TaxTMI 
TaxTMI 
2006 (4) TMI 447
X X X X Extracts X X X X
X X X X Extracts X X X X
....verting 30,08,600 shares of company from physical certificate into dematenalize form. The Assessing Officer found that as per the letter of NSDL dated 21-7-1997, the assessee-company has taken over the liability of shareholders. He held that since the liability is that of shareholders and not that of company, the same is not allowable. The Assessing Officer further hold that even if the liability is to be treated as that of the company, the same is not allowable as revenue expenditure, as the assessee derive an enduring benefit from One-time payment and hence the expenses are capital in nature. Learned CIT(A) held that the payment to NSDL cannot be said to be wholly and exclusively for the appellant's business inasmuch as it was not a liability of the appellant to get the shares converted into demat form but the liability is that of the respective shareholders. The expenditure is related more to the easy handling of the shares rather than business of appellant. Learned CIT(A) accordingly held that the expenditure cannot be said to be incurred in the normal course of its business. 4.2 'Learned counsel for assessee Shri Khincha submitted that the conversion into a demat form of sh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....unt with the depository through a DP. DP is the representative or agent in the depository system (like a broker who trades on behalf of the investors in and outside the stock exchange), and he maintains the investor's securities, account, balances and intimates to him the status of his holdings from time to time. The investor can open accounts with one or more DPs. When a person buys any security e.g. shares of debentures already in the depository mode, the buyer will become the owner of the said security in the depository within a day of the settlement being completed. The buyer is not required to apply to the company for registering the security in his name. Dematerialisation is the process by which physical certificates of an investor, at his request, are taken back by the company and actually destroyed and an equivalent number of securities are credited in the electronic holdings of the investor.' For this, the investor will have to first open an account with a DP and then request for dematerialisation of his certificates through the DP so that the dematerialized holdings can be credited into that account. If the investor wishes to get back his securities in the physical form, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntly in reducing the administrative costs. Even if certain expenses results into some benefit to the shareholders, the expenditure incurred in respect of or in connection with the shareholders, is allowable as revenue expenditure as held in the case of CIT v. Tirrihannah Co. Ltd. [1992] 195 ITR 393 (Cal.) and in Karjan Co-operative Cotton Sales Ginning & Pressing Society v. CIT [1993] 199 ITR 17 (Guj.). The expenditure can even be considered in the nature of part of listing requirements. The CBDT by its circular letter F. No. 10/67/65-TT(A-I) dated 26-8-1965 opined that expenses incurred by company on getting its shares listed in stock exchange should be considered as laid out wholly and exclusively for the purpose of business and therefore admissible as business expenditure under section 37(1). The guidelines of SEBI mandate that the shares to be traded in stock exchange can only be in dematerialized form. Thus, the charges paid to NSDL having not brought into existence any capital asset and is for the purpose of efficient functioning of the business are to be held as business revenue expenses and allowable as such. 5. The next ground of appeal is against disallowance of a sum ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t is allowable as such. 5.3 Learned Departmental Representative Shri Ajit Korde on the other hand strongly supported the appellate order. He submitted that the assessee when asked to justify quantification of liability by giving details of actual expenditure debited in provision account in financial years 1997-98 and 1998-99 towards post-sales customer support, could not furnish the details. The assessee stated that, such expenditure gets accounted under normal head and there is no specific debit to warranty provision in any year. The Assessing Officer in para1 6.3 of the assessment order notes that the liability is on estimate basis. The liability for warranty arises only when customer notifies defect in performance of the f: product sold by the company. For which, the customer is required to prove that, performance defect is due to program defect and not on account of mishandling of the customer. The Assessing Officer has noted that, future warranty claim is contingent on several factors and beyond scope of a fair estimate. The assessee does not have data on the basis of which reasonable estimate can be made. Therefore, provision is not ascertainable with reasonable degree of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is made. The provision is made at the rate of 2 per cent of salp price. Though no precise base is indicated by the assessee, yet, if can be considered to be reasonable having regard to the claim made in the past. The provision is made on "matching principle" i.e. matching cost with revenue. Such matching principle has been recognized in the case of Taparia Tools Ltd. v. Jt. CIT [2003] 260 ITR 102 (Bom.). Thus, the provision represents a liability in praesenti though discharged at a later date. In following cases, it has been held that the provision for warranty liability or provision for post-sales customer support is not a contingent liability but an accrued liability and hence allowable : (1) IRC v. Mitsubishi Motors, New Zealand [1996] 222 ITR 697 (PC). (2) Singhal & Co. v. ITO 1 ITD 476 (Chd.). (3) ITO v. Wanson (India) Ltd. [1983] 5 ITD 102 (Pune). (4) CIT v. Majestic Auto Ltd. [1993] 47 ITD 1 (Chd.) (TM). (5) Voltas Ltd. v. Dy. CIT [1998] 64 ITD 232 (Mumbai). (6) Jaybee Industries v. Dy. CIT [1998] 66 ITD 530 (Asr.). (7) CIT v. Beema Mfrs. (P.) Ltd. [2003] 130 Taxman 400 (Mad.). (8) Wipro GE Medical Syste....