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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI MAHAVIR SINGH, JM & SHRI MANOJ KUMAR AGGARWAL, AM
Per Manoj Kumar Aggarwal (Accountant Member)
The captioned appeal by assessee for Assessment Year [AY] 2009-10 assails the order of Ld. Commissioner of Income Tax (Appeals)- 12 [CIT(A)], Mumbai dated 25/02/2013. The assessee has raised as many as fifteen grounds of appeal
, which we take up in subsequent paragraphs.
2. Briefly stated the assessee, being resident corporate assessee engaged in the business of manufacturing of glass bottles, commission agent & trading, was assessed u/s 143(3) at Rs.18,84,69,520/- after certain adjustments / disallowances vide Assessing Officer [AO] order dated 22/12/2011 as against returned income of Rs.17,48,71,250/- filed by assessee on 26/09/2009.
3. In Ground Nos. 1 & 2, the assessee has agitated the addition of Rs.6,95,199/- u/s 69C towards payment made to American Express Banking Corporation [AEBC]. Pursuant to receipt of certain AIR information, the assessee was found to have paid Rs.20,90,702/- to AEBC against credit card payment which was not reflected in the books of accounts and further no response was received by AO against 133(6) notice issued to the AEBC which led to impugned disallowance in the hands of the assessee. The Assessee contested the same before Ld. CIT(A) on the premises that the assessee paid Rs.13,95,503/- to AEBC on account of business related travels expenses incurred by assessee which was duly reflected in the books and the balance difference arose Empire Industries Ltd. Assessment Year-2009-10 due to erroneous reporting in AIR by AEBC. In support, the assessee produced a confirmatory letter dated 26/12/2011 from AEBC. The Ld. CIT(A) after considering the remand report, deleted additions to the extent of Rs.13,90,003/-, being amounts reconciled by the Assessee but confirmed balance addition of Rs.6,95,199/- in view of the fact that the assessee could not adduce evidence to show that the mistake in AIR was subsequently been rectified by AEBC as stated in the said confirmatory letter. The Ld. Counsel for assessee [AR] placed reliance on the same letter issued by AEBC to contend that the difference addition is nothing but erroneous reporting in AIR by AEBC. The Ld. DR placed reliance on the findings of Ld. CIT(A). After hearing rival contentions and perusing the confirmatory letter issued by AEBC, we find strength in the argument of Ld. AR that the actual amount paid by the assessee was Rs.13,95,903/- and the balance difference arose only due to erroneous reporting by AEBC as this fact is clearly mentioned by AEBC in the confirmatory letter dated 26/12/2011. Therefore, since the assessee has discharge its part of obligation, the balance addition of Rs.6,95,199/- is not justified and therefore, the same is deleted. This ground of assessee’s appeal succeeds.
4. In Ground No. 3, the assessee is aggrieved by addition of Rs.21,391/- u/s 69A which is nothing but difference in interest income reflected by the assessee in his accounts vis-à-vis interest amount reported by the payer Bank. The assessee attributed the difference to time lag only but could not find favor with Ld. CIT(A) who confirmed the addition. The Ld. AR made a short submission that the balance interest amount has been offered to tax in the succeeding AY and therefore, no ITA No.4065/M/2013 Empire Industries Ltd. Assessment Year-2009-10 addition on that account was warranted for and the difference arose only due to time lag. We are of the opinion that if the assessee has offered the same in succeeding AY, the addition thereof in impugned AY is not warranted for. Therefore, this issue is restored to Ld. AO for limited purpose of verification of the fact that whether the assessee has offered additional interest in the next AY. If so, the impugned additions shall stand deleted. The assessee is also directed to submit necessary evidences in this regard forthwith. This ground of assessee’s appeal stands allowed for statistical purposes.
