Income Tax Appellate Tribunal - Mumbai
Financial Technologies (India) Pvt. ... vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "F", MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI R.K.PANDA(A.M) ITA NO.3537/MUM/05(A.Y. 2001-02) M/s. Financial Technologies (I) Ltd., 1st Floor, Malkani Chambers, Off. Nehru Road, Vile Parle(E), Mumbai - 400 099 PAN: AAACW 0292M (Appellant) Vs. The A.C.I.T 8(1), Mumbai. (Respondent) ITA NO.1160/MUM/07(A.Y. 2001-02) ITA NO.54/MUM/2007(A.Y.2002-2003) ITA NO.4853/MUM/2007(A.Y.2003-04) The A.C.I.T 8(1), Mumbai. (Appellant) M/s. Financial Technologies (I) Ltd., 1st Floor, Malkani Chambers, Off. Nehru Road, Vile Parle(E), Mumbai - 400 099 PAN: AAACW 0292M (Respondent) CO.NO.96/MUM/07(Arising out of ITA No.54/M/07,A.Y.2002-03) M/s. Financial Technologies (I) Ltd., 1st Floor, Malkani Chambers, Off. Nehru Road, Vile Parle(E), Mumbai - 400 099 PAN: AAACW 0292M (Cross Objector) Vs. The A.C.I.T 8(1), Mumbai. (Appellant in Appeal) Assessee by : Shri Chetan Karia Respondent by : Smt. Ashima Gupta ORDER PER N.V.VASUDEVAN, J.M,ITA No.3537/Mum/2005 is an appeal by the assessee against the order dated 22/3/2005 of CIT(A)VIII, Mumbai relating to assessment year 2001-02. ITA No.54/M/07 is an appeal by the revenue against order dated 30/10/2006 of CIT(A),VIII, Mumbai relating to A.Y 2002-03. The assessee has filed a Cross Objection i.e. C.O.No.96/Mum/2007 against the very same order of the CIT(A).
2. Ground No.1 & 3 raised by the assessee in ITA No.3537/M/07 and Ground No.6 to 10 raised by the revenue in ITA No.54/M/07 can be conveniently decided together as the arise on the same facts and circumstances. These grounds read as follows:-
Grounds No.1 of ITA No.3537/M/05:
"1.0 The Learned Commissioner of Income Tax (Appeals) erred in confirming disallowance of claim for deduction of Rs.1,09,56,923/- being sales return. 1.1 Without prejudice the Learned Commissioner of Income Tax (Appeals) erred in treating amount of Rs.1,09,56,923/- as part of income and failed to appreciate that the said sum had not accrued as income at all. 1.2 Without prejudice to the above the Learned Commissioner of Income Tax (Appeals) failed to appreciate that the customized software specifically developed for the customer did not have any market value and the value thereof should be taken as Nil."
Grounds No.6 to 10 of ITA No.54/M/07:
"6. On the facts and in the circumstances of the case and in law, the CIT(A) erred in allowing deduction of sales return of Rs. 1,09,56,923/-.
7. Without prejudice to ground No.6, the CIT(A) erred in allowing deduction of sales return of Rs. 1,09,56,923/- which was not claimed in the return and therefore, the deduction was not be allowed in view of the judgment of Hon'ble Supreme Court in Goetze (India) Vs. CIT, 284 ITR 323(SC).
8. "Without prejudice to grounds No.6 & 7, the CIT(A) erred in observing that the Assessing Officer has disallowed the claim of sales return made by the assessee on the ground that such claim was made by the appellant in the earlier year when the discussion made by the CIT(A) shows that the claim was not made in regular assessment carried out u/s. 143(3) of the Act for A.Y 2002-03."n
9. "Without prejudice to grounds No.6 to 8, the CIT(A) erred in not giving opportunity to the Assessing Officer and in not taking into account the discussion in the order u/s. 143(3) of Income Tax Act, 1961 for A.Y 2001-02 dt. 9/2/2004 where the claim of deduction of sales return was rejected by the Assessing officer on merits also.
10." Without prejudice to grounds No.6 to 9, the CIT9A) erred in not taking into account that there was no finding by his predecessor in order dated 22/3/2005 for A.Y 2001-02 that the claim of deduction of sales return of Rs.1,09,56,923/- be allowed in a.Y 2002-03."
3. The assessee is a company. It is engaged in the business of development of software and provision of software consultancy. The assessee derives income in the form of licence fee for allowing its customers to use software developed by it. The assessee sold (granted licence for use which is described as sales) software to Sunidhi Consultancy Services Ltd. (SCS). The sale was in respect of client access licence for ODIN front office software product for NSE and BSE ( 40 access licences) for Rs. 25,70,400/-. This sale was on 31/12/2000. On 31/3/2001 the assessee also sold software for Rs. 1,02,81,600/-. This sale was for allowing SCS Access Licence for Net.net Internet Trading Software Product. Both the aforesaid software products were meant to be used for online share trading. SCS expressed its desire not to use these software and, therefore, these licences were uninstalled. Thus sale to the extent of Rs. 1,09,56,923/- was treated as sales returned by the assessee. SCS had expressed its desire not to use this software in the month of September, 2001 and accordingly sales to extent of Rs. 1,09,56,923/- was treated as sales returns by the assessee.
4. The A.O called upon the assessee as to explain why software was rejected by the customer and why sales returned should not be accounted in the A.Y 2002-03 because the sales return had taken place during the previous year relevant to A.Y 2002-03, i.e., in the month of September, 2001 when the books of accounts of the Assessee for previous year relevant to AY 01-02 had already been closed. The assessee submitted before the AO that SCS purchased software from the assessee for internet trading in stock and shares. Since there was depression in the stock market SCS abandoned its country wide expansion for which the software was purchased and, therefore, decided to uninstall the software. The assessee with a view to have good client relationship accepted the plea of SCS. With regard to the claim of the sales returned as deduction in this year the assessee submitted that the income and expenses for the relevant year has to be matched and, therefore, the claim of the assessee should be accepted. In this regard the assessee placed reliance on the decision of the Hon'ble Supreme Court in the case of Kedarnth Jute Manufacturing Co. vs. CIT, 82 ITR 363(SC). The AO however found that the Assessee had issued a credit note of Rs.1,02,81,800/- to SCS on 12-09-2001 in respect of the sales return. SCS had sent their letter dated 29-06-2001 returning the software which they had earlier purchased from the Assessee. Accoding to the AO, the sales return happened during the previous year relevant to AY 02-03. He also found that the Accounts of the Assessee were closed on 31.3.2001. He therefore held that the sales return did not pertain to the AY 01-02. He further held that the Assessee was following the mercantile system of accounting and therefore the sales return can be accounted for only in the year in which crystalisation takes place i.e., AY 02-03. He therefore did not allow the claim of the Assessee for deduction on account of sales tax return in AY 01-02. Apart from the above main reason, the AO in para 3.5 of his order has also observed that SCS could not return the software just like that because the Assessee would have spent sufficient money in developing the software. According to him there should have been some agreement between the Assessee and SCS which should have contained some clause in the event of sales return. Since the Assessee did not produce any agreement between itself and SCS, the AO was of the view that the plea put forth by the Assessee regarding sales return could not be accepted. The third reason given by the AO for rejecting the claim of the Assessee for deduction on account of sales return was that the value of the sales return was not considered while valuing the closing stock. For the above three reasons the AO refused to allow the claim of the Assessee for deduction. The CIT(A) confirmed the order of the AO, hence ground No.1.0,1.1 and 1.2 by the Assessee before the Tribunal.
