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Income Tax Appellate Tribunal, DELHI “I-2” BENCH: NEW DELHI
Before: SHRI R.K.PANDA & SHRI KUL BHARAT
ORDER PER KUL BHARAT, JM : This appeal filed by the Revenue for the assessment year 2005-06 is directed against the order of Ld. CIT(A)-38, New Delhi dated 19.05.2017.
The assessee has also filed cross-objection against the appeal filed by the Revenue for the assessment year 2005-06. For the sake of convenience, these were heard together and are being disposed off by this common order.
C.O-54/Del/2018 2. The Revenue has raised following grounds of appeal:-
"Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in excluding Exensys Software Solutions Ltd, Thirdware Solutions Ltd, Visual Soft Technologies Ltd, Sankhya Infotech Ltd, from the final list of comparables by wrongly relying on the decision of the Ld. ITAT in the case of Colt Tech. I. Pvt. Ltd in where the facts and circumstances totally different.” 2. "On the facts and circumstances of the case and also in law, the Ld. CIT(A) erred in directing the AO to allow the claim of depreciation on software of Rs. 7,69,371/- by holding that the same would have been put to use by the assessee in FY 2004-05 despite the fact that invoices in respect of such software were received by the assessee from HP India in subsequent year and thereafter assessee made payment of such software. 3. "The appellant craves to amend modify, alter, add or forego any ground of appeal at any time before or during the hearing of this appeal."
The facts giving rise to the present appeal are that in this case return declaring an income of Rs.15,69,60,396/- was filed on 29.10.2005.
Subsequently, the case was selected for scrutiny and the assessment u/s 143(3) of the Income Tax Act, 1961 (“the Act”) was framed vide order dated 01.12.2008. The Assessing Officer while framing the assessment observed that during the year under consideration, the assesse had undertaken ‘international transactions’ with its Associate Enterprises (“AEs”) of Rs.225 crores. Therefore, a reference was made to the Transfer Pricing Officer (“TPO”) u/s 92CA of the Act for determination of Arm's Length Price (“ALP")
C.O-54/Del/2018 for such transaction. The TPO therefore, passed a detailed order dated 31.10.2008 u/s 92CA(3) of the Act, thereby, he found that the international transactions of the assessee with its AE were not at ALP. The TPO worked out the difference of Rs.23,64,79,338/-. The assessee filed objections against the findings of the TPO. Rejecting the objections, the Assessing Officer made addition of Rs.23,64,79,338/- on the basis of findings of the TPO. Further, the Assessing Officer disallowed the claim of the assessee regarding depreciation of Rs.7,69,371/-, software expenses as Revenue expenditure of Rs.3,46,91,403/- treating such expenditure of capital nature, the Assessing Officer however, allowed depreciation @ 60% of Rs.1,56,11,134/- on this, regarding liability written back of Rs.15,87,816/- and loss on account of foreign exchange fluctuation of Rs.39,48,559/-. Hence, the Assessing Officer computed the income of assessee at Rs.41,88,25,752/- against the total returned income of Rs.15,69,60,396/-.
Aggrieved against this, the assessee preferred appeal before Ld. CIT(A) who after considering the submissions, partly allowed the appeal.
Thereby, Ld.CIT(A) qua transfer pricing adjustments directed the Assessing Officer to grant benefit of (+/-) 5% to the assessee as provided in Rule 10B(4) of the Income tax Rules, 1962 (“the Rules”) while determining the ALP of the international transaction and excluding the comparables as decided in paras 3.1.1.1, 3.1.2.1, 3.1.3.1 and 3.1.4.1 of the impugned order. However, Ld.CIT(A ruled against assessee in respect of exclusion of Bodhtree Consulting Ltd., Working Capital Adjustment and adoption of multiple year data analysis. Further, Ld.CIT(A) in respect of depreciation
C.O-54/Del/2018 allowed the claim of the assessee and regarding treatment of software expenses of Rs.3,46,91,403/- following the decision of the Tribunal in the assessee’s own case for Assessment Year 2006-07, allowed the claim of the assessee. However, Ld. CIT(A) in respect of liability written back of Rs.15,87,816/- sustained the addition and regarding foreign exchange fluctuation claim of assessee was allowed.
Aggrieved against this, both the Revenue and the assessee have filed appeal and cross-objection respectively.