5. By way of Ground Nos. 4 & 5, the assessee has agitated disallowance of foreign travel expenditure of Rs.57,65,712/- being 50% of business related foreign travel of Rs.1,15,31,424/-. During Assessment proceedings, it was noted that the assessee incurred expenditure of Rs.115.31 Lacs towards foreign travel by directors and related persons which, in the opinion of Ld. AO, could not be properly substantiated / documented by assessee which led to disallowance of 50% against the same. The same was confirmed by Ld. CIT(A) also. The Ld. AR drew our attention to the fact that the assessee earned handsome commission from export and incurred travelling expenses to negotiate the business deals and hence the same was allowable particularly when the assessee has already paid Fringe Benefit Tax [FBT] against those expenses and therefore, adhoc disallowance against the same could not be sustained in view of various judgment of Mumbai Tribunal in the following cases, the copies of which has been placed before us:- (i) Hansraj Mathurdas Vs. ITO [ITA No. 2379/M/10 order dated 16/09/2011] Empire Industries Ltd. Assessment Year-2009-10 (ii) K.S.Jewellery & Co. Vs. ACIT [ITA No. 7495/M/2013 order dated 03/06/2015] (iii) Om International Vs. ACIT [ITA Nos.2310-11/M/2012 order dated 25/04/2013] (iv) DCIT Vs. Kamal Associates [ITA No. 4326/M/2014 order dated 21/07/2016] (v) Indo Bearing Traders Vs. ACIT [ITA No.7119/M/2011 order dated 10/10/12] A perusal of the above orders of Tribunal lends strength to the argument of Ld. AR that since FBT has been paid on these expenses, disallowance thereof u/s 37(1) was not warranted for. Therefore, we are inclined to delete the said additions subject to verification of payment of FBT on these expenses by Ld. AO. Therefore, the matter is restored back to the file of Ld. AO for limited purpose of verifying the fact that the FBT has been paid on these expenses. If so, the impugned addition stands deleted. The ground of assessee’s appeal is allowed for statistical purposes.
6. In Ground Nos. 6 & 7, the assessee is aggrieved by treatment of project advisory services fees paid to an entity for Rs.14,60,680/- as capital in nature. During assessment proceedings, upon perusal of professional charges paid by assessee, it was noted that the assessee paid impugned payments to IL&FS Infrastructure Development Corporation [IDC] towards project advisory for development of IT SEZ in Ambarnath Thane and the same was paid towards initiation, activation and set up of service to be rendered in future towards proposed IT SEZ project at Ambarnath. The assessee explained that the same was an upfront signing fees payable to the IDC regardless of the fact whether the project materialized or not. However, not convinced with the explanation, AO treated the same as capital expenditure and disallowed the same on the premises that the assessee failed to substantiate that Empire Industries Ltd. Assessment Year-2009-10 the same were in relation to existing business only and not towards new business. Aggrieved, the assessee contested the same before Ld. CIT(A) and contended that the assessee incurred the said expenditure to explore opportunities to deploy excess reserves of more than Rs.30 crores profitably and efficiently and was incurred for techno-economic feasibility studies to identify projects that could be taken up in future. The object of the expenditure was to enable an efficient and profitable utilization of the surplus funds and therefore, allowable u/s 37(1) of the Income Tax Act, 1961. The assessee further contended that it has reflected rental income of Rs.38.70 crores and therefore, the feasibility study carried out for proposed IT SEZ, being related with the same, was an extension of existing business only and not a new line of business. However, not convinced, Ld. CIT(A) noted that the assessee failed to prove the nexus of new business with the existing business and therefore, the same being, capital in nature, was not allowable. Before us, the Ld. AR has raised similar pleas and drew our attention to the fact that main objective to undertake the feasibility study was to explore opportunities to deploy the excess reserves held by the assessee and therefore, the same were allowable to the assessee. Reliance has been placed on the judgment of Hon’ble Andhra Pardesh High Court in CIT Vs. Coromandal Fertilizers [247 ITR 417]. Per contra, Ld. DR placed reliance on the stand of lower authorities and contended that the same being incurred to set up new business and therefore, not allowable.
7. After hearing rival contentions and perusing relevant material on record, we find that the said expenditure were in the nature of upfront consultancy fees to identify the projects which may be taken up by the ITA No.4065/M/2013 Empire Industries Ltd. Assessment Year-2009-10 assessee in future. A perusal of financial statements of the assessee reveals that as at the beginning of the year, the assessee had reserves of more than Rs.20 Crores. The quantum of the amount or payment thereof has not been doubted by the revenue. The assessee has reflected income from House Property. Therefore, on the totality of these factors, we find strength in the arguments of Ld. AR that the said expenditure was nothing but in the nature of revenue expenses being paid to explore the new business opportunities so as to deploy the excess resources more profitably and efficiently and payable irrespective of the fact whether the project materialized or not. Further by incurring the same, the assessee has not obtained any benefit of enduring in nature and therefore, the same were allowable as revenue expenditure. We hold so and allow this ground of assessee’s appeal.
