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Income Tax Appellate Tribunal, DELHI BENCH “B” NEW DELHI
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “B” NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND MS. SUCHITRA KAMBLE : JUDICIAL MEMBER Asstt. Yr: 2006-07 DCIT Circle-11(1), Vs. M/s E-enable Technologies Pvt. Ltd. New Delhi. 34, Netaji Slubhash Marg, Darya Ganj, New Delhi 110002. PAN: AAACE 9909 K ( Appellant ) (Respondent) Appellant by : Shri Amrit Lal Sr. DR Respondent by : Shri Himanshu Sinha Adv.& Sh. Satyam Rastogi CA Date of hearing : 07/12/2015. Date of order : 18/01/2016. O R D E R PER S.V. MEHROTRA, A.M:
This appeal, by the Revenue, is directed against CIT(A)’s order dated 15.02.2011 relating to AY 2006-07.
Brief facts of the case are that assessee company, in the relevant assessment year, was engaged in the business of computer education/ training centre, software development, support and maintenance. It had filed its return of income declaring total income at Rs. 69,96,748/-. The assessment was completed at a total income of Rs. 1,11,51,637/-, inter alia, making following disallowances:
(i) Capital expenses Rs. 3,30,195/- (ii) Provision for sale and Rs. 33,61,059/- Maintenance of software 3. Ld. CIT(A) allowed the assessee’s appeal and deleted both these additions. Being aggrieved, the department is in appeal before us and has taken following two grounds of appeal:
“1. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of Rs. 3,30,195/- on account of software purchase.
2. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of Rs. 33,61,059/- on account of sales and maintenance of software.”
Brief facts, apropos ground no. 1 are that the assessee had debited software/ AMC to the extent of Rs. 50,80,754/-. The AO required the assessee to explain why the said sum should not be treated as capital expenses. The assessee pointed out that this sum represented the amount of software purchases, annual maintenance contract (AMC) for hardware and software and the expenses towards consultancy. As regards the software purchases, the assessee submitted that they were to the extent of Rs. 8,25,488/-. The assessee further submitted that the software so purchased had been sold out and it was only the trading activity of the assessee. The assessee also submitted that the software purchases to the extent of Rs. 5,19,011/- had been sold for Rs. 9,59,924/-. The assessee filed the bills of purchases as well as the sale vouchers. From these documents the AO concluded that there was no co-relation between the purchase and sale of software because the software purchased did not tally with the software sold out. He, therefore, did not accept the assessee’s contention that it was only a trading transaction. He treated the sum of Rs. 8,25,488/- in capital field and allowed depreciation @ 60%. Thus, made a disallowance of Rs. 3,30,195/-.
Before ld. CIT(A) it was submitted that the assessee was the implementation partner of ‘Hyperion Software’, which was installed to evaluate performance of the employees. It was submitted that the assessee undertook to devise systems for performance evaluation in organizations. In the performance of these services, “ hyperion software”, which it purchased from time to time after customizastion depending upon the needs of the customers, the software was installed on the customer’s system and thereafter it was used by the customer. Once installed on the customer’s system, it was no longer available for use by the assessee. He, accordingly, deleted the disallowance.
We have considered the submissions of both the partiers and find that the findings of ld. CIT(A) that from the details and copies of purchase invoices and sales of software invoices it was evident that software was purchased and subsequently sold to customer and was not used by assessee, have not been controverted by the department. We, accordingly, confirm the order of CIT(A) on this issue.
Brief facts apropos ground no. 2 are that assessee had debited a sum of Rs. 33,61,059/- as provision for sale and maintenance of software. The AO required the assessee to explain as to how it was an ascertained liability. The assessee submitted that it enters into AMC with customers while selling the software for a period of one year. AMC is received and credited to the P&L A/c. The provisions for sale and maintenance represented the AMC received for the period beyond the financial year. The AO did not accept the assessee’s claim, inter alia, observing that it was not to be paid back or accrued to assessee from day-to-day. He, therefore, denied the claim of Rs. 33,61,05/-.
Before ld. CIT(A) the assessee reiterated his submissions and pointed out that the total AMC in the year was bifurcated into amount for the year and the amount received for services to be provided in the next year. This bifurcation was made on time basis and, accordingly, the provision for sale and maintenance of software of Rs. 33,61,059/- represented the unexecuted portion of the AMJC income, which was received in advance. It was further clarified that assessee was following mercantile system of accounting and, therefore, the revenue recognizable for the year under consideration from AMC sale was that which pertained to the period falling in the financial year 2005-06 and which was covered by the AMC period. This accounting treatment was as per accounting standard “AS-9” on revenue recognition as prescribed by the Institute of Chartered Accountants of India. The assessee further pointed out that it was consistently following this accounting policy. The assessee relied on the decision of Hon’ble Allahabad High Court in the case of CIT Vs. Hindustan Computer Ltd. 233 ITR 366, wherein under similar facts the assessee’s claim was upheld.
The ld. CIT(A) allowed the assessee’s claim by observing as under:
“6.5. I have considered the assessment order as well as the written submission of the appellant. The reason the AO did not accept the contention of the appellant was because the AMC has been received by the assessee at once and it is not to be paid back. It appears that the AO has not understood the accounting treatment being given to receipt of the AMC consistently by the appellant. It is seen that provision for sale and maintenance of software is the reversal of income to the extent of ' unexecuted portion of contractual liability and unexecuted portion of AMC is charged as income in the next financial year. This method of accounting has been consistently followed by the appellant in earlier years as well as subsequent years and accepted by the department. If a departure is made from this method this amount will be taxed twice. I find that there is no reason why the AO should take a different view when there is no change in the facts of the case. I also find that the case law relied on by the appellant is squarely applicable to the facts of the appellants case. In view of the reasons above, the addition is directed to be deleted.
We have considered the rival submissions and have perused the record of the case. The facts are not disputed. The assessee is following mercantile system of accounting and as per accounting standard-9, the net effect of the accounting treatment was for only that part of the AMC receipt was taken into consideration which pertained to the year under consideration. This method has consistently been followed by the assessee. We, therefore, do not find any reason to interfere with the order of ld. CIT(A). Ground fails.
In the result, departmental appeal is dismissed. Order pronouncement in open court on 18/01/2016.