5. In AY 02-03, the very same claim was made by the Assessee for deduction on account of sales return while computing total income of the Assessee for that year. The computation of total income for this year is at page 179 of the Assessee's paper book. Perusal of the same reveals that from the net loss as per profit and loss account, the Assessee has added "Sales return claimed in AY 01-02 of Rs.1,09,56,923. The return of income was filed by the Assessee showing a loss of Rs.13,73,25,871/-. If the sales return is considered in AY 02-03, then the loss to that extent would have increased. Thus the factual position is that the Assessee did not claim the very same sales return as deduction while computing total income as per the computation of total income.
6. The AO did not consider the claim of the Assessee at all. The computation of total income in the order of assessment for AY 02-03 starts with total loss as per computation of total income of Rs.13,73,25,871/-. Therefore the AO has not made any addition to the returned loss in respect of the sales return of Rs.1,09,56,923/-.
7. The Assessee in the appeal before CIT(A) against the order of the AO, raised ground No.15 in which it had projected its grievance against the order of the AO not allowing sales return in AY 02-03. The CIT(A) allowed the claim of the Assessee observing as follows:
"I have verified the assessment order passed by the Assessing Officer as also the appellate order passed by my predecessor and it appears that no such claim was allowed in the past.
The appellant had finalized its accounts for A.Y 2001-02 and subsequent to that sales return for the same year for Rs.1,09,56,923/- had arisen. The appellant had tried to claim such sales return at the time of filing the return of income for A.Y 2001-02 and the learned assessing officer as well as my predecessor had not entertained such claim of the appellant for A.Y 2001-02. The appellant has submitted before me copy of assessment order. As per that order, no such deduction was allowed to the appellant in the A.Y 2001-02.
In view of the above undisputed facts, the appellant deserves to get relief and therefore, the deduction is allowed during this year. This ground is therefore, allowed."
8. Aggrieved by the relief allowed by the CIT(A) to the Assessee, the Revenue has raised ground No.6 to 10 before the Tribunal.
9. We have heard the rival submissions. The learned D.R. reiterated the stand of the revenue as reflected in Ground No.6 to 10 in ITA No.54/Mum/07 and further relied on the order of the AO in AY 01-02 on this issue. The learned counsel for the Assessee submitted that the factum of sales return stands duly established by the various documents filed by the Assessee and even the AO has not disputed the same. According to him, the deduction has to be allowed in either AY 01-02 or 02-03. He further submitted that the other reasons given by the AO in AY 01-02 cannot be sustained. There is no material on record to show that the Assessee had an agreement with SCS by virtue of which it could refuse to accept the sales return by SCS. He also submitted that the reason given by the AO that the sales return will have some value and such value should have been shown as closing stock, cannot be accepted. He pointed out that software is developed by the Assessee and allowed to be used by the end user only on a license basis. He pointed out that in software industry, the cost of developing software is claimed as revenue expenditure and license fee received is shown as sales. There is no value shown in respect of the software developed as closing stock. The Assessee follows such a system of accounting and therefore the allegation that to the extent of value of sales return the closing stock should have been shown is neither sustainable on facts or in law.
10. We have considered the rival submissions. In our view the order of the CIT(A) allowing deduction in AY 02-03 has to be upheld. The fact that there was sales return has not been disputed. The only dispute is to the year in which it has to be allowed. Admittedly the sales return had taken place in the previous year relevant to AY 02-03 and therefore that would be the appropriate A.Y. in which the deduction has to be allowed. The other reasons given by the AO in AY 01-02 for rejecting the claim of the Assessee, in our view cannot be sustained. As rightly submitted on behalf of the Assessee, there is no material on record to show that the Assessee had an agreement with SCS by virtue of which it could refuse to accept the sales return by SCS. The other reasons given viz., that the sales return will have some value and such value should have been shown as closing stock, cannot also be accepted. The Assessee is a developer of software and the software so developed by the Assessee are allowed to be used by the end user only on a license basis. The Assessee follows a system of accounting prevalent in the software industry whereby, the cost of developing software is claimed as revenue expenditure and license fee received is shown as sales. There is no value shown in respect of the software developed as closing stock. Therefore the allegation that to the extent of value of sales return the closing stock should have been shown is neither sustainable on facts nor in law. We may add that wiith regard to grounds No.7 raised by the revenue in its appeal, the factual position is that the claim has been made by the Assessee in the computation of total income and it cannot be said that the claim was not made before the AO. With regard to ground No.8 raised by the revenue, the same is immaterial because, the AO has not discussed this issue in the order of assessment in AY 02-03, though a claim was made by the Assessee in the computation of income. Thus factually the claim of the Assessee has been impliedly rejected by the AO in AY 02-03. With regard to ground No.9, the reasons given by the AO in AY 01-02 have already been discussed by us above and the revenue cannot have any grievance in this regard. With regard to ground No.10, we are of the view that the absence of any direction in the order of CIT(A) in AY 01-02, will not be a bar for allowing the claim of the Assessee in AY 02-03.
11. For the reasons given above, we dismiss ground No.1.0,1.1 and 1.2 raised by the Assessee in ITA No.3537/Mum/05, before the Tribunal and ground No. 6to 10 by the revenue in ITA No.54/mum/07.
12. The only other remaining ground of appeal of the Assessee in ITA No.3537/Mum/05 is ground No.2, which reads as follows:
"2.0 The commissioner of Income Tax (Appeals) erred in confirming disallowance of Rs. 89,47,670/- being amount written off as bad debts u/s. 36(1)(vii)."
13. At the outset the learned counsel pointed out that the correct amount of bad debts written off which was claimed as deduction and not allowed by the revenue authorities and disputed in this appeal was only Rs.81,01,420/. The Assessee sold software to Anant Rati Shares and Securities Ltd., and Navratan Shares and Securities Ltd., for Rs.72,28,300/- and Rs.8,73,120/- respectively. The aforesaid two companies were debared from trading in any shares both at NSE and BSE. Their business had therefore come to a halt and despite efforts they did not pay the outstanding and there was no chance of recovery at all. In these circumstances, the outstanding amounts from the aforesaid two parties were written off as bad debts and claimed as deduction in computing the total income. The reason given by the AO for rejecting the claim of the Assessee, which was endorsed by the CIT(A) also, was that the Assessee had not established that the debt which was written off as bad had in fact become bad. The law in this regard is now well settled.
14. The claim for deduction has to be examined in the light of the provisions of Sec.36(1)(vii) of the Act. Prior to 1stApril, 1989, every assessee had to establish, as a matter of fact, that the debt advanced by the assessee had, in fact, become irrecoverable. That position got altered by deletion of the word "established", which earlier existed in Section 36(1)(vii) of the Income Tax Act, 1961 [`Act', for short].
15. For the sake of clarity, we re-produce herein below provisions of Section 36(1)(vii) of the Act, both prior to 1st April, 1989 and post-1st April, 1989:
"Pre- 1 s t April, 1989 :
Other deductions.
36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28(i) to (vi) xxxx xxxx xxxx
(vii) subject to the provisions of sub-section(2), the amount of any debt, or part thereof, which is established to have become a bad debt in the previous year.