8. In Ground No.8, the assessee is aggrieved by treatment of software expenditure of Rs.35,36,682/- as capital expenditure. The Ld. AO noted that the assessee acquired certain licenses to use the SAP software and made payments towards licensing, installation and testing of software, training expense etc. during the year which as per the contention of assessee, were incurred to ensure smooth conduct of the business and improve operational efficiency. Further, the amount was paid merely for the right to use the software and not the outright purchase therefore, and therefore revenue in nature and fully allowable. However, not convinced with the arguments of the assessee, Ld. AO conclude the same to be enduring benefit availed by assessee and therefore capital in nature against which the assessee was entitled for depreciation @60%. Aggrieved, the assessee contested the same with Empire Industries Ltd. Assessment Year-2009-10 partial success before Ld. CIT(A) who concluded that the assessee was entitled for full deduction against Rs.3,08,840/- being annual expenses in nature and 60% depreciation on the balance amount, being capital in nature. Still aggrieved, the assessee is in appeal before us. The Ld. AR placed reliance on the following judgment in support of the claim that the full deduction against software expense is allowable, being revenue in nature as the same was incurred only to ensure smooth / efficient running of assessee’s business:-
(i) CIT Vs. Geoffrey Manners & Co. Ltd. [2014 49 taxmann.com 320 Bombay High Court] (ii) CIT Vs. Raychem RPG Ltd. [2011 346 ITR 138 Bombay High Court] (iii) CIT Vs. Asahi India Safety Glass Ltd. [2011 245 CTR 529 Delhi High Court] The Ld. DR contended that as the assessee acquired benefit of enduring nature, the same was capital in nature and rightly been allowed depreciation against the same as these expenses were intangible rights in nature.
We have heard the rival contentions and perused the cited case laws. We note the following observation of jurisdictional Bombay High Court in the case of CIT Vs Geoffrey Manners & Co. Ltd. [supra]:- “12. In relation to this the Tribunal in the impugned order observed that there is room for certain flexibility in the views taken from time to time. The Assessee in such cases installs the computers. This technology is now said to be acceptable in changing world. The rapid advancement of research also contributes a small degree of endurability, but that by itself does not mean that the expenses incurred cannot be revenue in nature. Since technology advancement is an aspect which must be taken judicial note of, so also, machinery becoming obsolete that there is necessity of acquiring further technology. This is to meet the growing competition and considering trends in the market. Therefore, such expenditure will have to be treated as revenue expenditure. This decision of the Tribunal for the present Assessment Years also is in accord with its earlier decisions which are referred to in paragraph 14 of the order under challenge. Empire Industries Ltd. Assessment Year-2009-10 13. Further, in the case of CIT v. Raychem RPG Ltd. [2012] 346 ITR 138/21 taxmann.com 507, a Division Bench of this Court held that similar view of the Tribunal in the case of that Assessee cannot be said to be perverse or vitiated by any error of law apparent on the face of record. This Court approved the findings of the Tribunal in favour of the Assessee-Raychem RPG Limited. The expenditure referred to by the Division Bench is identical. The view taken, therefore, in the case of the present Assessee is in accord with the settled principles and advancement in technology and judicial notice of which has been taken by this Court.
For the reasons afore-stated even the third question cannot be said to be a substantial question of law. Further, Hon’ble Delhi High Court in CIT Vs. Asahi India Safety Glass Ltd. [supra] has observed as under:-
“9. The revenue in support of its stand has taken recourse to the test of enduring benefit. It is in our view now somewhat trite to say that the test of enduring benefit is not a certain or a conclusive test which the courts can apply almost by rote. What is required to be seen is the real intent and purpose of the expenditure and whether the expenditure results in creation of fixed capital for the assessee. It is important to bear in mind that what is required to be seen is not whether the advantage obtained lasts forever but whether the expense incurred does away with a recurring expense(s) defrayed towards running a business as against an expense undertaken for the benefit of the business as a whole. In other words, the expenditure which is incurred, which enables the profit making structure to work more efficiently leaving the source of the profit making structure untouched, would in our view be an expense in the nature of revenue expenditure. Fine tuning business operations to enable the management to run its business effectively, efficiently and profitably; leaving the fixed assets untouched would be an expenditure in the nature of revenue expenditure even though the advantage may last for an indefinite period. Test of enduring benefit or advantage would thus collapse in such like cases. It would in our view be only truer in cases which deal with technology and software application, which do not in any manner supplant the source of income or added to the fixed capital of the assessee. [See Alembic Chemical Works Co. Ltd. vs CIT (1989) 177 ITR 377; CIT vs J.K. Synthetics (2009) 309 ITR 371 at page 412 and CIT Vs. Indian Visit.com (supra)]. 9.1. This is the approach which the Supreme Court has applied even in cases where there is a once for all or a lump sum payment. What is to be seen in the facts of this case, as already noticed by ushereinabove, that the assessing officer as a matter of fact has returned a finding that the expenditure undertaken was for overhauling the accountancy of the assessee and to efficiently train the accounting staff of the assessee. The Tribunal, which is decidedly the final fact finding authority has after noticing the material on record observed that the expenditure was incurred under various sub-heads, which included licence fee, annual technical support fee, professional charges, data entry operator charges, training charges and travelling expenses. The final figure was a consolidation of expenses incurred under these Empire Industries Ltd. Assessment Year-2009-10 sub-heads. The Tribunal, in our view, and rightly so, came to the conclusion that none of these resulted in either creation of a new asset or brought forth a new source of income for the assessee. The Tribunal classified the said expenses as being recurring in nature to upgrade and/or to run the system.
