behalf of the assessee relating to customers and government authorities". According to the Assessing Officer the debit notes were self made and the assessee did not furnish supporting bills to show to whom the sum has been paid and the nature of services rendered. The Assessing Officer, therefore, disallowed the claim for deduction of the aforesaid sum.
34. Before the CIT(A) the assessee submitted that the expenditure on this score was incurred wholly and exclusively for the purpose of business since the assessee did not have offices at Delhi, Chennai and Calcutta and he liaison work with government department was handled by M/s. Mukund Ltd. since it had a full-fledged branch at the said places. The projects executed by the assessee at the said places and income arising therefrom in A.Y 2001- 46 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) 02 as well as in subsequent year were given by the Assessee, which were as under:-
S.No. Projects A.Y.2001-02 A.Y. 2002-03
1, U.P. Indian Oil Corporation ltd. Mathura Rs. 6,00,67,116/- Rs.6,30,36,716
Gas Authority of India , Patna Rs.4,44,90,581/- Rs. 17,66,107
2. Orissa: Nalco - Angul Rs.1,58,92,389/- Rs. 5,03,03,207
Neelachal Ispat Nigam Ltd. Rs.5,86,10,390/- Rs. 83,18,648
Jaipur
3. South India
Bharat Heavy Electricals Ltd. Simhardi Rs.18,28,56,387/- Rs.13,05,46,022
AP Rs.3,16,56,069/- Rs. 6,18,96,613
BSES, Sameerwadi, Karnataka
Rs.39,35,55,932/- Rs.31,58,67,313/-
The Assessee submitted that the evidences in support of the claim were furnished before the AO during the assessment proceedings.
35. The CIT(A) was of the view that the assessee established the identity of the payee and the purpose of the payment and, therefore, directed the Assessing Officer to allow the claim for deduction.
36. Before us the ld. D.R submitted that the evidence filed by the assessee did not establish the nature of services rendered by the assessee for which payments for liaisoning charges were made.
47 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03)
37. Ld. Counsel for the assessee relied on the order of the CIT(A) and the documents filed before the Assessing Officer.
38. We have considered the rival submissions. From page 53 to 56 of the assessee's paper book we find that there are four debit notes raised by Mukund Ltd. claiming liaisoning expenses. These debit notes only give a description that it was being raised for liaisoning work done by Mukund Ltd. in relation to customers and government authorities. From the details of the contracts in respect of which the liaisoning work was done by Mukund Ltd. it is seen that they were mainly government agencies. It is the plea of the assessee that since Mukund Ltd. had full fledged office at Delhi, Chennai and Calcutta and since assessee did not have branchy office at these places, but were carrying on number of projects, they utilized the services of Mukund Ltd. We do not find any details of the nature of liaisoning services rendered. We are of the view that the evidence furnished by the assessee did not establish the purpose for which the payments were made by the assessee. What was the nature of services rendered is also not clear. The claim by the Assessee that the payment was for liaisoning services will not in our opinion be sufficient to allow the deduction. In that view of the matter we set aside the order of CIT(A) and restore the order of the Assessing Officer. Ground No.1 raised by the revenue is allowed. 48 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03)
39. Ground No.2 raised by the revenue has already been adjudicated while deciding the appeal of the assessee. For the reasons stated therein Ground No.2 of the revenue is dismissed.
40. Ground No.3 raised by the revenue reads as follows.
"3, On the facts and in the circumstances of the case as well as in law, the Learned CIT(A) has erred in directing to delete the disallowance of deduction u/s. 35D made at Rs. 11,48,996/- without appreciating the fact that assessee did not file the detailed working of the deduction claimed u/s. 35D in the Return of Income or during the course of assessment proceedings.
41. Under section 35D the assessee is entitled to the deduction of 1/10th of expenditure for a period of 10 years, which is incurred for setting up new industrial undertaking. The over all ceiling limited for the expenditure to be allowed as a deduction u/s. 35D is 2.5% of the cost of the project or capital employed, at the option of the assessee. The assessee claimed a deduction of Rs. 11,48,000/- u/s. 35D of the Act. According to the Assessing Officer the assessee did not file the required calculation to find out the limit of 2.5% of the cost of the project or capital employed. The assessee submitted before the Assessing Officer that right from the assessment year 1995-96 the assessee had been claiming deduction u/s.35D of the Act and has been allowed the deduction. In 1995-96 the assessee had made a right issue of 49 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) shares and incurred an expenditure of Rs.11,61,848/- in connection with the same for which deduction u/s. 35D was allowed. In A.Y 1997-98 the assessee came out with public issue of shares for expansion of its undertaking and has claimed deduction u/s. 35D of the Act on such expenses. The assessee also submitted that 2.5% of the capital employed in respect of public issue in A.Y 1997-98 would come to Rs. 36 lacs. The assessee thus submitted that the deduction claimed should be allowed.
42. The CIT(A) held as follows.
"6.2 I have considered the submissions of the appellant company. I find that the AO has disallowed the deduction u/s. 35D for the obvious reason that capital employed and the borrowings upto A.Y 1997-98 works out to Rs. 1449 lacs and 2.5% of the same works out to Rs. 36 lacs. As the deduction u/s. 35D is being allowed since A.Y 1995-96, the AO is directed to work out and allow the same in accordance with restrictions specified under section 35D (3) of the I.T. Act. This ground is partly allowed."
43. Before us ld. D.R submitted that the neither the Assessing Officer nor the CIT(A) have verified the over all ceiling limit contemplated u/s. 35D of the Act. We are of the view that this is a matter which requires verification. The Assessing Officer will verify as to whether the deduction claimed is within the over all ceiling limit of 2.5% of the cost of the project or capital employed after giving the assessee opportunity of being heard. 50 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03)
44. In the result, the appeal field by the revenue is partly allowed. ITA No.1081/M/06 & ITA No.1215/M/06 (For A.Y. 02-03)
45. ITA No.1081/M/06 is an appeal by the assessee while ITA No.1215/M/06 is an appeal by the revenue. Both these appeals are directed against the order dated 17/11/2005 of CIT(A) X, Mumbai relating to A.Y 2002-03. First we take up for consideration of filed by the assessee.
46. Ground No.1 & 2 raised by the assessee read as follows:
"1.On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the Assessing Officer in making an addition under section 36(1)(va) read with section 2(24)(x) of Rs.2,61,387/- in respect of employees contribution to provident fund paid after the due date but before the grace period allowed by a government circular.
2. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the assessing officer in making an addition under section 36(1)(va) read with section 2(24)(x) of Rs.5,32,869/- in respect of employees' contribution to provident fund paid after the due date but during the previous year."
47. These grounds are identical to Ground No.1 to 3 raised by the assessee in ITA No. 1905/M/05 for A.Y 2001-02. For the reasons stated 51 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) therein these grounds of appeals are allowed and the Assessing Officer is directed to allowed the deduction claimed by the assessee.
48. Ground No.3 raised by the assessee reads as follows:
"On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in not directing to allow depreciation on the opening written down value of various blocks of assets as finally determined in the appellate order for earlier year."
49. This issue relates to the depreciation claimed by assessee in A.Y 2001- 02 on the various assets which were acquired in the process of purchase of the EDP division of Mukund Ltd. Since the issue with regard to depreciation has already been decided by us in A.Y 2001-02 the Assessing Officer is directed to give effect to the same and consequently work out the opening WDV of various blocks of assets and allow depreciation in accordance with law.
50. Ground No.4 raised by the assessee reads as follows:
"4. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the Assessing Officer in not granting deduction in respect of prior period expenses amounting to Rs. 40,51,722/- being the expenses debited in the Profit and Loss account of the previous year relevant to the above assessment year."
51. On going through the Annexure XXI to Tax Audit Report it was seen by the AO that a sum of Rs. 40,51,722 has been shown as prior period 52 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) expenses debited to profit. The assessee was asked to show cause as to why prior period expenses should not be disallowed as the method of accounting followed by the assessee company was mercantile system of accounting. In reply, the assessee filed a letter dated 4.2.2005 stating as under:-
"In Annexure XXI, of the Tax Audit report for assessment year 2003- 04, amounts of Rs. 99512958 and Rs. 1049875 has been shown as prior period expenses and income respectively. Copy of the said annexure is enclosed herewith for your reference. In the accounts for the previous year relevant to the Assessment year 2003-04, the said expenses / income have been debited/ credited and have been shown below line as prior period expenses.
In this connection, our clients have to state that net prior period expenses amounting to Rs.84,63,083/- (Rs.9512958 - Rs. 1049875) ought to be allowed as a deduction in Assessment Year 2002-03 since the said expenses pertain to the said assessment year. Further, in case the said expenditure of Rs. 8463083/- is not allowed as a deduction in assessment year 2002-03, the said expenses should be allowed as a deduction in assessment year 2003-04 being the year in which the said expenses have been debited to the profit and loss account."
The submission of the assessee was considered but rejected by the AO. According to the AO, the assessee company was following mercantile system of accounting and therefore the expenses of prior period amounting to Rs. 40,51,722/- was disallowed and added to the total income of the assessee. The AO also held that the claim of adjustment of prior period expenses debited in the previous year relevant to the assessment year 2003-04 will be considered during the course of assessment for assessment year 2003-04. 53 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03)
52. The findings of the CIT(A) on the issue were as under:-
"During the appellate proceedings it has been submitted that as the AO had not allowed such expenses in earlier assessment year it should be allowed the expenses to be deducted for the year under consideration. The appellant has further submitted that as these expenses were not allowed in the earlier year the same ought to have been allowed in the year under consideration. In its support the appellant has relied on the judgement of Bombay High Court in the case of CIT vs. Nagri Mills co. Limited, 33 ITR 681(Bom), ITAT Mumbai in the case of Excel Industries Limited Vs. DCIT ITA No.5630/Mum/1991.