Post- 1 s t April, 198 9:
Other deductions.
36.(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section28(i) to (vi) xxxx xxxx xxxx
(vii) subject to the provisions of sub-section(2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year."
16. In TRF Limited Vs. CIT 230 CTR 14 (SC), the Hon'ble Supreme hold has held that after 1st April, 1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee.
17. In view of the above, the claim of the Assessee deserves to be allowed and the same is directed to be allowed.
18. In the result, the appeal being ITA No.3537/Mum/05 is partly allowed.
19. Now we will take up for consideration the remaining grounds in ITA No.54/Mum/07, appeal by the revenue for AY 02-03:
20. Ground No.1 raised by the Assessee, reads as follows:
"On the facts and in the circumstances of the case and in law, the CIT(A) erred in not upholding the action of the Assessing Officer in disallowing claim of pro-ratio of AMC Charges made by the assessee."
21. The assessee is engaged in development of software, which is of dynamic nature. The assessee develops software for online trading of shares and securities and other items such as commodities, foreign exchange, etc. Such software unlike other software is required to be upgraded on a regular basis. For such upgradation the Assessee charges Annual Maintenance Charges (AMC). The type and frequency of upgrades vary and is linked to needs of the customer, changes in the requirements of law, SEBI, stock exchanges, etc. These upgrades are given to the customers on a regular and ongoing basis for which a sum is recovered either in advance or during the course of the AMC agreement. The services are provided over the entire tenure of the contract of AMC, unlike one time or upfront service, these services are provided on a regular basis over a period of the contract which is generally for twelve months. For e.g. if the assessee signs an MOU for AMC for 12 months from 1st January of calendar year for 12 months AMC ending 31st Dec. of the calendar year, the assessee for the relevant financial year recognizes prorata income from 1st Jan. to 31st March and the remainder is shown as income in the next financial year. The assessing officer did not allow pro rata recognition of income as claimed by the Assessee for the following reasons:
1. The Assessing Officer took a view that AMC charges should be accounted for and offered to taxation at the point of receipt of such AMC or at the time of billing thereof i.e. at first instance itself. The rational for such logic given is that the right to receive the payment is on entering into the contract itself.
2. The Assessing Officer also relied on decision in the case of Crisil Vs. DCIT (2003) 84 ITD 247, Mumbai wherein the Tribunal held that the initial rating fee received by the assessee company is income of the assessee on the date of receipt of fee. Extending the same analogy the Assessing Officer forwarded an argument that if the service period is of twelve months, it does not mean that the revenue is also accrued over a period of twelve months.
3. The Assessing Officer also relied on the decision in the case of Turner Morrison & Co. Ltd. vs. CIT 1953 23 ITR 152 (SC) which is to the effect that sale proceeds and resultant profit and gains therein shall become income chargeable to tax on immediate basis.
In the opinion of the Assessing Officer even in case of Mercantile System of Accounting revenue accrues at the time of entering into contract even if the service period is of 12 months. The AO also took the view that the charges were not AMC but were charges for upgrading the software periodically and were akin to sale of software.
22. The Assessee made alternative claim which was that Income has to be considered by applying the "Match making principle" and linking income with expenses and therefore corresponding expenses to be incurred by the Assessee in future should be allowed as deduction, in the event of the entire receipts of AMC is brought to tax in one year without pro rata apportionment of income on the basis of time.
23. The AO rejected the plea of the Assessee for the following reason.
"4.13. This alternate plea of the assessee cannot be accepted. No doubt matching cost concept is one of the fundamental principles of accounting. All the cost incurred to earn the income of the year must be accounted for to match the revenue of that year. However, this is true for trading and manufacturing concerns because in such cases the nexus between cost of goods purchased or manufactured and sales effected can directly be established. But the same is not so in the case of the assessee providing services. In the instant case of the assessee the expenses is not directly relatable to the revenue. Moreover, the assessee company is a growing concern. The expenses under the Income Tax Act is allowable if the liability is not crystalised on the date of accrual of income on account of AMC. This issue finds support in the judgment of the Hon'ble Supreme Court in the case of CIT vs. M/s. Swadeshi Cotton & Flour Mills Pvt. Ltd. (1964) 153 ITR 134. further reliance is placed in the case of CIT vs. Sugar Dealers (1975) 100 ITR 424 (All) wherein it has been held that contingent/unascertained liability is not allowable as deduction under the Income Tax Act. The assessee is rightly accounting for expenses as and when the liability is crystalised. Hence, the alternate plea of the assessee cannot be accepted."
24. Before CIT(A) submitted as follows:
1. AMC charges are not one time income but have to be spread over the period for which the services are to be rendered.
2. AMC basically are receipts in advance for rendering of services during the period of 12 months and such advance receipt is not income accruing to the appellant at the beginning of the contract.
3. Right to receive accrues day-do-day till the contract is in existence and not on the day when the contract is entered into.
4. Clause no.4 sub-clause 6 of Software Service Agreement categorically states that both the parties have right to terminate / rescind the contract at any time during the period of contract, which clause the learned AO has altogether brushed aside. Further, Annexure "A" to the contract states that in case of termination, proportionate amount of Agreement received in advance, if any, would be refunded.
5. The said clause itself establishes that the AMC income does not accrue at the time when the contract is entered into.
6. The amount received as service charges to be rendered in future could not be considered as an income and is not exigible to tax.
7. Alternative claim of matching concept needs to be accepted.
25. The CIT(A) accepted the plea of the Assessee holding as follows:
"I have carefully gone through the submission made by the Assessing Officer as also by the appellant. The appellant has explained the reasons as to why such AMC charges need be prorated over a period of the contract, which is generally 12 months and that such AMC services are rendered over a period of time and that no income arises at the beginning of the contract. The assessee also has distinguished the decision relied on by the Assessing Officer in the case of CRISIL Vs. DCIT reported in (2003) 84 ITD 247 Mumbai. In the case of CRISIL the income is for rating a company and the service provided by CRISIL to the customer stops on giving rating and hence such income was treated as income immediately on receipt basis although the benefit of which shall be available for the next 12 months or so. This is at variance in the case of the appellant. In support of the argument the appellant also has produced Software Support Service Agreement which inter alia clause no.6 under main clause 4 offers right to rescind the agreement to the contractee in case the contractee decides not to avail such services. Such right also is available to the company to terminate such contract after giving notice for the stipulated period. In other words, no right to receive had arisen at the beginning of the contract of AMC. The appellant also has put forward argument of accrual method of accounting as also another argument of matching cost concept.
The appellant also has sought to distinguish the decision of Turner Morison from its application in the case of the appellant in as much as that the decision of Turner Morison was based on principal to agent basis as against the appellant's case whereby the same is applicable on principal to principal basis. The assessee has also relied on mercantile method of accounting, decision in the case of Kedarnth June, need for applicability of accounting standards as also decision in the case of Godhra Electricity Co. 1997 225 ITR 746 (SC) which refers to accounting of real, income as also decision in the case of ISBC Consultancy Services 88 ITD 134(Mumbai) wherein it was held that customization of software is nothing but manufacturing and the AMC of software involves nothing but upgradation and customization of software from time to time as per various requirements including statutory requirements, customer base, requirement, banking related change requirements etc. This AMC pertains more to dynamic upgradation of software akin to manufacturing and hence the manufacturing / AMC which take place over a period cannot be accounted for on receipt of such amount at the beginning of the contract.
