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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI AMIT SHUKLA, JM & SHRI PRASHANT MAHARISHI, AM
PER PRASHANT MAHARISHI, AM:
ITA number 1594/M/2019 filed by the Deputy Commissioner of income tax Co Circle – 7 (3), Mumbai (the learned AO) and ITA number 1539/M/2019 filed by assessee are the cross appeals against appellate order passed by the Commissioner of income tax (appeals) –
In Assessee’s appeal in ITA no. 1539/mum/2019 following grounds are raised :-
“1. On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of the Learned Assessing Officer in not considering expenditure of Rs.2,69,83,497/- towards software as a revenue expense but capitalizing the same under fixed assets and allowing depreciation.
On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of the Learned Assessing Officer to the extent of limiting the deduction u/s 80GGB to Rs 11,00,00,000 against Rs 11,65,34,000 claimed by the Appellant in respect of donation given to political parties on the ground that the receipts are not available without appreciating the fact that bank statement discloses such contribution to the political party.”
In appeal of ld AO following Grounds in ITA no. 1594/mum/2019 are raised :-
“1. "Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) was correct while deleting the addition of Rs. 2,24,11,60,000/- made by the Assessing officer u/s 36(1)(iii) and capitalized the same to inventory.
"On the facts and circumstances of the case and in law, the Ld. CIT(A) was correct while deleting the addition of Rs. 1,55,33,306/- that no exempt income was earned during the year, thereby ignoring the CBDT Circular no. 5 of 2014 dated 11.02.2014 wherein it is specifically stated that provision of section 14A of the Act are attracted even to cases where no exempt income has been earned during the year."
Assessee Company is engaged in the business of real estate construction and development. During the year, the assessee is developing a project named Palawa in Dombiwali. Assessee filed its return of income on 31/3/2016 declaring a total income of ₹ 792,840,922/–. The return was picked up for scrutiny.
i. During the year under consideration, the assessee is developing the residential project and debited as interest of ₹ 2,241,160,000/– on account of interest cost shown in inventory as revenue expenditure. Assessee claimed the same as revenue expenditure. Assessee submits that interest expenses has been claimed as a deduction
iii. During the year the assessee has made up donation to political parties amounting to ₹ 116,534,000/– and claimed deduction at the rate of hundred percent u/s 80 GGB of the act. The assessee could produce only the receipt of ₹ 10 crores and therefore the learned that the assessing Officer disallowed the balance sum of Rs 1 65,34,000/-.
iv. The assessee has also claimed deduction u/s 80 IB (10) of Rs.164,50,370/– the learned AO asked the assessee to prove the due compliance for claiming the above deduction however assessee could not substantiate and therefore the deduction was disallowed.
v. Learned AO noted from the balance sheet that assessee has investment of ₹ 47.65 lakhs at the beginning of the year and ₹ 1192 lakhs at the end
Accordingly the assessment order u/s 143 (3) of the act was passed on 29/12/2017 at the total income of ₹ 310,95,22,095/–.
Assessee aggrieved with the order of the learned assessing officer preferred an appeal before the learned CIT – A. He passed an order on 19/12/2018 deciding the above issues as Under:-
i. interest disallowance of ₹ 2,241,160,000 was deleted holding that the borrowed funds have been utilized for stock in trade which is not a capital asset following the decision of the honourable Bombay High Court in case of local and constructions industries Ltd wherein the special leave petition filed by the revenue against that decision has been rejected by the honourable Supreme Court. He further relied upon the decision of the coordinate bench in case of Ashish builders private limited versus ACIT ITA number 310/M/2012, ITO versus Rohan Estates in ITA number 7200/M/2010 and Kolte Patil developers Ltd. He also held that the decision of the Wall Street construction does not apply to the facts of the case for the reason that assessee is following percentage completion method and not project completion method. He was also of the view that
ii. He upheld the findings of the learned assessing officer with respect to the software expenditure as capital expenditure despite assessee showing that the expenditure has been incurred towards licenses or upgrading the annual maintenance contract. He accepted the alternative plea of the assessee to allow depreciation at the rate of 60%.
iii. With respect to deduction Under Section 80 GGB of the act of ₹ 16,534,000/– he found that assessee has submitted the receipt of Rs 1 crore paid to Maharashtra Pradesh Rashtrawadi Party and therefore he deleted the addition to the extent of that sum and confirmed the disallowance of ₹ 6,534,000/-.
iv. The assessee did not press grounds with respect to deduction u/s 80 IB and hence it was dismissed.
v. With respect to the disallowance u/s 14 A of the act he directed the learned AO to delete the above disallowance on the ground that during the year there is no exempt income.