Ground No.1 of the Revenue’s appeal is against the exclusion of the comparables directed by Ld.CIT(A) i.e. Exensys Software Solutions Ltd.; Thirdware Solutions Ltd., Visualsoft Technologies (Seg.); Sankhya Infotech Ltd. from the final list of the comparables.
Ld.CIT DR vehemently argued that Ld.CIT(A) was not justified in directing the exclusion of the comparables selected by the TPO. He supported the orders of the TPO & Assessing Officer. He took us through the order of the TPO to buttress the contentions that the comparables selected by the TPO are correctly selected and are in accordance with settled principles of law.
On the contrary, Ld. Counsel for the assessee opposed the submissions of Ld. CIT DR and submitted the Ld.CIT(A) has rightly excluded the comparables. In respect of Thirdware Solutions Ltd., Ld. Counsel for the assessee submitted that the company owned software products and earned income from sale of licenses and subscription. He
C.O-54/Del/2018 contended that as per Schedule 14 to the Audited financial statements, it was stated that the company had purchased software licenses amounting to Rs.2.11 crores. In annual report of the company, it was further stated that the company was engaged in trading and development of software. In view of the aforesaid, it was submitted that since this company was engaged in trading of software and earned income from licensing of software, the company could not be regarded as an appropriate comparable for benchmarking the international transaction of provision of software services undertaken by the assessee. He further submitted that the company has also invested in R&D activities related to software engineering and technologies. He submitted that Ld.CIT(A) has rightly excluded this company relying on the decision of Co-ordinate Bench of this Tribunal rendered in the case of Colt Technology Services India Pvt.Ltd. (ITA No.609/Del/2011). He contended that in the case of 3DPLM Software Solutions in (Assessment Year 2005-06) the company was rejected as comparable. He submitted in other cases also, this company was rejected as comparable. In respect of Sankhya Infotech Ltd., he further submitted that the company is inter alia engaged in development of software products and training. In the annual report of the company, it was stated that the company had a separate R&D wing and during the year, the company undertook multifold research activities and the developments resulted in bringing efficiency in product development. It was further submitted that the company was engaged in development of niche products for the aviation industry. He submitted that the company’s revenue recognition policy was different from the assessee. Therefore, he
C.O-54/Del/2018 supported the order of Ld.CIT(A) for exclusion of this comparable. In respect of Visualsoft Technologies (Seg.), he submitted that in this company also during the relevant Financial Year, the company had undertaken extensive R&D activity. He submitted that as per the annual report, Visualsoft Technologies (Seg.) continued to focus on development of various frameworks in different technologies as well as bringing in excellency in processes and methodologies. In respect of Exensys Software Solutions Ltd., it was submitted that the company owned valuable intangible asset in the form of brand amounting to Rs.5,00,00,000/- out of total asset base of Rs.7,95,58,105/-. The assessee on the other hand was a captive service provider and neither owned nor exploited any non-routine intangible. He further submitted that the Hon’ble Delhi High Court in the case of Pr.CIT vs Oracle (OFSS) BPO Services Pvt.Ltd. (ITA No.124/2018) held that companies having brand presence could not be regarded as appropriate comparable for the purpose of benchmarking the international transactions undertaken by a captive service provider. Ld. Counsel for the assessee further reiterated the submissions as made in the chart supplied during the course of hearing.
9. We have heard the rival contentions and perused the material available on record. The Revenue is aggrieved by the exclusion of following comparables by the Ld.CIT(A):-
[1]. Exensys Software Solutions Ltd.; [2]. Thirdware Solutions Ltd.; [3] Visualsoft Technologies (Seg.); and C.O-54/Del/2018 [4] Sankhya Infotech Ltd.
By excluding these comparables, Ld.CIT(A) placed reliance upon the judgement of the Hon’ble Delhi High Court and the decision of Tribunal in the case of Colt Technology Services India Pvt.Ltd. (ITA No.609/Del/2011).
We find that the Ld.CIT(A) after considering the material placed on records and has given finding on facts in respect of the functional comparability of the comparables selected by the TPO. The Revenue has failed to effectively rebut the finding of Ld.CIT(A). Moreover, this issue has already been examined in the case of Colt Technology Services India Pvt.Ltd.(supra) by the Tribunal as well as Hon’ble Jurisdictional High Court. Therefore, we do not see any reason to interfere in the findings of Ld.CIT(A). Thus, order of Ld.CIT(A) is hereby affirmed. The Ground of appeal No.1 raised by the Revenue is dismissed.