I have gone through the contention of the appellant as well as that of the AO. I have also perused the order of the CIT(A) for the A.Y 2001- 02 where in I have found that the appellant has not raised any question of allowance of such expenses as has been claimed . Further appellant has not submitted any details regarding such expenses either for the year under consideration or for A.Y 2003-04 in which the appellant has debited below the line sum of Rs. 84,63,083/- as prior period which are claimed to be for the year under consideration. Also the appellant's claim has not been rejected by the AO in respect of amount debited in the year pertaining to the assessment year 2003- 04 which is claimed to be pertaining to the year under consideration, and therefore, I am unable to accept the arguments of the appellant that the amount in question being prior period expenses amounting to Rs. 40,51,722/- should be allowed as deduction in the year under consideration more so in view of the fact that the appellant has been following the mercantile system of accounting. Thus this ground of appeal is rejected. However AO is directed to verify the appellant's claim in A.Y 2003-04 as has been stated in the assessment order and may allowed the same if found to be correct as per the provisions of law."
53. Before us ld. Counsel for the assessee submitted that the assessee offered prior period income to tax in this year which was duly taxed by the AO but when it comes to allowing deduction of prior period expenses the 54 ITA NO.1905/MUM/05(A.Y. 2001-02) ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03) Assessing Officer took a stand that the expenses relate to the earlier period. It was also submitted by him that the issue is recurring issue in each year and the revenue should follow a uniform practice. If prior period expenses are claimed in 2001-02 the revenue should not take a stand that the same can be allowed only in the year of crystallization and when it is claimed in the year of crystalisation they should not take a stand that they should be claimed in the year in which they are accounted in the books. The ld. Counsel for the assessee submitted that the assessee is willing to produce all vouchers and the deduction should be allowed in the year of crystallization. In this regard ld. Counsel for the assessee filed before us a copy of the decision of the ITAT Mumbai Bench in the case of M/s. Excel Industries Ltd. vs. DCIT in ITA No.5630/M/91 for A.Y 1987-88 and Toyo Engineering India Ltd. vs. JCIT (2006) 5 SOT 616(Mum). In the aforesaid cases on identical facts, as that of the assessee in this appeal, the Tribunal has taken the view that fair determination of tax liability of an assessee should be made adopting the reasonable approach.
54. The Ld. D.R on the other hand, relied on the order of the revenue authorities.
55 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03)
55. After considering the rival submissions we are of the view that it would just and proper to remand the issue back to Assessing Officer for fresh consideration. The assessee will produce for examination by the Assessing Officer all the bills and vouchers in respect of expenses. The Assessing Officer will examine the same and allow it in the year in which the expenses crystallized or accrued. The above directions in our view will meet the ends of justice as the assessee has to get deduction in one of the assessment years.
56. In the result, appeal by the assessee is partly allowed. ITA NO.1215/MUM/06 - REVENUE'S APPEAL
57. Ground No.1 raised by the revenue reads as follows:
"1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition made of Rs. 11,48,988/- made under section 35D of the Act, being 1/10th of share issue expenditure.
58. This ground of appeal is identical to Ground No.3 raised by the revenue in ITA No.1810/M/05. For the reasons stated therein the issue is remanded to the Assessing Officer for fresh consideration in the light of the directions given in the said order.
56 ITA NO.1905/MUM/05(A.Y. 2001-02)
ITA NO.1081/MUM/06(A.Y. 2002-03) ) ITA NO.1810/MUM/05(A.Y. 2001-02) ITA NO.1215/MUM/06(A.Y. 2002-03)
59. Ground No.2 raised by the revenue reads as follows.
"2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the addition made by disallowance of depreciation on EDP equipment. Application & System Software in running mode and Intellectual Property Rights comprising of technical skills.
60. This ground of appeal is identical to Ground No.2 raised by the revenue in ITA NO.1810/M/05 for A.Y 2001-02. For the reasons stated therein this ground of appeal of the revenue is dismissed. In the result, appeal by the revenue is partly allowed for statistical purposes.
61. In the result appeals of the assessee and appeal of the revenue for A.Y 2001-02 are partly allowed, while appeal of the revenue for A.Y 2002-03 is partly allowed for statistical purposes.
Order pronounced in the open court on the 8th day of Oct.2010 Sd/- Sd/-
(P.M.JAGTAP) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated. 8th Oct.2010
Copy to: 1. The Assessee 2. The Revenue 3. The CIT City -concerned
4. The CIT(A)- concerned 5. The D.R"H" Bench.
(True copy) By Order
Asst. Registrar, ITAT, Mumbai Benches
MUMBAI.
Vm.