Therefore, Hon’ble High courts have taken a consistent view favorable to the assessee that even if the software expenses incurred by the assessee results into enduring benefit to assessee, the same could not be treated as capital expenditure and real intent and purpose of the same has to be looked into. A perusal of impugned expenses shows that the same were in the nature of obtaining license, implementation, set-up fees, AMC Charges etc. Therefore, we accept the stand of Ld. AR that the impugned expenses were incurred to ensure smooth conduct of the business and improve operational efficiency and therefore, being revenue in nature, were allowable to full extent in view of the judgment of superior court. Resultantly, by holding that the assessee shall be entitled for full deduction of software expenses, we allow assessee’s this ground of appeal
10. In Ground Nos. 9 & 10, the assessee has challenged disallowance of Rs. 24 Lacs paid as service charges to four parties to whom notices u/s 133(6) were issued by the AO and physical inspection was carried out at their premises by the inspector, however, the same did not yielded any result which led the AO to doubt the genuineness of the same and finally added to the income of the assessee. The same was also confirmed by the Ld. CIT(A) being remaining unsubstantiated. Before us, the Ld. AR contended that the said service charges were paid by the assessee to four parties against invoices and all the payment were ITA No.4065/M/2013 Empire Industries Ltd. Assessment Year-2009-10 through banking channels after deduction of TDS thereupon. In support, the relevant documents in support of the same viz. Invoices issued by the service provider, ledger extracts, bank statements, Income Tax Returns etc. has been placed in the paper book which we have perused. We find that the issue requires re-examination at the level of Ld. AO as ledger extracts reveals that the said expenditure has been incurred towards installation of some machineries and hence prima facie, capital in nature. Therefore, this matter is restored back to the file of AO for re- examination in the light of documents placed by the Ld. AR in the paper- book. The assessee is directed to substantiate his claim forthwith before AO and submit necessary information / documents called for by Ld. AO failing which AO shall be at liberty to dispose-off the same on the basis of material available on record. The assessee’s ground of appeal stands allowed for statistical purposes.
11. In ground No. 11 & 12, the assessee is aggrieved by restricting depreciation on UPS to 25% as against higher depreciation of 60% claimed by the assessee treating the same as integral part of computer system. The AO treating the same as plant & machinery, allowed depreciation @25% only which was confirmed by Ld. CIT(A). The Ld. AR has placed reliance on the judgment of Hon’ble Bombay High Court in CIT Vs. Saraswat Infotech Ltd. [ITA NO. 1243 of 2012 15/01/2013] to contend that UPS being integral part of computer system was entitled for higher deduction of 60% as applicable to computer system. After perusing the cited judgment, we find strength in the arguments of Ld. AR and therefore, following the jurisdictional High Court, we hold that UPS being integral part of computer system being installed to regulate the Empire Industries Ltd. Assessment Year-2009-10 flow of the power to avoid any kind of damage to the computer network due to fluctuation in power supply which could lead to loss of valuable data and hence, entitled for same rate of depreciation as applicable to computer system. This ground of assessee’s appeal succeeds.
12. In Ground No.13, the assessee is aggrieved by non-grant of interest u/s 244A. The same being allowable to assessee as per relevant statutory provisions and hence do not require our interference at this stage and accordingly dismissed.
13. Ground Nos. 14 is related with initiation of penalty proceedings u/s 271(1)(C). The same being premature at this stage, also do not require our interference at this stage and hence dismissed.
14. Ground No. 15 is general in nature.
15. The AO is directed to re-compute book profit u/s 115JB and also re-work carry forward / set-off of losses etc. on the basis of final outcome of the appeal, if required.
16. The assessee’s appeal stands partly allowed in terms of our above order. Order pronounced in the open court on 17th May, 2017.
Sd/- Sd/- (Mahavir Singh) (Manoj Kumar Aggarwal) �ाियक सद� / Judicial Member लेखा सद� / Accountant Member मुंबई Mumbai; िदनांक Dated : 17.05.2017 Sr.PS:- Thirumalesh Empire Industries Ltd. Assessment Year-2009-10 आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. ��थ� / The Respondent 2. आयकर आयु�(अपील) / The CIT(A) 3. आयकर आयु� / CIT – concerned 4. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai 5. गाड� फाईल / Guard File 6.