10. Now coming to Ground No.2 raised by the Revenue in this appeal, is against the allowing the claim of depreciation on software of Rs.7,69,371/- by holding that the same has been put to use by the assessee in Financial Year 2004-05. Despite the fact that invoices in respect of such software were received by the assessee from HP India in subsequent year.
Thereafter, the assessee made payment of such software.
Ld.CIT DR for the Revenue submitted that Ld.CIT(A) was not justified in allowing the claim of the assessee where admittedly the assessee could not prove the delivery and installation of the software. He further contended that the Assessing Officer has categorically brought on record
C.O-54/Del/2018 that the invoices were raised after 15 months which goes against the normal practice. He took us through the assessment order. Ld.CIT DR pointed out that in para 4.8 of the assessment order. The Assessing Officer has categorically analyzed the delivery date.
11.1. He further contended that merely stating that software was put to use would not be sufficient for allowability of claim of depreciation.
12. On the contrary, Ld. Counsel for the assessee opposed these submissions and supported the order of Ld.CIT(A). He submitted that during the relevant previous year 2005, the assessee had purchased software amounting to Rs.25,64,570/- from Hewlett Packard India Sales Pvt.Ltd., (“HP India”). The software was downloaded by the assessee in August 2004. However, the invoices in respect of the above were received in the subsequent year from HP India. The assessee had capitalized the software on the basis of actual receipt and use of software before 31.03.2005. The assessee accordingly in the return as income claimed depreciation for half year on the aforesaid software. The Assessing Officer disallowed the claim of depreciation on software amounting to Rs.7,69,371/- on the basis that the assessee had made a wrong and incorrect claim of depreciation. He submitted that the assessee had purchased the software developed by Microsoft through HP India. As per the policy of Microsoft, all licensed software are to be downloaded from the Microsoft Volume Licensing Services (“MVLS”) website and no physical goods were shipped. For acquiring the license, the assessee issued two purchase orders (“PO”) i.e [PO No.4000099387 and 40000099388] on C.O-54/Del/2018 13.07.2004 and one PO [PO No.4000105723] on 05.10.2004 to HP India.
The assessee company had sent an e-mail on 21.07.2004 to HP India for confirmation of receipt of PO, which was duly acknowledged by HP India on 22.07.2004. He submitted that the license keys for secured products were provided to the assessee on 17.08.2004. The assessee activated the secured software downloaded from MVLS web site through the license key provided on 17.08.2004. Therefore, the assessee had acquired and put to use the software much before 31.03.2005. He contended that the assessee downloaded the software in August 2004 i.e. delivery of goods was taken prior to the issue of invoice and the same was put to use by the assessee in the relevant previous year. Therefore, it is contended that Ld.CIT(A) has rightly deleted the addition.
13. We have heard the rival contentions and perused the material available on record. We find that Ld.CIT(A) has deleted the addition by observing as under:-
4.2.5. “I have given careful consideration to the submissions of the appellant and order of Assessing Officer. In this case, the Appellant downloaded the software purchased from HP India in August 2004. However, the invoices in respect of such software were received in the subsequent year from HP India. The claim of depreciation on such software was denied by the AO on the ground that there is no evidence of delivery of software to the appellant. Also, there is a significant delay in raising the invoice by HP India which suggest that the software was not actually used by the Appellant in FY 2004-05. It was also observed that without invoice and charging of sales tax sale couldn't have been taken place in the eyes of law. Therefore, the Appellant was not the owner of software in FY 2004-05 and C.O-54/Del/2018 accordingly, the Appellant is not entitled to claim deprecation in said year. In support of its claim, the Appellant contended that the software in question was developed by Microsoft was purchased through HP India. Such software was downloaded by the Appellant from Microsoft website and no physical delivery was made for such software. The Appellant has issued following three PO to HP India (a) PO No. 4000099387 - 13 July 2004 (b) PO No. 4000099388 - 13 July 2004 (c) PO No A000105723 - 5 October 2004 For purchasing such license, the Appellant had sent an e-mail on 21 July 2004 to HP India for confirmation of receipt of PO. It was duly acknowledged by HP India on the next day i.e. 22 July 2004. HP India has provided the license keys for secured products to the Appellant vide email dated 17 August 2004. As per Appellant, software was downloaded from the web site by using the license key provided on 17 August 2004. Such email was addressed to the official email ID of the employee of the Appellant. It is submitted by the Appellant that it is usual practice where software are downloaded from website and then same is activated for use through license keys. Once the license key is available, software can be used without any further registration. In the instant case as well, similar process was adopted. Further, it is submitted that no goods were physically shipped to the Appellant by HP India. Accordingly, no further documentation is available for registration of such license key or software. Email sent by HP India to the Appellant sharing the license key itself substantiates that it has been registered for the use of the Appellant. To support these facts, various documentary evidences such as copy of purchase orders, email correspondences, cheque issued to HP India and invoices has been submitted by the Appellant. Further, a reconciliation between the C.O-54/Del/2018 numbers of licenses purchased as per the purchase order and Invoices raised by HP India was also submitted. From the perusal of the details and documents submitted by the Appellant, it is clear that the Appellant has indeed purchased the software from HP India and has made payment for the same. The real issue in this case is that whether the Appellant has actually purchased and used the software in the FY 2004-05 and thereby is eligible for claiming the depreciation thereon or not. The AO has denied such claim primarily due to the significant delay in raising of invoice by HP India and payment made by the Appellant which have been made in subsequent year. HP India has acknowledged the PO raised by the Appellant vide its email dated 22 July 2004. Further, HP India has provided the licence key to use software vide email dated 17 August 2004. It has also been mentioned that the Appellant that can download the software from the web portal of Microsoft and it can be activated by entering the license key mentioned in the email. These documents substantiates that the Appellant has actually purchased the software in August 2004. It is a usual practice that software are downloaded from online portal and then are activated for use using the license key provided by the software developer. Therefore, it seems logical that once the software is purchased and license key is made available to Appellant in August 2004, the same would have been put to use by the Appellant in FY 2004-05. Delay in generation of invoice and making the payment does not have any impact on such purchase or use of software. In view of the same the deprecation claimed by the Appellant should be allowed in the FY 2004-05. In view of the above, the AO is directed to allow the claim of depreciation on software of Rs 769,371. As a result Ground of Appeal
2 is allowed.”
14. We are unable to sustain the finding of Ld.CIT(A). Undisputedly in this case, the invoices were raised after 15 months as observed by the C.O-54/Del/2018 Assessing Officer. Further, the Assessing Officer has categorically observed that invoices reflected that sales tax/VAT has been charged on sale of goods. Such taxes have been charged in August 2005. He observed that without invoices and charging of sales tax, sale could have not been affected. The assessee had not become the owner of the software wholly or partly before 31.03.2005 hence, on account of ownership claim of the assessee is failed. We are in agreement with the view expressed by the Assessing Officer in our considered view merely downloading of software and providing key to use by the vendor would not ipso facto entitle the assessee for claiming depreciation. Section 32 of the Act provides depreciation on the eligible assets owned wholly or partly by the assessee and used for the business or profession. Hence, the law is clear. There is no ambiguity under the law. Without proper sale, the assessee could not have owned wholly and partly the assets on which depreciation have been claimed. We, therefore, set aside the finding of Ld.CIT(A) on this issue and restore the finding of the Assessing Officer. Ground No.2 raised by the Revenue in this appeal is therefore, allowed.
15. Now, coming to cross-objection filed by the assessee pertaining to Assessment Year 2005-06. The assessee has raised following grounds in cross-objection:-
1. “That the CIT(A) have erred in law and on facts, in arbitrarily upholding the action of the Ld. Transfer Pricing Officer for retaining Bodhtree Consulting Ltd as functionally valid comparable on the ground that the same was included by the Respondent in the Transfer Pricing Report.
C.O-54/Del/2018 2. That the CIT(A) have erred in law and on facts, in upholding the action of the TPO in not allowing the risk adjustment on account of differences in the risk profile of the Respondent vis-a-vis the comparable companies.
3. That the Ld. Assessing Officer/ Ld. Transfer Pricing Officer have erred in law and on facts, in not providing working capital adjustment to the Respondent though the same was directed by the CIT(A).
4. That the Ld. CIT(A) and the Ld. Assessing Officer have erred in law and on facts, in treating the liabilities written back in relation to acquisition of fixed assets amounting to INR 1,587,816 as revenue in nature. 4.1. That the Ld.CIT(A) and the Ld. Assessing Officer have erred in law and on facts by holding the liabilities written back in relation to acquisition of fixed assets as chargeable to tax under section 41(1) of the Act.”
At the outset, Ld. Counsel for the assessee submitted that he does not wish to press Ground No.2. Hence, Ground No.2 raised by the assessee in the cross-objection is dismissed, as not pressed.
Ground No. 1 raised by the assessee is related to transfer pricing adjustment. Ld. Counsel for the assessee submitted that Ld.CIT(A) had retained this company in the final set of comparable companies on the basis that the company was selected by the assessee in the TP documentation. Ld. Counsel for the assessee further submitted that even though the said company was selected as comparable by the assessee in the Transfer pricing documentation, there is no estoppels in law against the assessee in requesting for exclusion of such company. Reliance was placed on the decision rendered in the cases of CIT vs C.Parekh & Co.(India)
C.O-54/Del/2018 Ltd. 229 ITR 661; Bharat General Reinsurance Co.Ltd. 81 ITR 303. Ld.
Counsel for the assessee submitted that Bodhtree Consulting Ltd. cannot be an appropriate comparable for the reasons that the company had not shown any significant related party transactions. Further, it was contended that the company was functionally different. It was contended that the company engaged in service related to e-paper and data cleansing solutions.
On the contrary, Ld.CIT DR opposed these submissions and supported the findings of Ld.CIT(A).
We have heard the rival contentions and perused the material available on record. There is no dispute with regard to the assessee himself adopted this company as one of the comparables in its transfer pricing study. Before us, the assessee has taken altogether difference time praying for exclusion of this comparable. However, the assessee could not point out as to how the TP study undertaken by it, is erroneous and adopting the same was by mistake. In absence of such averment or any evidence supporting the decision, we do not see any reasons to defer from the findings of Ld. CIT(A). The same is hereby confirmed. Ground No.1 raised by the assessee in the Cross-objection is thus, rejected.
Now, coming to Ground No.3 raised by the assessee in the cross- objection is against not giving the appeal effect to the direction of the Ld.CIT(A). Ld. Counsel for the assessee submitted that Ld.CIT(A) had directed the TPO to allow working capital adjustment while benchmarking
C.O-54/Del/2018 the international transaction of provision of software services. However, while giving effect to the order of Ld.CIT(A), the TPO did not allow working capital adjustment to the assessee. He therefore, submitted that TPO may be directed to give effect to the direction of Ld.CIT(A) and allow working capital adjustment while computing the operating margins of the comparable companies. The assessee has also filed a chart demonstrating the operating margins of the comparable companies after allowing adjustment for working capital. The contents of the chart are reproduced for ready-reference:-
Sl.No. Name of the Company Comparables Comparables After As per TPO As per CIT(A) excluding Bodhtree Consulting 1. Bodhtree Consulting Ltd. 22.34% 22.34% Excluded 2. Akshay Software Technologies 6.08% 6.08% 6.08% Limited 3. Lanco Global Systems Limited 8.81% 8.81% 8.81% 4. Sasken Network Systems 15.26% 15.26% 15.26% Limited 5. Gebbs Infotech Limited 13.88% 13.88% 13.88% 6. V J I L Consulting limited -2.43% -2.43% -2.43% 7. Sasken Communication 12.82% 12.82% 12.82% Technoloiges Limited (Seg.) 8. L&T Infotech Limited 10.09% 10.09% 10.09% 9. Exensys Software Solutions Ltd. 6.69% Rejected by Rejected by CIT(A) CIT(A) 10. Thirdware Solutions Ltd. 64.19% Rejected by Rejected by CIT(A) CIT(A) 11. Visualsoft Technology Ltd. 20.17% Rejected by Rejected by (segmental) CIT(A) CIT(A) 12. Sankhya Infotech Limited 23.06% Rejected by Rejected by CIT(A) CIT(A) Arithmetic mean 16.81% 10.86% 9.22%
Per contra, Ld.CIT DR opposed these submissions and supported the findings of the Assessing Officer.
C.O-54/Del/2018 22. We have heard the rival contentions and perused the material available on record. We find that Ld.CIT(A) in para 3.1.6.1 has given direction as under:-
3.1.6.1. Working Capital Adjustment should be allowed to STM
“In the course of appellate proceedings, argument for allowance of working capital adjustment was made by the appellant vide submission dated 17 April 2014. With respect to allowance of working capital adjustment to the appellant remand report was called from the Assessing Officer, which was received vide letter dated 30 September 2016, and forwarded to appellant. The AO submitted that in view of the fact that working capital adjustment was allowed to the appellant by the TPO and DRP in AY 2010-11, AY 2011-12 and AY 2007 -08 respectively, working capital adjustment should be allowed to the appellant. Hence, assessing officer is directed to grant working capital adjustment to appellant while giving effect to this order.”
Ld.CIT DR could not rebut the contentions of the assessee.
Therefore, in view of the direction given by Ld.CIT(A), we hereby direct the TPO to allow working capital adjustment to the assessee. Ground No.3 raised by the assessee in this cross-objections is thus, allowed.
Ground Nos.4 & 4.1 raised by the assessee in this cross-objection is against sustaining the addition of Rs.15,87,816/- on account of liabilities returned back in relation to acquisition of fixed assets.
Ld. Counsel for the assessee submitted that the assessee had given a chart relevant to previous year regarding liability, written back a sum of Rs.15,87,816/- being the liability in respect of purchase of fixed assets
C.O-54/Del/2018 which was capitalized in the previous year relevant to Assessment Year 2003-04.
Ld. Counsel for the assessee reiterated the submissions as made in the written submissions. Ld. Counsel for the assessee submitted that the assessee during the relevant previous year had returned back a sum of Rs.15,87,816/-.
The assessee in its return of income reduced the aforesaid amount from the profit as per the P&L A/c being transaction of capital nature. The Assessing Officer however, made disallowance of the said amount and added back the same to the taxable income of the assessee. He submitted that the reasons for disallowing the claim was on the basis that as per the Assessing Officer, the assessee had claimed and allowed depreciation on the said amount in the previous years and the same amounts to writing back of a trading liability which was required to be taxed as per section 41(1) of the Act. Ld.CIT(A) affirmed the view of the Assessing Officer.
Ld. Sr. Counsel for the assessee, Sh. Ajay Vohra took us through the provision of the Act. He submitted that section 41(1) of the Act can be invoked in the event firstly, if in the assessment of the assessee an allowance or deduction has been made in respect of any loss, expenditure or trading liability incurred by him; secondly, any amount is obtained in respect of such loss or expenditure; thirdly, or any benefit is obtained in respect of such trading liability by way of remission or cessation thereof.
He submitted that applying the provision of section 41(1) of the Act to the C.O-54/Del/2018 facts of the present case, it was submitted that in the case in hand, the initial expenditure was incurred for purchase of fixed assets which was capitalized in the books and no allowance or deduction was claimed in the earlier years in respect of such expenditure as envisaged under section 41(1) of the Act. Ld. Counsel for the assessee placed reliance on the judgement of Hon’ble Supreme Court in the case of CIT vs Mahindra & Mahindra Ltd. 404 ITR 1(SC). Ld. Counsel for the assessee also placed reliance on the judgement of the Hon’ble Supreme Court in the case of Nectar Beverages Pvt.Ltd. 314 ITR 314 (SC) to buttress the contention that “depreciation is neither a loss, nor an expenditure, nor a trading liability, referred to in section 41(1).” He contended that applying the ratio laid down by Hon’ble Supreme Court in the case of CIT vs Mahindra & Mahindra Ltd. (supra) and Nectar Beverages Pvt.Ltd. (supra) hence, the amount written back in respect of purchase of fixed assets, being capital in nature, is not a write back of trading liability covered u/s 41(1) of the Act.
Ld.CIT DR opposed these submissions and supported the order of Ld.CIT(A).
We have heard the rival contentions and perused the material available on record. Ld.CIT(A) has decided the issue in para 5.5. The same is reproduced hereunder for ready-reference:-
5.5. “I have carefully considered the submissions of the appellant and the assessment order of AO. It is noted that write-back of amounts due by the Appellant would be taxable only if it represents an expense, loss or trading liability, for which a deduction has been claimed.
C.O-54/Del/2018 Section 41 (1) states that when an allowance deduction has been made in assessment for any year in respect of loss, expenditure, or trading liability incurred by the assessee and subsequently during any previous year the 1st mentioned person has obtained whether in cash or in any other manner whatsoever any amount in respect of such laws on expenditure or some benefit in respect of such trading liability by way of renovation or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business and profession and accordingly chargeable to income tax as the income of that previous year whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year not. Assessing Officer has correctly held that the claim of the assessee that the liability is on capital account and no deduction or allowance has been allowed in respect of the same is not correct. The liability pertained to the fixed assets on which depreciation has been claimed by the assessee and allowed him. Therefore, the claim that the amount has not impacted the profit or loss account is not correct. The assessee has included the relevant assets purchased from those parties in the gross block. Depreciation thereon has been claimed and duly allowed to the appellant. Therefore, the claim of appellant that it has not received any allowance in respect of the corresponding liability in earlier years is legally incorrect. Thus, Ground of Appeal 4 is dismissed.”
The Hon’ble Supreme Court in the case of Nectar Beverages Pvt.Ltd.
314 ITR 314 (SC) in para 9 of the judgement held as under:-
“The entire controversy, therefore, stands resolved if one understands the meaning of "balancing charge". Where any allowance or deduction had earlier been made in respect of any loss, expenditure or trading liability and subsequently the assessee has obtained or realized any amount towards such loss, expenditure or trading liability, Section 41(1) deems such realization/recoupment as C.O-54/Del/2018 assessee's income for the year in which it is realized. Section 41(2) as it stood at the material time stated that if in respect of any plant and machinery, any depreciation had been allowed and subsequently such plant and machinery was sold, discarded or destroyed, the assessee might get some value either as a result of sale or insurance or from salvage or compensation thereabout. The necessity to keep Section 41(2) as a provision in addition to Section 41(1) arose from the fact that, in its very nature, depreciation is neither a loss, nor an expenditure, nor a trading liability, referred to in Section 41(1). The depreciation recovered on sale of the capital asset was includible in the total income as balancing charge only under Section 41(2). That concept was foreign to the scheme of Section 41(1). The balancing charge under Section 41(2) arose only where any depreciable asset (building, machinery, plant or furniture) was sold. In fact, when the concept of "block of assets" stood introduced w.e.f. 1.4.1988, Section 41(2) stood deleted. However, even after 1.4.1988, the proviso to Section 32(1)(ii) continued till 1.4.1996 when by the Finance (No. 2) Act, 1995 the bottles and crates even below Rs. 5,000/- came within the "block of assets" as defined under Section 2(11) of the 1961 Act. As stated, this judgment is confined to depreciable assets costing less than Rs. 5,000/- which did not enter the block of assets during the assessment years in question (when Section 41(2) stood deleted).”
Further, Co-ordinate Bench of this Tribunal in the case of JSW Steel Ltd. vs ACIT [2017] 82 taxmann.com 210 (Mumbai-Trib.) in para 12 of the decision held as under:-
“Before we dwell upon the controversy involved, it needs to be first determined, whether the amount of waiver of loan is taxable under the normal provisions of the Income Tax Act, 1961 or not. It is axiomatic that under the Income Tax Act only those receipts which are in the nature of income can alone be subject to tax and such a nature
C.O-54/Del/2018 of income should fall within the charging section as provided under the Act. All the receipts by an assessee would not necessarily be deemed to be income of the assessee for the purpose of income tax and the question whether the particular receipt is income or not will depend upon the nature of the receipt as well as the scope and effect of the relevant taxing provision. The Hon’ble Supreme Court in the case of Parimisetti Seetharamamma vs. CIT (57 ITR 532) has observed as under: “By sections 3 and 4, the Indian Income-tax Act, 1922, imposes a general liability to tax upon all income. But the Act does not provide that whatever is received by a person must be regarded as income liable to tax. In all cases in which a receipt is sought to be taxed as income, the burden lies upon the department to prove that it is within the taxing provision. Where, however, a receipt is of the nature of income, the burden of proving that it is not taxable because it falls within an exemption provided by the Act, lies upon the assessee. Where the case of the assessee is that a receipt did not fall within the taxing provision, the source of the receipt is disclosed by the assessee and there is no dispute about the truth of that disclosure, the income-tax authorities are not entitled to raise an inference that the receipt is assessable to income-tax on the ground that the assessee has failed to lead all the evidence in support of his contention that it is not within the taxing provision.” Generally the waiver of remission of a liability cannot be regarded as income in the hands of the assessee unless it is a trading liability and if the waiver of a loan is on capital account then certainly it cannot be reckoned as income or revenue, which is clearly evident from the relevant provisions of section 41(1) which reads as under: "(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or C.O-54/Del/2018 trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year,- (a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of business or profession and accordingly chargeable to income- tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not;…………" From the plain reading of above section it is quite ostensible that before this section can be invoked it is sine-qua-non that assessee should establish that first of all an allowance or deduction has been granted during the course of assessment for any year in respect of, (i) loss; (ii) expenditure; or (iii)trading liability, which is incurred by the assessee; and subsequently during any previous year the assessee obtains, whether in cash or in any other manner, whatsoever; (i) any amount in respect of such loss or expenditure, or (ii) some benefit in respect of such trading liability by way of remission or cessation of such liability. Thus, a remission or cessation of liability which can be deemed to be as an income must be a trading liability for which an allowance or deduction has been made in the assessment for an earlier year. A Companies liability on account of the principal amount of loan borrowed by it on a capital account, i.e., for acquisition of a capital asset cannot be reckoned as a nature of trading liability as envisaged in section 41(1), therefore, its remission cannot be deemed as income under the said provision. When a remission of a particular liability cannot even be deemed as income pursuant to a provision C.O-54/Del/2018 which has been enacted specifically for the purpose of treating it as a deeming income, then how can it be treated as income for the purpose any other provisions of the Act, unless specially provided to be taxed under any provision. Here, in this case admittedly the pre-requisite condition for invoking the provision of section 41(1) has not been satisfied/fulfilled at all for the reason that the pre-component of the borrowing for acquisition of capital asset has neither been allowed as allowance nor as deduction in the earlier years and being for the purpose of acquisition of a capital asset any waiver thereof will not constitute income under section 41(1).
The aforesaid proposition is also well supported by Hon’ble Bombay High Court in the case of Mahindra & Mahindra vs. CIT, reported in 261 ITR 501. Similarly, in a later judgment Hon’ble Court in the case of CIT vs. Softworks Computers Pvt. Ltd., reported in 354 ITR 16, after considering the said judgment and also the judgment of Solid containers Ltd., reported in 308 ITR 417, observed and held as under:- “7. We find that the decision of this court in the matter of Solid Containers Ltd. (supra) has also considered the earlier decision in the matter of Mahindra and Mahindra Ltd. (supra) and distinguished the same by holding that in that case the loan was given for purchase of capital assets unlike in the case of Solid Containers Ltd. (supra) where waiver was of a loan taken for trading activity and thus considered to be of a revenue nature. In the present case, the amount which was advanced as a loan to the respondent-assessee was for the purposes of relocating its office premises. The loan taken was utilized for the purposes of acquiring a office at Godrej Soap Complex, Vikroli, Mumbai. Therefore, the loan in the present fact was taken for acquisition of capital asset and not for the purposes of trading activity as in the case of Solid Containers Ltd. (supra). The present case is, therefore, covered in favour of the respondent-
C.O-54/Del/2018 assessee by the decision of this court in the matter of Mahindra and Mahindra Ltd. (supra).” Thus, waiver of loan taken for acquisition of a capital asset and on capital account cannot be taxed u/s 41(1), as it is neither on revenue account nor a remission of a trading liability so as to attract tax in the year of remission.” 33. In the light of the above binding precedents, we find merit in contentions of the assessee. We, therefore, direct the Assessing Officer to delete the addition made on account of liability written back amounting to Rs.15,87,816/- related to capital assets. Thus, Ground No.4 raised by the assessee in the cross-objection is allowed.
In the result, the appeal of the Revenue and the cross-objection of the assessee are partly allowed.
Above decision was pronounced on conclusion of Virtual Hearing in the presence of both the parties on 18th August, 2021.