Considering the nature of activity of the appellant it is clear that such services on upgradation of software are provided on ongoing basis and not on upfront basis. Moreover, the right to receive is not granted at the beginning of the contract as the contract also provides for termination of contract either of the party and that such a contract cannot be said to have conferred the right to receive at the beginning of the contract. In my view, the arguments of the appellant under the circumstances seems to be appropriate and accordingly proration of income is allowed, and the income is to be taxed on accrual basis and not on upfront basis. This ground is therefore, decided in favour of the appellant and is accordingly allowed."
25. Aggrieved by the order of the CIT(A), the revenue has raised ground No.3 before the Tribunal.
26. We have heard the submissions of the learned D.R. who reiterated the stand of the revenue as reflected in the order of the AO. The learned counsel for the Assessee reiterated the stand of the Assessee as put forth before CIT(A) and further relied on the decision of the Special Bench ITAT Chennai in the case of ACIT Vs. M/s. Mahindra Holidays & Resorts (India) Ltd. 131 TTJ 1 (SB) (Chennai).
27. We have considered the rival submissions. The details of the AMC received by the Assessee and booked as income for the various A.Y.'s are as follows:
Year Bill during year F.Y 2001-02 (AY 2002-03) Income Booked FY 2002-03 (AY 2003-04) FY 2003-04 (A.Y 2004-05) FY 2004-05 (AY2005-06) FY 2005-06 (AY 2006-07) Apr-May 2000(FT Pvt. Ltd) 752,060 FTIL FY 2000-01 (A.Y. 2001-02) 6,447,514 4,267,660 F.Y 2001-02 (A.Y. 2002-03) 14,065,190 8,421,848 5,643,342 FY 2002-03(AY 2003-04) 20,419,152
-
14,704,352 5,686,888 23,450 4,462 FY 2003-04(AY 2004-05) 26,210,346
-
-
21,739,434 4,470,912
-
FY 2004-05(AY 2005 -06) 38,244,517
-
-
-
34,216,409 4,028,108 AMC Income booked 12,689,508 20,347,694 27,426,322 38,710,771
28. A reading of the above chart would show that while actual AMC receipts were more than what was actually accounted as income in AY 02-03 and 03-04, the same were more than actual receipts in AY 04-05 and 05-06. Another aspect which needs to be noticed is that the Assessee has been following a consistent method irrespective of the actual receipt being less or more than what is accounted for as income. Thus it cannot be said that the Assessee derives any advantage by following the method of accounting which is in dispute in this appeal. We should however add that this aspect will alone not be relevant to decide the issue and the question is as to the time at which income accrues or arises under the mercantile system of accounting. With this background in mind, let us examine the rival claims.
29. Copy of the Software Support Services Agreement dated 29-3-2001 is at page 119 to 122 of the paper book. It is necessary to see the various terms of this agreement.
30. Under the agreement, the Assessee has agreed to provide support services to a licensee of the software developed by the Assessee. Support service has been defined as follows:
"Support Services" shall mean the technical support services in connection with the Software and includes bug fixes and support for any regulatory changes related to the message based or file based interfaces as specified by the respective regulators. Support Services shall not include customizing the Software and resolving problems associated with the design and configuration of the system software (operating system, database engine, drivers among others) required by the Software or the hardware on which Licensee has installed or uses the Software."
31.The nature of service to be provided is further elaborated in clause-2 of the agreement as follows:
"Specification of Support:
FTIL offers the following support services: Technical Support Assistance via the telephone, electronic mail, or facsimile shall be made available from 9.00 am to 6 .00 PM (IT) Monday through Friday, working Saturdays ( as per the FTIL policies - 2nd and 4th Saturdays are non-working) excluding the public and FTIL holidays. Access to FTIL's Licensee only web page where the Licensee can obtain product code patches and other relevant Product specific technical information. Validated Software updates may be made available to the Licensee as they are released for the Software. Updates include corrections, modifications or additions of or to the Software. Updates include upgrades and / or enhancements. However, updates in the nature of major additions to the software amounting to an addition of a module may be chargeable at the discretion of FTIL. Issues monitored by an Account Manager to ensure priority issue escalation and timely resolution. Proactive shipment of Product updates on installed licenses."
32. The support service has to be provided by the Assessee only after the expiry of the warranty period. Clause-4 of the agreement provides for other terms and conditions. For this appeal condition 5 and 6 are very important and they read as follows:
"5. Licensee may, during 12 months after the discontinuance of the Software Support reinstate the Software Support upon notice to FTIL. Such reinstatement shall be governed by the terms under which Software Support was initially provided. FTIL shall have the right to charge a reinstatement fees equal to the fees for Software Support which would have been paid under this Agreement had Licensee elected to continue Software Support without interruption. FTIL does not reinstate Support for the Software if support is discontinued for a period exceeding 12 months.
6. Termination of Licenses shall also have the effect of immediate termination of this Agreement. Both the parties to this agreement shall have right to terminate this Agreement by giving notice of 15 days to other persons on stating reasons for the same."
33. A reading of clause-5 would show that in the event of discontinuance of support services the Assessee has to proportionately refund the charges collected. Both parties have the right to terminate the agreement at any time. Though there is no specific clause for refund of proportionate charges paid under the agreement, such a right is available to a licensee in law. Even otherwise, clause-5 in our view indirectly provides for a right to a licensee to demand refund of the fee already paid for period for which AM is not utilized by the licensee. This in our view would be the proper way to look at the agreement.
34. Another factual detail which needs to be referred to is the fact that the Assessee was accounting for AMC in the year of receipt but changed the method of accounting in AY 01-02, by spreading the AMC receipts over the period for which the services were to be rendered i.e., the receipts proportionate to the previous year alone is recognized as income and the remaining is accounted for income of the succeeding financial year.
35. The issue raised by the AO that the AMC is not for maintenance of software but for upgrading the software, in our view, does not make much of a difference because both for maintenance and for upgrading the Assessee has to incur expenditure. The receipt of AMC for a particular period is coupled with an obligation to render service for the said period and this aspect becomes relevant in deciding the alternate claim of the Assessee for allowing proportionate expenditure if entire income is accounted.
36. The Special Bench of the Tribunal in the case of M/s.Mahindra Holidays & Resorts (I) Ltd. (supra) had to deal with identical case. The facts of the case before the special Bench was that the assessee company was in the business of selling time share units in its various resorts. For the said year the assessee declared a total loss of Rs. 3,90,42,370/- which loss was determined at Rs. 1,87,58,252/- by an order under sec. 143(3) of the Act. Subsequently, the assessment was reopened under sec. 147 of the Act and the appeal before the Tribunal arose from the re- assessment proceedings. It was noticed by the Assessing Officer that the relevant balance sheet showed an amount of Rs. 14,98,30,966/- under the head "Deferred income-advance towards members facilities- see note 1(vi)(a)". This figure represented the amount collected from time - share members but not recognized as revenue for the current year. The explanation of the assessee was that it had considered only 40% of the membership fees collected as income and the balance 60% was treated as deferred income. It was stated that the balance amount was to be spread over the next 33 years during which the assessee is expected to provide time share facilities to the members. It was also stated that in order to provide various facilities during the next 33 years, it has to incur many costs. Further explanation of the assessee was that the AMC was exclusively meant to cover the maintenance of various facilities which are an integral part of the time-share property. These charges were for the maintenance of various electronic gadgets made available in the accommodation, furniture, kitchen equipments, central air-conditioning etc. On the other hand, the consideration for future obligations received in the initial stages is towards transfer facility from one resort to another, split, accumulation and advancing facility, domestic and international exchange, transmission, up-gradation etc. The assessee mainly relied on the judgment of the Supreme Court in the case of Calcutta Co. Ltd. (supra). The Assessing Officer observed that the assessee is following mercantile system of accounting and hence, income has to be accounted for on accrual basis. He was of the view that the receipt was undisputedly income as the assessee itself had shown it as deferred income. However, the Act does not recognize the concept of deferred income and hence the assessee's explanation cannot be accepted.