Both the parties are aggrieved with the order of the learned CIT – A and therefore are in cross appeal before us.
The learned departmental representative vehemently supported the order of the learned assessing officer and submitted that as the assessee is following the percentage completion method, the above interest should form part of work in progress and as soon as part of revenue is offered for taxation assessee is entitled to claim the same in that proportion deduction of the same.
The learned authorised representative submitted that identical issue arose in the case of assessee for assessment year 2014 – 15 where the revenue has raised identical ground in ITA number 147/M/2018 decided by order dated 20/2/2020 wherein the coordinate bench has dismissed the ground of appeal of the learned that AO. He referred to paragraph number 7 of that order. Accordingly, he submitted that this issue is covered in favour of the assessee in its own case by the order of the coordinate bench in assessment year 2014 – 15.
We have carefully considered the rival contention and perused the orders of the coordinate bench as well as the decision of the ITA T in assessee’s own case for assessment year 2014 – 15 wherein the revenue challenged the deletion of the disallowance of ₹ 891,171,622/– made by the learned assessing officer u/s 36 (1) (iii) of the act on identical facts and circumstances. We find that the grounds of appeal raised by the learned AO are also identical worded. There is no
“6. We have heard the rival submissions, perused the orders of the authorities below and case laws relied on. This aspect of the matter has been elaborately considered by the Ld.CIT(A) with reference to the averments of the Assessing Officer and considering the submissions of the assessee and also the decision of Hon'ble Jurisdictional High Court in the case of CIT v. Lokandwala Construction Industries Ltd., (supra) and various other decision and allowed the claim of the assessee observing as under: - “The submissions of the learned counsel have been carefully considered. According to the learned counsel the interest claimed by the assessee is a period cost and has to be allowed under section 36 (1) (iii) of the Act. The assessee has relied upon the judgment of the apex court in the case of the Taparia tools Ltd vs. DCIT (2015) 272 ITR 605 wherein the Supreme Court held that the only aspect which needed examination was as to whether the provisions of section 36 (1) (iii) read with section 43 (2) of the act was satisfied or not. Once these are satisfied there is no question of denying the benefit of deduction in the year in which such an amount was actually paid or incurred. Further, the proviso introduced by the Finance Act 2003 prohibits the allowance of interest cost only if the borrowed funds have been utilized for acquisition of a capital asset even for existing business. In this case the borrowed funds have been utilized for stock in trade which is not a capital asset. The jurisdictional Bombay High Court in the case of Lokhandwala constructions Inds Ltd 260 ITR 579 held as under: "in the instant case, it was dear that the assessee undertook two-fold activities. It bought and sold flats. Secondly, the assessee was also engaged in the business of construction of buildings. The profits from both the activities were assessed under section 28. The assessee had undertaken the project of construction of flats. Therefore, the loan was obtained for obtaining stock-in-trade. The project constituted the stock-in- trade of the assessee. The project did not constitute a fixed asset of the assessee. Since the assessee had
We find that the order of the learned CIT – A is also on identical lines. Therefore, respectfully following the decision of the coordinate bench in assessee’s own case,
With respect to ground number 3 the learned assessing officer has disallowed expenses u/s 14 A of the act invoking the provisions of rule 8D. However, the learned CIT – A addition stating that there is no exempt income earned by the assessee during the year.
The learned departmental representative supported the order of the learned AO and submitted that even if there is no exempt income disallowances required to be made. He further supported the order by The Finance Act 2022 amendment made in Section 14 A of the act.
The learned authorised representative supported the order of the learned CIT – A and submitted that when there is no exempt income there cannot be any disallowance u/s 14 A of the act. He further submitted that the amendment made by The Finance Act 2022 applies prospectively.
We have carefully considered the rival contention and perused the orders of the lower authorities. Undisputed fact shows that there is no exempt income and during the year by the assessee. If there is no exempt, income naturally there cannot be any disallowance u/s 14 A of the act because no expenditure has been incurred on any exempt income during the year. Further the reliance placed by the learned departmental representative on the amendment made by the finance act 2022 applies
In the result, appeal filed by the learned assessing officer is dismissed.