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lant has also benefited from the said expenditure the learned CIT(A) has erred in permitting a clouding of his conclusion by non-relevant factors such as the appellant is a super rich company and that the expenditure is for a social welfare measure. No asset capable of being recognized in the capital field has been acquired by the appellant as a result of the said expenditure. The learned CIT(A) has erred in not considering the alternative plea of the appellant that in "the signal lights, the appellant's name is prominently displayed and therefore the payment should be allowable as advertisement expenditure. Almost similar issues arose before this Tribunal in assessee's own case for earlier years. The Tribunal by its order dated 31-3-2005 held that payment for expenditure on contribution to police to regulate and control traffic is an allowable expenditure. The principles enunciated thereunder will equally apply to the expenditure on installation of traffic signals which is under consideration in the present appeal. 6.3 Learned Departmental Representative Shri Ajit Korde on the other hand strongly relied upon the appellate order. He submitted that even as per the annual report, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ts advanced. The appellant installed traffic signals at Bannerghatta Circle in Bangalore. The appellant has installed the signal lights at Bannerghatta Circle where the office of appellant is situated and where more than 500 employees are working. Due to severe traffic congestion at the circle its employees had to wait for a long period to reach office resulting in delay in completing the projects. The assessee accordingly thought fit to install traffic signals which after installation were handed over to the traffic police and the Government It is the contention of Revenue that the purpose of making the expenditure being dual i.e. payment as a social commitment and also as business need, cannot be considered as wholly and exclusively for the purpose of business" and hence not allowable. For this purpose, reliance is placed on the decision of Hon'ble Madras High Court in the case of T.S. Hajee Moosa ( supra) and that of Hon'ble Delhi High Court in the case of B.K. Khaima & Co. (supra). We find that (as a result of getting repeatedly involved in traffic jams and other hazards, the workers are a distressed slot. The incurrence of expenditure was prompted solely with a view to benefit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y and exclusively for the purpose of the business and the assessee can claim the whole of the expenditure as deduction. The basic requirements for invoking sections 37(1) and 80G are different and the two sections are not mutually exclusive. Though the contribution by an assessee is in the form of donations of the category specified under section 80G, if it could also be termed as an expenditure of the category falling under section 37(1), then the right of the assessee to claim the whole of it as allowance under section 37(1) cannot be denied. But such money must be laid out or expended wholly and exclusively for the purpose of business. The word "wholly" refers to the quantum of expenditure and the word "exclusively" refers to the motive, object or purpose of the expenditure. Under section 37(1), if the expenditure has been incurred by the assessee voluntarily, even without necessity, but if it is for promoting the business, the deduction would be permissible." "That the words 'for the purpose of the business' used in section 37(1) should not be limited to the meaning of 'earning profit alone'. Business expediency or commercial expediency might require providing facil....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the locality in which the business was situated could not be regarded as being wholly outside the ambit of the business concerns of the assessee, especially where the undertaking owned by the assessee was one which was to some extent a polluting industry. The expenditure was deductible." In view of the above principle laid down, we hold that licence the expenditure was incurred to secure the benefit to its employees, which in turn had also achieved its social objects, can still be considered as "wholly and exclusively for the purpose of business" and hence allowable under section 37(1) of the Act. In the case of T.S. Hajee Moosa (supra) relied by learned Departmental Representative, the issue was regarding travel expenses of the wife of senior partner undertaking foreign tour. What was held therein is that the expenditure was treated as personal in nature. Section 37 specifically prohibits allowance of an expenditure which are personal expenses of the assessee. In the present case, the assessee is a corporate body and the expenses on traffic signals cannot be considered as "personal expenses". In the case of B.K. Khanna & Co. (supra) relied by learned Departmental Repres....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted income or income of earlier years. The learned CIT(A) has erred in concluding that (i) the deduction would be barred by section 14A; (ii) that the appellant has claimed a double deduction; (iii) that the ratio of the Supreme Court in Escorts (India) Ltd. (supra) would apply in the present case. The learned CIT(A) has also erred in not appreciating the difference and distinction between an exemption and a deduction. 