37. The special Bench proceeded to hold as follows:
"It is not in dispute that the assessee follows mercantile system of accounting. Sec. 5(1) of the Act defines the scope of total income in case of a resident and includes all income which:
Is received or deemed to be received in India in such year by or on behalf of such person or
(b) Accrues or arises or is deemed to accrue or arise to him in India during such year; or Accrues or arise to him outside India during such year.
As per sec. 29 of the Act, the profits and gains of business or profession have to be computed in accordance with the provisions contained in section 30 to 43D of the Act which in nutshell means that it is the net income which is taxable and not the gross income. Net income has to be arrived at after allowing all deductions permissible under the Act. In the backdrop of these facts and statutory provisions, we have to examine whether the income received by the assessee has really accrued to it or not. The most enlightening judgment in this regard and which has also been the bedrock of subsequent decisions, is that of the Supreme Court in the case of E.D Sassoon & Co. Ltd. vs. CIT 261 ITR 27."
38. The Special Bench after considering several decisions of the Hon'ble Supreme Court and Hon'ble High Courts held:
There was a continuing obligation on the part of the Assessee to provide accommodation and other incidental services to the customer.
The Assessee could claim corresponding expenditure that it is likely to incur in future and claim is as deduction proportionately after accounting for the entire receipt as income but where it is not possible to make a reasonable estimate of expenses it would be appropriate to recognize income on a prorata basis. On facts the Special Bench found that there were uncertainties in estimating the probable liability of the Assessee in future.
39. It can be seen from the aforesaid decision that the main reason for the tribunal to deviate from the accepted principle of recognizing income under the mercantile system of accounting was the inability to quantify the expenditure in future that are likely to be incurred against the receipts in the current year. In the present case however, the Assessee has itself made a claim for expenses being allowed in the event of the entire receipt being brought to tax. The Assessee has not quantified such estimate of expenditure.
40. We are of the view that none of the circumstances pointed out by the Assessee can stop income from accruing. The moment bills are raised by the Assessee, there is accrual of income since the Assessee follows mercantile system of accounting and right to receive the payment is the point of time at which the income accrues. In the present case, the Assessee has not denied that it had already accounted for the expenditure incurred till the end of the previous year in respect of the obligations under the AMC. In such circumstances, the Assessee cannot seek to postpone recognizing income. We are of the view that the conclusions of the AO are proper in this regard and the CIT(A) fell into an error in reversing the order of the AO. The right to receive is not postponed merely by a clause in the AMC that the contract can be terminated by either party. In the event of termination, the Assessee is at liberty to reverse the recognition of income. The Assessee is however at liberty to claim expenditure it is likely to incur for the remaining period of the Annual Maintenance contract which is beyond the end of the previous year of the Assessee. Such claim has to be allowed even under the mercantile system of accounting, the only rider being that the Assessee should be capable of quantifying such expenditure on a reasonable basis. This is because the incurring of the liability is certain and it is only its quantification and actual payment that is postponed. The Assessee has not given such a break of expenses. We feel that it be just and proper to direct the Assessee to give such a break up. The actual liability incurred in this regard by the Assessee for the various years would also be available. Thus the reasonableness of the quantification can also be judged by the AO. We therefore reject the argument of the Assessee for postponing recognition of income but at the same time direct the AO to allow the expenditure to be incurred in future in respect of the income already recognized as deduction. For this limited purpose the issue is remanded to the AO. For the reasons given above, we reverse the order of the CIT(A) in part and restore the order of the AO in part. Ground No.1 raised by the revenue is thus partly allowed.
41. Ground No.2 raised by the Revenue in its appeal reads as follows:
"2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not upholding the action of the Assessing Officer of disallowing the claim of depreciation on intangible properties namely IPR for Rs. 3,37,61,539/-."
42. The Assessee company merged with a company by name M/s. Electronic Broking Services Ltd.(EBSL) in AY 01-02. The merger was after due approval as required in law. Pursuant to such merger, the Assessee claimed that it became entitled to intellectual property rights (IPR) valued at Rs.18 crores. On such IPR, the Assessee claimed depreciation u/s.32(1) of the Act. The same was denied by the AO but allowed by the CIT(A). Against the order of CIT(A), the revenue has raised ground No.2.
43. At the time of hearing, it was brought to our notice by the parties that a search and seizure action u/s.132 of the Act, was carried out in the case of the Assessee by the Income tax authorities on 20-6-07 and a statement of Mr.Jignesh P.Shah, a director of the Assessee was recorded u/s.132(4) of the Act and in such statement, the director had agreed that the claim for depreciation on IPR is being withdrawn to avoid litigation and to buy peace. Thereafter an order of assessment u/s.153-A read with Sec.143(3) of the Act was passed for AY 02-03, 03-04 taxing the depreciation on IPR already allowed in assessment for AY 02-03 and 03-04. Copies of the orders of assessments and statement u/s.132(4) were placed on record. In view of the above, the disallowance of claim for depreciation on IPR which was disallowed by the AO and which was allowed by the CIT(A) deserves to be restored. The order of the AO disallowing claim for depreciation on IPR is restored. The relevant ground of appeal of the revenue is allowed.
44. Ground No.3 raised by the revenue reads as follows:
"3. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not upholding the action of the Assessing Officer of disallowing the claim of bad debts amounting to Rs. 60,47,870/-."
45. The Assessee claimed as a deduction in computing its total income a sum of Rs.60,47,870/-. The AO called upon the Assessee to furnish complete details of bad debts written off, how the debts written were offered for taxation in the past, whether the customers whose debts were considered bad and written off were still customers of the Assessee, what were the steps taken by the Assessee to recover the debts and how honestly the Assessee has reached a conclusion that the debts have become bad.
46. The Assesee in response to the query of the AO by its letter dated 22-12-2004 submitted the following.
"a.List of entire bad debts written off during the year.
b. Copies of sales invoice corresponding to the bad debts in support of our claim that such sale was included in the sale of earlier financial year, the breakup of which is as under:
Financial year Amounts of sale included in list of bad debts Amounts of sales offered to taxation which includes amount of sale referred to in column (2) Details of income tax return filed.(1) (2) (3) (4)
1998-1999 9,80,500 1,74,27,820 26.10.1999/ 1877 1999-2000 3,83,175 5,87,02,876 27.11.2000/ 2058 2000-2001 43,10,993 18,75,41,562 19.10.2001 /493 31.10.2001 / 2177 2001-2002 3,73,201 10,51,50,212 25.10.2002 /282 Total 60,47,870 c. The aforesaid sales includes AMC sales and are included in the Profit& Loss Account & Balance Sheet of respective year, which are audited and are on your records.
d. We enclose herewith copies of sales, bill which have resulted into bad debts for your ready reference.
e. For your ready reference we enclose herewith respective sales register which includes sales shown in item no.2 above to confirm that such sales / income are offered to income tax in earlier years and that the same be allowed as deduction.
f. Copy of resolution passed by the Board of Directors is already on record.
g. The assessee has complied all the condition which govern the grant of an allowance under this clause, which are dealt with as under:-
The debt was in respect of business, which has been carried on by the assessee. The assessee continues same business.
The debt has been taken into account in computing the income of the assessee of the accounting year 1999-2000, 2000-2001 & 2001-2002.
The amount of debt has become bad on account of various reasons already furnished alongwith statement of bad debts. The Board of Director also has passed suitable resolution to write off such expenses as bad.
The amount has been written off as irrecoverable on the books of account of the assessee for the assessment year 2002-2003 in which the same is written off an claimed as deductible.
In view of the above please allow entire claim of deduction of bad debts U/s. 36(1)(vii) r/w 36(2) of the Income Tax Act, 1961."
47. The AO however held that the Assessee had not established that the debts which were written off as bad had in fact become bad and irrecoverable and he denied the claim for deduction. On appeal by the Assessee the CIT(A) directed the AO to allow the claim of the Assessee by following the decision of the Special Bench of the ITAT in the case of ACIT Vs. Oman International Bank 100 ITD 285 (SB)(Mum) wherein it was held that after the Amendment to the provisions of Sec.36(1)(vii) of the Act, by the Finance Act, 1998 w.e.f. 1-4-1998, it is no longer necessary for the Assessee to establish that the debt which was written off as bad had in fact become bad and irrecoverable. Aggrieved by the order of the CIT(A), the revenue has raised ground No.3 before the Tribunal.
48. We have heard the rival submissions. We have already discussed an identical issue in para 13 to 17 of this order while dealing with an identical ground of appeal of the Assessee in ITA No.3537/Mum/07 for AY 01-02. For the reasons stated therein, ground No.3 raised by the revenue is dismissed.
49. Ground No.4 raised by the revenue reads as follows:
"4. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not upholding the action of the Assessing Officer of disallowing the claim of employee severance expenses amounting to Rs. 12,11,204/-."
50. The Assessee claimed as deduction a sum of Rs.1,43,55,000/- being employees severance expenses. The details filed by the Assessee in this regard were as follows:
'Details of Severance Package paid to US Employees JATIN ( IN USD) DHIREN Annual package (revised from May 2002) 185,000.00 185,000.00 Package per month 15,416.67 15,416.67 Ex-gratia(Over 3 yrs Period) 157,000.00 157,000.00 Apprx. Ex-Gratia per Annum 52,333.33 52,333.33 Calculation of Severance Pay (4 months) 61,666.67 61,666.67 Ex-gratia for the year 2001-2002 52,333.33 52,333.33 Medical Insurance(Company's Contribution- Standard @ USD 702.7 per month for 1 year) 8,432.40 8,432.40 Leave Entitlement(15 days encashment) 7,708.33 7,708.33 Total Severance Expenses paid as per various clauses of the Terms of Contract SUBTOTAL(A) 130140.73 130140.73 Additional Ex-Gratia & Benefits SUBTOTAL(B) (Severance Package) 12,359.27 12,359.27 TOTAL 142,500.00 142,500.00 The company has paid (US$ 130140.73 x 2=) US$ 260281.46 as per the terms of contract with the employees.
The company has paid (US $ 12359.27 x 2=) US$ 24718.54 towards additional ex-gratia payments towards smooth handover of all the properties belonging to the Company in the office at USA subsequent to their severance from the company. Such services were rendered by them to the company as an additional service for which they were paid additional amount. They also rendered their further services in terms of subsequent handover of premises at later date and sorting out with the maters with landlords of the property and other agencies. Additional payments were made also to make smooth transfer of existing clients and database in favour of the company. Such payment was absolutely necessary for the purpose of the business and be fully allowed."
51. The AO was of the view that the additional ex-gratia payment of $12,359.27 each to the two employees were not incurred for the purpose of business of the Assessee. The reasoning of the AO in this regard was as follows:
"7.5 The submission of the assessee is not acceptable. It is seen that the amount of US$ 24718.54 was paid over and above the contractual obligation of the assessee company. There was no obligation on the part of the assessee to pay additional amounts of US$ 12359.27 each to the two employees. Any payment over and above the contractual obligation of the assessee is not the business expenses. More so this is a case wherein the payments are made at the time of the employees leaving the services of the company. The assessee is not paying additional amounts over and above the contractual obligation to its servicing employees so that it could be in the nature of incentive to its employees. As per assessee's submission, the additional payments were made for smooth transfer of existing clients and database. However, it is pertinent to note that the assessee company had its branch office at United States. All the dealings were made by the two employees on behalf of the assessee company and in their personal capacity. The business purpose of excess payments made to the employees of the company is not established.
7.6 It was held in the case of CIT vs. India Cements Ltd. (1975) 98 ITR 69(Mad) that payment in excess of the amount which an assessee is liable to pay under the terms of an agreement is not an allowable deduction under section 37(1).
7.7 In view of the above discussion, an amount of Rs. 12,11,204/-(US $ 24718.45 X 49] is added back to the total income of the assessee company."
52. Before CIT(A) the Assessee submitted that the assessee had opened up office in USA. The USA Office had only two employees, who were asked to resign for commercial reasons and that pursuant to their resignations, the entire business would have come to end. The USA office of the Company had following assets with it:
a. Fixed Assets.
b. Cash & Bank balances c. Databases & Important Documents of the Company.
The USA Office of the Company had also entered into contract with local property owner for allowing their office to be used by the Company. The USA office also had entered into various commercial negotiations with several of USA Companies. Such negotiations were at various stages of negotiations. Such negotiations had to be completed / taken to their logical conclusions. With the exit and retirement of all(two) employees, a void and vacuum was being created in USA branch office of the assessee. Moreover various negotiations were entered into by retiring employees. It was absolutely necessary and in the interest of business to receive various services from such retiring employees even after their retirement important among them being:
Project existing assets of the Company. Handover assets & charge to new incumbents as & when they were appointed. To settle accounts with the lessor of premises. To bring financial & other closures to all pending commercial transactions which were at various stages of negotiations.
Had this not been done, the Assessee would have incurred various risks in terms of: Abrupt closure of business and its unfavourable consequences. Legal action by the lessor of premises. Loss of image, goodwill & prestige of the company in a prestigious market for future business operation of the company. Any other action by federal bank or other authorities. Additional expenditure by sending local people who know nothing about previous operations/ contracts.
It was also highlighted that the assessee had paid expenses to employees situated at USA Branch. Such payments were made to two employees a. Mr. Jatin Desai & b. Mr. Dhiren Shah. The severance expenses were incurred and paid on the basis of Employment & Confidentiality Agreement as per amounts over and above the amount required as per clause 15 of the agreement. Such amounts were paid keeping in mind various commercial consideration, as set out above. It was thus submitted that commercial considerations and business requirements were absolute reasons for additional amounts, which were paid to retiring employees.
53. The CIT(A) agreed with the plea of the Assessee and he held as follows:
"I have carefully gone through the submissions made by Assessing Officer as also by the appellant and I am of the view that it will be incorrect for any Assessing Officer to judge any expenditure on subjective basis. What is necessary is to step into the shoes of a businessman to assess whether or not such expenditure was necessary to be incurred on the basis of commercial expediency. There is no dispute regarding the factum of payment and the fact that these amounts were paid to employees who had no connection with the appellant company or its directors. Under the circumstances, I do not see any reason for not accepting the plea of the appellant. The disallowance is accordingly deleted."
54. Aggrieved by the order of the CIT(A), the revenue has raised gr.No.4 before the tribunal.
55. We have heard the rival submissions. The AO has made the disallowance on the basis that the payment in question was in excess of what the Assessee was bound to pay under the agreement with its employees. In our view the AO ignored the compelling circumstances under which it had to pay the additional amount to the employees who left its services. The AO in making the impugned disallowance has stepped into the shoes of a businessmen and substituted his views of what is commercial expediency. This is not permissible. On facts we are satisfied that the payment in question was owing to commercial expediency and in order to facilitate the carrying of the business of the Assessee and therefore the CIT(A) was right in holding that the expense in question is wholly and exclusively for the purpose of business of the Assessee and allowing the claim for deduction. The decisions relied upon by the Assessee before CIT(A) in this regard clearly support the plea of the Assessee. For the reasons given above, we dismiss ground No.4 raised by the revenue.
56. Ground No.5 raised by the revenue reads as follows:
"4. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not upholding the action of the Assessing Officer of disallowing interest payment u/s. 14A of the Act, amounting to Rs. 88,350/-."
57. The Assessee earned dividend income of RS.3,29,13,890/- which was exempt u/s.10(33) of the Act. In view of the provisions of Sec.14-A of the Act, the AO was of the view that expenses incurred to earn the income which does not form part of the total income of the Assessee cannot be allowed as a deduction in computing the total income. The AO worked out such expenses at Rs.88,350/- and made an addition of the said sum u/s.14-A of the Act. On appeal by the Assessee the CIT(A) allowed the claim of the Assessee holding that the disallowance u/s.14-A was not justified. Aggrieved by the order of CIT(A), the revenue has raised ground NO.5 before the Tribunal
58. Before the tribunal, both the parties agree that in view of the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce the issue of disallowance u/s.14-A has to be examined afresh by the AO. We accordingly set aside the order of CIT(A) and direct the AO to examine the issue of disallowance u/s.14-A to the AO for fresh consideration in the light of the Hon'ble Bombay High Court decisions referred to above.
59. Ground No.6 to 10 have already been decided while deciding the appeal of the Assessee for AY 01-02. For the reasons stated therein these grounds of appeal are dismissed.
60. In the result, the appeal being ITA No.54/M/07 is partly allowed. C.O.No.96/Mum/07 is filed in ITA No.54/Mum/07. The grounds raised in the C.O. are purely supportive of the order of the CIT(A) and therefore they are dismissed. In the result, C.O.No.96/Mum/07 is dismissed.
61. ITA No.4853/Mum/07: This is an appeal by the Revenue against the order dated 9.4.07 of CIT(A)-VIII, Mumbai relating to AY 03-04.
62. Ground No.1 raised by the revenue reads as follows:
"On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in not upholding the action of the AO in disallowing claim of prorate of AMC charges made by the assessee."
63. This ground of appeal arises under identical facts and circumstances under which Ground No.1 raised by the revenue in ITA No.54/Mum/07 in AY 02-03 was decided. For the reasons stated therein this ground of appeal of the revenue is partly allowed.
64. Ground No.2 raised by the revenue reads as follows:
"On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in not upholding the action of the AO in disallowing claim of depreciation on intangible properties namely, IPR for Rs.2,53,21,154/-."
65. This ground of appeal arises under identical facts and circumstances under which Ground No.2 raised by the revenue in ITA No.54/Mum/07 in AY 02-03 was decided. For the reasons stated therein this ground of appeal of the revenue is allowed.
66. Ground No.3 to 5 raised by the revenue reads as follows:
"On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in directing the AO to allow Rs. 8,77,292/- as expenses u/s. 37(1) of the Act without considering that the amounts are not expenditure and are not proved to be laid out as expended wholly and exclusively for the purpose of the business."
67. The Assessee claimed as a deduction in computing its total income a sum of Rs.9,75,292/-. The AO called upon the Assessee to furnish complete details of bad debts written off, how the debts written were offered for taxation in the past, whether the customers whose debts were considered bad and written off were still customers of the Assessee, what were the steps taken by the Assessee to recover the debts and how honestly the Assessee has reached a conclusion that the debts have become bad.
68. The Assesee in response to the query of the AO by its letter dated 31.1.2006 submitted the following.
"The breakup of write off of expenses under the head irrecoverable debts are as under:
Financial year Discount & Price Difference Price Difference on A/c. of Sales Tax Rejection of Product Bad Debts Advance for Business Total 99-00
-
-
-
53,000
-
53,000 00-01 82,000
-
3,45,000 45,000
-
4,72,000 01-02 97,920 89,800
-
-
-
1,87,720 02-03 9,020
-
1,49,500
-
1,04,052 2,62,572 Total 1,88,940 89,800 4,94,500 98,000 1,04,052 9,75,292
69. The AO however held that from the details furnished above, the amount irrecoverable have been written off which are in nature discount and price difference to the extent of Rs.188,940/- which cannot be considered as bad debts. The AO further held that the Assessee was selling software, which are product software. In India most of the states do not levy any sales tax on sale of product software. Company is situated in the state of Maharashtra State. In the state of Maharashtra, the rate of sales tax on product software has been levied at 4%. Most of the buyers in different parts of the country are not paying sales tax and hence such sales tax are not recovered or not recoverable due to the above fact the Assessee can come to know about such non-payment only when final payment from the buyer is received. The sales which have been effected in the last few months of the year, payments thereof gets completed only in the next financial year and hence the write off on account of sales tax can take place in subsequent year. He held that a sum of Rs.89,800/- have been written off during the year pertaining to such write off on account of sales tax, which are not recoverable. Such write off is also in the nature of discount to the buyer and hence cannot be allowed. The AO analyzed another category of write-off viz., rejection of the product sold by the company or non-use of such product. He held that the Assessee makes sales of various products. This involves sale, subsequent training and marketing support. After the training it is expected that the buyer shall start using product and shall make payment thereof. In some of the cases the buyer fails to utilize the product for various reasons and do not make payment of such sales. The Assessee has fully accounted for sales immediately on installation of such product to the buyer. Since buyer is not using the product and has not paid for reasonably long period, the amounts are not recoverable and hence fully written off. The company has written off a sum of Rs.4,94,500/- and the same according to AO is not fully allowable as bad debts. This reason in short is that the debt has not been established to have become bad. The next category analyzed by the AO was that the Assessee had written off various amounts as bad debts aggregating to Rs.98,000/- which are very small and the details of which are separately furnished. Such amounts pertain to one buyer which has stopped the business activity and the amount written off was towards sale in two financial years for Rs.53,000/- & Rs.45,000/- in F.Y 99-00 & 00-01. For various reasons including not spending good money over bad money, time barred nature of recovery & amounts, which are not recoverable; the company had decided to write off such amounts. According to the AO, the same is fully deductible U/s. 36(1)(vii) and be allowed as expense. The next category was a sum of Rs. 1,04,052/- to Mr. Satyadeep Rajan for business purposes as advance for getting approval from various departments of MTNL & BSNL for establishing connectivity for running software of the company one online trading basis. According to the AO such amounts were given as advance for completing such work not for business purposes.