Now we come to the appeal of the assessee. The ground number 1 of the appeal is with respect to the disallowance of software expenditure of ₹ 26,983,497/–. The learned assessing officer held it to be a capital expenditure. On appeal before the learned CIT – A, alternative plea of the assessee was adjudicated and depreciation was allowed at the rate of 60%.
The learned authorised representative submitted the party wise details of software expenses at page number 11 of the paper book along with the sample invoices. He submitted that these are the stand-alone license fees incurred by the assessee and assessee does not get any enduring benefit but the user right of such assets. He therefore submitted that this expenditure could not be held to be capital expenditure. He further referred to note on expenses incurred for software expenditure placed at page number 19 of the paper book and further relied on the decision of the honourable Bombay High Court in case of CIT versus Raychem RPG Ltd ITA 4176/2009 of honourable Bombay High Court, the decision of special
The learned departmental representative vehemently supported the order of the learned lower authorities.
We have carefully considered the rival contentions and perused the orders of the lower authorities. The assessee has incurred ERP expenditure and license fees for the software. Honourable Bombay High Court in 346 ITR 318 in case of CIT versus Raychem RPG Ltd covers the issue wherein it has been held as Under:-
“2. As regards the first question, Tribunal relying upon its order in the assessee's own case relating to asst. yr. 2001-02 held that the software expenditure was revenue expenditure. The appeal filed by the Revenue for the asst. yr. 2001-02 has been dismissed for want of removal of office objections and thus the order passed by the Tribunal for the asst. yr. 2001-02 has attained finality. Moreover, the Tribunal in its order relating to the asst. yr. 2001-02 has allowed expenditure as revenue expenditure by recording thus:
"7. When we apply this functional test suggested by the Special Bench of the Tribunal, we find that impugned software does not form part of the profit- making apparatus of the assessee and hence the same is to be disallowed as revenue expenditure. We hold so because we find that the business of the assessee company is that of manufacturing of telecommunication and power cable accessories and trading in oil retracing system and other products and impugned software is
In our view, no fault can be found in the aforesaid order of Tribunal holding that software expenditure was allowable as revenue expenditure.”
Therefore, respectfully following the decision of the honourable Bombay High Court we direct the learned assessing officer to delete the disallowance of software expenditure of ₹ 26,983,497/– the AO is directed to allow the complete deduction of ₹ 35,977,997/– as revenue expenditure and withdraw the depreciation granted thereon. Accordingly, ground number 1 of the appeal is allowed.
Ground number 2 of the appeal is with respect to the claim of the assessee u/s 80GGB of the act. The learned assessing officer examined the total claim of assessee of ₹ 116,534,000 and granted deduction of ₹ 10 crores. On appeal before the learned CIT – A further disallowance of Rs 1 crore is further allowed. Therefore issue before us is with respect to the disallowance of only ₹ 6,534,000/–. Before us, the learned authorised representative
The learned departmental representative submitted that when the assessee has not produced the receipt of the donation it could not be allowed.
We have carefully considered the rival contentions and perused the orders of the lower authorities. We find that assessee has given a donation of ₹ 116,534,002 three different parties. The donation of ₹ 200 lakhs is paid to Shivsena, ₹ 800 lakhs to Maharashtra Pradesh Rashtrawadi Party and ₹ 16,534,000 To Bhartiya Janta Party. Assessee has produced all the receipts except in case of ₹ 6,534,000 paid to Bharatiya Janta party. The transaction is demonstrated through the bank account of the assessee. In any way, the donation paid in cash is as such not allowable under that Section. The provision of Section 80GGB also speaks about the contribution is defined in Section 293A of the companies act 1956. As assessee has shown that the amount is of contribution paid by account payee cheque, merely because receipt is not available it cannot be denied. Therefore, we set-aside this issue to the file of the learned assessing officer to examine the claim of the assessee with respect to ₹
Appeal of the assessee is allowed with above directions.
In the result, appeal filed by the learned AO is dismissed and appeal of the assessee is allowed.
Order pronounced in the open court on 30.08.2022.
Sd/- Sd/- (AMIT SHUKLA) (PRASHANT MAHARISHI) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) Mumbai, Dated: 30.08.2022 Sudip Sarkar, Sr.PS Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, True Copy//
Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai