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Income Tax Appellate Tribunal, “A”
Before: SHRI S.S.GODARA & DR. DIPAK P. RIPOTE
आयकर अपीलीय अिधकरण “ए” "ायपीठ पुणेम"। IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, PUNE BEFORE SHRI S.S.GODARA, JUDICIAL MEMBER AND DR. DIPAK P. RIPOTE, ACCOUNTANT MEMBER आयकरअपीलसं. / ITA No.2581/PUN/2017 िनधा"रणवष" /Assessment Year: 2014-15 The Assistant Soft Tech Engineering Pvt. Ltd., Commissioner of Income Vs Unit-5A, the Pentagon, Tax, Shahu College Road, Near Satara Circle-6, Pune. Road, Telephone Exchange, Pune – 411009. PAN: AACCS 3857 L Appellant/ Revenue Respondent/ Assessee Assessee by Shri Nikhil Mutha – AR Revenue by Shri S P Walimbe – DR Date of hearing 06/06/2022 Date of pronouncement 22/07/2022 आदेश/ ORDER PER DR.DIPAK P.RIPOTE, AM: This appeal filed by the Revenue is directed against the order of ld.Commissioner of Income-tax(Appeals)-4, Pune’s order dated 30.05.2017 ,involving proceedings under section 143(3) of the Income Tax Act, 1961, for the Assessment Year 2014-15. The Revenue has raised the following grounds of appeal: “1. On the facts and in the circumstances of the case, the Ld.Commissioner of Income Tax(A) has erred in allowing the amount of Rs.3,13,93,146/- being claim for professional fees and contracting expenses and Rs.61,03,239/- being Managerial expenses relating to software development while the same should be capitalized and not to be allowed as revenue expenses.
ITA No.2581/PUN/2017 for A.Y.2014-15 ACIT, Circle-6, Pune Vs.Soft Tech Engineers Pvt. Ltd.,(R)
On facts and in the circumstances of the case, the Ld.Commissioner of Income Tax(A) has erred in allowing the claim of bad debts of Rs.61,17,001/- written off in the books of accounts of the assessee, even though debts of less than one year. 3. For these and such other grounds as may be urged at the time of hearing, the order of the ld.CIT(A) may be vacated and that of the Assessing Officer be restored. 4. The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal during the course of appellate proceedings before the Hon’ble Tribunal.” 2. Brief facts of the case are that the appellant is a software product company with focus on the Architecture-Engineering- Construction(AEC) domain. The appellant has filed its return of income on 29.09.2014 declaring total income of Rs.2,98,66,470/-. Subsequently, the learned AO issued notice u/s.143(2) of the Act. In response to the notice issued, the appellant filed detailed written submissions along with documentary evidences to present its case, attended hearing from time to time through its authorized representatives and provided all the information requested by the learned AO during the course of assessment proceedings. The assessment was completed under section 143(3) on 07.12.2016 determining the income at Rs.7,50,33,345/- after making the following additions: i) Professional fees treated as Capital in nature Rs.3,13,93,146/- ii) interest & Managerial Remuneration treated as Capital in nature Rs. 61,03,239/- iii) Disallowance in Bad debts Rs. 61,17,001/- iv) Disallowance in deposit balances written off Rs. 15,53,389/- Rs.4,51,66,775/- Total
ITA No.2581/PUN/2017 for A.Y.2014-15 ACIT, Circle-6, Pune Vs.Soft Tech Engineers Pvt. Ltd.,(R)
The Ld.AuthorisedRepresentative(ld.AR) for the assessee
submitted paper book.With reference to first ground of the Revenue
regarding professional fee, contracting expenses, the details of professional fees paid are on page 264-268,270-272,312-423 of paper book. The Ld.AR explained the nature of services provided by taking us through these documents. The Ld.AR explained that these
expenditures were also debited in earlier years and subsequent years
and Department has allowed it as revenue expenditure.
Ld. DR strongly relied on the orderof the Assessing
Officer(AO).
Heard both the parties, studied the records.
The AO has treated expenditure of Rs.3,13,93,146/- as capital
expenditure which were claimed by the assessee as revenue
expenditure. Following expenditures were treated by the AO as Capital expenditure.
Amount of Reference Sr. expenses to para of Nature of sub-contracting services Paid to No revenue submissio nature (Rs.) n Customization and implementation 1 services specific to customer contracts Contract with Resurgent India a Trimax IT 88,50,000 Limited for PWIMS software Infrastructure Pvt. Para 3.3 Contract with VACC Technical Ltd b Ltd., 82,15,000 for OPTICON Galaxy software Efficacious India 16,00,000 Training fro implementation and 2 Ltd Para 3.4 sales/marketing team Efficacious 35,25,000
ITA No.2581/PUN/2017 for A.Y.2014-15 ACIT, Circle-6, Pune Vs.Soft Tech Engineers Pvt. Ltd.,(R)
Management Consultants Pvt. Ltd Software customization/support for Various 3 4,51,032 customers consultants Software implementation for Various 4 26,83,739 Para 3.5 customers consultants Various 5 Marketing and sales 60,68,375 consultants Total 3,13,93,146 6. The ld.CIT(A) has given his findings in para 5.3.3 of his order which is reproduced here as under : 5.3.3 I have carefully considered the findings of the AO in the assessment order and the submissions made by the Ld. AR. The AO summarily made the disallowance treating as capital expenditure without offering any cogent reasons. The AO did not even identify which portion of the expenditure can be capitalized and for what reason? On the other hand what is very clear is that the appellant has a policy for capitalization of expenditure for development, customization and maintenance of software. It appears, the AO took a short-cut route to disengage himself to understand the nitty-gritty of development & customization of software. From the submission what is clear is that the appellant had given every detail both during assessment and appellate proceeding to demonstrate that those expenditures were revenue in nature keeping in view of the accounting standards followed for many years. For example, the Appellant had received an order from RIL for one of its software products PWIMS. In respect of the said contract, the Appellant had entered into a sub-contracting arrangement with Trimax IT Infra, for the purpose of availing services relting to implementation of PWIMS software of the Appellant as per the specific requirements of RIL, along with preparation of manuals and training to RIL’s personnel. M/s. Trimax IT Infra, carried out implementation of the PWIMS software as per RIL’s requirements along with preparation of operational and functional manuals and training to RIL's employees. The said functions are a part of the regular and recurring sales functions of the Appellant’s business. The AO, in the assessment order, has disallowed the entire amount of ITA No.2581/PUN/2017 for A.Y.2014-15 ACIT, Circle-6, Pune Vs.Soft Tech Engineers Pvt. Ltd.,(R)
Rs.88,50,000/- as being capital in nature. However, the AO has not provided any reason for the same in the assessment order.
Again, the Appellant had entered into a contract with VACC, Nigeria for supply of the OPTICON Galaxy software, an ERP product of the Appellant with its standard modules relating to cost management, project management, fixed asset, financial accounting, document management, inventory and warehousing, etc. The order also included customization of the said software with a module relating to plant and machinery (‘PMS module’), its integration on basic OPTICON framework, UAT, implementation and training etc. In this regard, the Appellant entered into a sub- contract agreement with Trimax IT Infra, to customize the OPTICON Galaxy software with regards to development of PMS module and its integration with basic OPTICON framework as well as for implementation and UAT, specific to the needs of the customer (viz. VACC). The customization requirement of PMS Module was very specific to the Appellant’s customer viz. VACC, Nigeria, with their plant and machinery database and tracking of their maintenance schedule including building their entire database of machineiy, etc. The activities were performed by Trimax IT Infra, on-site at customer’s premises.The Appellant does not possess ownership/ copyright of the PMS module developed by TrimaxIT Infra, nor does it have the knowledge/ database/ access to customization services rendered byTrimax IT Infra.In the assessment order, the AO disallowed the entire amount allegedly observing that the expenditure resulted into improvement of OPTICON Galaxy software of the Appellant and should, hence, be capitalized. Similarly with regards to the subcontracts with EIL & EMPL, the ld.AR rightly brought to my notice that EIL - for provision of training/ t consultancy for integrating Business Intelligence software solutions of the Appellant with Enterprise Content Management and Business Process Management systems of the customers. These trainings are related to improvement of general understanding of third party systems like SAP, IBM products (like Cognos and File Net), Microsoft Products (like Dynamics, Share point etc.) and other tools used by the Appellant’s implementation team.And EMCPL - for training to sales, pre-sales
ITA No.2581/PUN/2017 for A.Y.2014-15 ACIT, Circle-6, Pune Vs.Soft Tech Engineers Pvt. Ltd.,(R)
and implementation team in understanding requirement gathering processes, solution architecture understanding and validations, analysis and production of gap documents, preparation of customer pain points, enabling team on training process management and developing skill among the Appellant’s implementation and sales/ marketing teams.Though the appellant provided vide submission dated 24November 2016the details of the contracts to the AO, but the AO, in the assessment order, has disallowed the entire amount of Rs. 51,25,000/-being payment made to EIL and EMCPL on the ground that the trainings resulted into enrichment of technical know-how of the Appellant and hence, should be capitalized.Apart from the factual matrix regarding the nature of expenditure, the Id. AR also drew sufficient strengths from various judgements cited by him to rebut the findings of the AO in the assessment order. It will be pity to disturb the consistency followed by the appellant in this year when all previous years such claims have been allowed by the department. Moreover, the accounts of the appellant are audited U/S.44ABof the IT Act and the auditors have not flagged any such issues. Under such circumstances, I am inclined to agree with the contentions raised by the Appellant. Therefore, the AO is directed to delete the addition made in this ground. Thus, this ground of appeal is allowed.”