70. On appeal by the Assessee the CIT(A) directed the AO to allow the claim of the Assessee by following the decision of the Special Bench of the ITAT in the case of ACIT Vs. Oman International Bank 100 ITD 285 (SB)(Mum) wherein it was held that after the Amendment to the provisions of Sec.36(1)(vii) of the Act, by the Finance Act, 1998 w.e.f. 1-4-1998, it is no longer necessary for the Assessee to establish that the debt which was written off as bad had in fact become bad and irrecoverable. Aggrieved by the order of the CIT(A), the revenue has raised ground No.3 before the Tribunal.
71. We have heard the rival submissions. As far as disallowance of bad debts written off by the Assessee which was claimed as deduction and disallowed by the AO on the ground that the write off of bad debts cannot be allowed without establishing that the debt has in fact bad, we have already discussed an identical issue in para 13 to 17 of this order while dealing with an identical ground of appeal of the Assessee in ITA No.3537/Mum/07 for AY 01-02. For the reasons stated therein, ground No.3 & 4 with regard to bad debts written off raised by the revenue are dismissed. As far as the discount and price differences, price difference on account of sales tax and rejection of products which are claimed as bad debts are concerned, they are laid down wholly and exclusively for the purpose of business of the Assessee. They are intimately connected to the business of the Assessee and are therefore to be allowed as deduction u/s.37(1) and in any event u/s.28 as a loss incidental to the business of the Assessee. As far as ground No. 5 of the revenue is concerned, the amounts paid to Mr.Satyadeep Rajan are clearly connected with the business of the Assessee which is development of software for on line trading in stock market. They are allowable as deduction u/s.37(1) and in any event u/s.28 of the Act. We therefore do not find any merits in these grounds raised by the revenue and the same are therefore dismissed
72. In the result, ITA No.4853/Mum/07 is partly allowed.
73. ITA No.1160/Mum/07: This is an appeal by the Revenue against the order dated28.11.2006 of CIT(A)-VIII, Mumbai, relating to AY 01-02. We have already seen an appeal for AY 01-02 by the revenue. That appeal emanated from the order of the AO u/s.143(3) of the Act. The present appeal emanates from the order of the AO for AY 01-02 passed u/s.147 of the Act.
74. Ground No.1 raised by the revenue reads as follows:
"On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in not upholding the action of the AO in disallowing claim of a sum of Rs. 42,67,660/- on account of AMC charges."
75. This ground of appeal arises under identical facts and circumstances under which Ground No.1 raised by the revenue in ITA No.54/Mum/07 in AY 02-03 was decided. For the reasons stated therein this ground of appeal of the revenue is partly allowed.
76. Ground No.2 raised by the revenue reads as follows:
"On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in not upholding the action of the AO in disallowing claim of depreciation as intangible properties namely IPR for Rs. 4,50,15,385/-."
77. This ground of appeal arises under identical facts and circumstances under which Ground No.2 raised by the revenue in ITA No.54/Mum/07 in AY 02-03 was decided. For the reasons stated therein this ground of appeal of the revenue is allowed.
78. Ground No.3 raised by the Revenue reads as follows:
"On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in not upholding the action of the AO in disallowing a sum of Rs. 1,00,000/- u/s. 14A of the Act."
79. The Assessee earned dividend income of RS.72,61,599/- which was exempt u/s.10(33) of the Act. In view of the provisions of Sec.14-A of the Act, the AO was of the view that expenses incurred to earn the income which does not form part of the total income of the Assessee cannot be allowed as a deduction in computing the total income. The AO worked out such expenses at Rs.1,00,000/- and made an addition of the said sum u/s.14-A of the Act. On appeal by the Assessee the CIT(A) allowed the claim of the Assessee holding that the disallowance u/s.14-A was not justified. Aggrieved by the order of CIT(A), the revenue has raised ground NO.3 before the Tribunal.
80. We have already seen that the present assessment proceedings are u/s.147 of the Act. The Assessee filed a return of income for AY 01-02 on 31.10.2001. An order of assessment u/s.143(3) was passed on 9.2.2004. Reassessment proceedings were initiated by issue of notice u/s.148 of the Act dated 17.3.2005 to disallow the claim for depreciation on IPR which was allowed in the assessment proceedings u/s.143(3) of the Act. Sec.14-A was introduced by the Finance Act, 2001 w.e.f. 1-4-1962 and it provided that expenses incurred to earn the income which does not form part of the total income of the Assessee cannot be allowed as a deduction in computing the total income. A proviso was introduced by the Finance Act, 2002 w.e.f 1-4-2002 , which reads as follows:
" Provided that nothing contained in this section shall empower the AO to either reassess under Sec.147 or pass an order enhancing the assessment or reducing a refund already made or other increasing the liability of the Assessee under Sec.154, for any assessment year beginning on or before the 1st day of April, 2001"
81. Thus under the proviso there is an embargo on the power of the AO to make a disallowance u/s.14-A of the Act, in respect of an assessment or or before 1-4-2001. The embargo is not merely on reopening but on assessment. The ITAT Mumbai benches in the following cases JCIT Vs. Bombay Dyeing Mfg.Co.Ltd. 125 TTJ (mum) 263 and Thacker & Co. Ltd. Vs. ITO 106 ITD 141 (mum) have considered the proviso and have held, relying on CBDT circular No.11 dated 23.7.2001, that proviso to Sec.14-A places absolute embargo on the jurisdiction of the AO to reassess by making a disallowance u/s.14-A in proceedings u/s.147 of the Act, where such assessment for AY on or before 1-4-2001 have already been made and where no such disallowance had been made. In view of the above, we do not find any grounds to interfere with the order of the CIT(A).
82. Consequently the ground of appeal of the Revenue is dismissed.
83. In the result, ITA No. 1160/Mum/07 is partly allowed.
84. In the result, ITA No. 3537/Mum/05 being appeal of the Assessee for AY 01-02 is partly allowed. ITA No. 54/Mum/07 being appeal of the Revenue for AY 02-03 is partly allowed while the connected C.O. No.96/Mum/07 by the Assessee for AY 02-03 is dismissed. ITA No.4853/Mum/07 and 1160/Mum/07 being appeals by the revenue for AY 03-04 and 01-02 are partly allowed.
Order pronounced in the open court on the 7TH day of Jan.2011
Sd/- Sd/-
(R.K.PANDA) (N.V.VASUDEVAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated. 7th Jan.2011
Vm.
Copy to: 1. The Appellant 2. The Respondent 3. The CIT City -concerned
The CIT(A)- concerned 5. The D.R"B" Bench.
(True copy) By Order
Asst. Registrar, ITAT, Mumbai Benches
MUMBAI.
Details
Date
Initials
Designation
1
Draft dictated on
23/12/2010
Sr.PS/PS
2
Draft Placed before author
03/01/2011
Sr.PS/PS
3
Draft proposed & placed before the Second Member
JM/AM
4
Draft discussed/approved by Second Member
JM/AM
5.
Approved Draft comes to the Sr.PS/PS
Sr.PS/PS
6.
Kept for pronouncement on
Sr.PS/PS
7.
File sent to the Bench Clerk
Sr.PS/PS
8
Date on which the file goes to the Head clerk
9
Date of Dispatch of order
PAGE 38
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