The ld.CIT(A) has elaborately discussed the facts of the case and reason for treating the impugned expenditure as revenue expenditure.We agree with the findings of the ld.CIT(A). We have studied the copies of the invoices, copies of the agreements submitted by the assessee. On studying these documents, we are of the opinion that no enduring benefits arises out of these services. 7.1. In the case of Empire Jute Co Ltd Vs CIT (1980)124 ITR 1 Hon’ble SC has observed in para 7 as under :
ITA No.2581/PUN/2017 for A.Y.2014-15 ACIT, Circle-6, Pune Vs.Soft Tech Engineers Pvt. Ltd.,(R)
Quote “When dealing with cases where the question is whether expenditure incurred by an assesses is capital or revenue expenditure, the question must be viewed in the larger context of business necessity or expediency. If the outgoing expenditure is so related to the carrying on or the conduct of the business that it may be regarded as an internal part of the profit-earning process and not for acquisition of an asset or a right of a permanent character. the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure.” Unquote.
In the case of Parag Tools Ltd vs CIT Hon’ble AP High Court FB (1980)123 ITR 773 held , Quote “ Where the expenditure has a direct nexus, connection or relation to the carrying on of or conducting the business of the assessee, it must be regarded as an integral part of the profit-making process. In such a case, it must be held to be a revenue expenditure. Where the purpose and object of the expenditure is to acquire an asset or right of an enduring nature or permanent character, it is a capital expenditure.” Unquote.
7.2. When we apply the test laid down by the Hon’ble Supreme Court and the Hon’ble High Courts, one can come to the conclusion that the impugned expenditure has direct nexus with activity of conducting business of the assessee and not generating an enduring benefit, not creating any asset, hence these are revenue expenditure.
7.3. Also, it is fact that these expenditures had been debited for earlier and subsequent years as Revenue expenditure and the Assessing Officer has not made any disallowance in those years. The rule of consistency is most important. The Assessing Officer cannot ignore the rule of consistency.
ITA No.2581/PUN/2017 for A.Y.2014-15 ACIT, Circle-6, Pune Vs.Soft Tech Engineers Pvt. Ltd.,(R)
7.4. Therefore, based on the above discussion,we hold that the impugned expenditures are revenue expenditure. Hence,Ground No.1of the Revenue is dismissed.
Ground No.2 is regarding bad debts written off of Rs.61,17,001/-. The assessee had written off bad debts of Rs.94,62,691/- .The Assessing Officer observed that bad debts of Rs.61,17,001/- were pertaining to F.Y.2012-13 means the year under consideration. Hence, the AO came to the conclusion that assessee had not made enough efforts for recovery of these debts. Therefore, the AO rejected the claim of the Assessee.
8.1. In this case it is fact that the impugned debt have been taken into account in computing income of the assessee and the impugned debt have been written off in the books. Thus, both the conditions mentioned in Section 36(1)(vii) have been fulfilled by the assessee. Once, these two conditions are fulfilled, the AO has to allow the claim of the assessee.Once the amount has become irrecoverable and the assessee writes' off the same, there is no statutory requirement for the assessee to establish that the debt, in fact, has become irrecoverable. Hon’ble SC has held in the case of TRF Ltd vs CIT as under :
ITA No.2581/PUN/2017 for A.Y.2014-15 ACIT, Circle-6, Pune Vs.Soft Tech Engineers Pvt. Ltd.,(R)
Quote “This position in law is well-settled. 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.” Unquote.
8.2. It is sufficient if the bad-debts are written off as irrecoverable in the accounts of the assessee. Later, if at any stage, the assessee recovers any money against the sum written off as bad-debt, the assessee is under obligation to declare it as income. The AO is not empowered to verify the sufficiency of efforts taken for recovery. Therefore, we uphold the order of the Ld.CIT(A). Accordingly, this ground of the Revenue is dismissed.
The Ground No.4 is general in nature and does not need any adjudication, hence, dismissed.
In the result, Appeal of the Revenue is dismissed.
Order pronounced in the open Court on 22nd July, 2022. (S.S.GODARA) JUDICIAL MEMBER पुणे / Pune; "दनांक / Dated : 22nd July, 2022/ SGR* आदेशक""ितिलिपअ"ेिषत / Copy of the Order forwarded to : अपीलाथ" / The Appellant. 1. ""यथ" / The Respondent. 2. 3. The CIT(A), concerned. 4. The Pr. CIT, concerned. िवभागीय"ितिनिध, आयकर अपीलीय अिधकरण, “ए” ब"च, 5. पुणे / DR, ITAT, “A” Bench, Pune. गाड"फ़ाइल / Guard File. 6. ITA No.2581/PUN/2017 for A.Y.2014-15 ACIT, Circle-6, Pune Vs.Soft Tech Engineers Pvt. Ltd.,(R)
आदेशानुसार / BY ORDER, //// Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे/ITAT, Pune.