7.3 Learned Departmental Representative strongly supported the appellate order. He invited our attention to the decision of Hon'ble Supreme Court in the case of Escorts (India) Ltd. (supra) extracted herein : "We think that all misconceptions will vanish and all the provisions will fall into place if we bear in mind a fundamental, though unwritten, axiom that no legislature could have at all intended a double deduction in regard to the same business outgoing; and, if it is intended, it will be clearly expressed. In other words, in the absence of clear statutory indication to the contrary, the statute should not be read so as to permit an assessee two deductions both under section 10(2)(vi) and section 10(2)(xiv) of the 1922 Act or under section 32(1)(ii) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e expenditure. Section 14A applies to expenditure only. Section 80G would be available even when the said donations are made out of capital or gilts received or exempted income or income of earlier years. Thus, the donation of Rs. 1.5 lakhs qualifies for deduction under section 80G. The Assessing Officer is directed to allow the same as per the provisions of section 80G. 8. The next ground of appeal is against exclusion of certain expenditure from export turnover and total turnover while computing deduction under section 80HHE of the Act. 8.1 Learned CIT(A) agreeing with the observation and finding in the order of learned CIT(A) rendered for assessment years 1994-95, 1995-96 and 1996-97, held that the expenses incurred in foreign currency relating to technical services rendered abroad is to be excluded from export turnover and total turnover while computing deduction under section 80HHE. 8.2 At the time of hearing, learned counsel for assessee submitted that since the appeal of assessee for assessment years 1994-95, 1995-96 and 1996-97 has been decided by the Tribunal in ITA Nos. 794 and 795/Bang/1998 by order dated 31st March, 2005, the same may be followed for this year ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....chnical services do not include software development would amount to defeating the purpose of the deduction on receipt of foreign exchange. In Laxmi Industries v. CIT [2001] 250 ITR (Raj.) assessee's sale of goods to the ONGC on global tender were 'deemed exports' according to the Ministry of Commerce. However, the High Court denied deduction under section 80HHC as foreign exchange was not brought into India. This is accepted view for the interpretation of the section 80-O. The deduction of section 80-O is to be given on net income and not on gross income. The Bangalore Tribunal has followed the decision of CIT v. M.N. Dastur & Co. (P.) Ltd. [2000] 243 ITR 10 (Cal.) and Petroleum India International v. Dy. CIT [1999] 71 ITD 31 (Mum.) (SB), in its orders on deduction under section 80-O. The meaning of 'technical service' is explained by the Supreme Court in Continental Constructions Ltd. v. CIT [1992] 195 ITR 81 (SC). The Supreme Court has held that : "Where a person employs an architect or an engineer to construct a house or some other complicated type of structure such as theatre, scientific laboratory or the like for him, it would not be incorrect to say that the e....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Perusal of section 1.1 of the agreements given on p. 19 of the assessee's paper book and in para 24 of the CIT(A)'s order for assessment year 1993-94 show that the service mentioned therein cannot be provided by a person without specialized knowledge, experience and skill. Therefore, the services rendered by the assessee including that of software development is 'technical services'. The assessee himself has given treatment to the income in foreign exchange of Rs. 7.3 crores as income from services. This is according to the Schedule 21 to the notes to accounts (refer para 21.2 of the CIT(A)'s order for assessment year 1993-94). The CIT(A) also has relied on the decision of S.R.F. Finance Ltd. v. CBDT [1995] 211 ITR 861 (Delhi). The High Court has explained the difference between 'work' and 'service' as under: "The two words convey different ideas. In the former, i.e. 'work', the activity is predominantly physical, it is tangible. In the activity referred to as 'services', the dominant feature of the activity is intellectual or at least mental". Therefore, work of software development requiring professional thinking and intellectual work is 'services'. CIT(A) resto....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s among others, the expenditure incurred in foreign exchange in providing technical services outside India. The question for our consideration is whether the appellant is involved in the rendering of technical services, so as to necessitate the exclusion of expenditure incurred in foreign currency in connection with the provision of technical services outside India. On a careful consideration of the facts and law, we are inclined to agree with the learned counsel for the appellant company when he states that the appellant company during the years was not involved in the rendering of technical services. From a perusal of the relevant documents before us, we notice that the appellant is involved in developing software. These software are provided through the computer programmes, developed by them. The Software Technology Parks of India has accepted the software export figures of the appellant company which clearly indicates that the company was involved in software development. The software development agreement, the sample of which is referred to in pp. 19 to 34 of the paper book filed by the appellant also indicates that the company is involved in creation of comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ancy services. Further we notice that the appellant company had only marketing offices outside India. The annual report for example for the year ending 31-3-1994 the extracts1 of which were brought to our attention clearly indicates that the company had only marketing offices outside India. The approvals from RBI and other regulatory authorities also indicate that the company had only marketing offices outside India. Looking at the overall picture, based on the facts of the case law, evidence adduced and the discussions, we hold that where a person is involved in computer programme, creation, he should be regarded as being engaged in the development of computer software so as to fall within section 80HHE(1)(i). Such a person should not be held as engaged in the business of rendering technical services covered by section 80HHE(1)(ii). We accordingly hold that the appellant company was not involved in the business of providing technical services outside India in connection with the development of computer software. We therefore direct that in computing the figures of export turnover and total turnover relevant for the application of the formula in sub-section 3 of the section 80HHE, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ub would be an allowable expenditure and cannot be considered as capital expenditure. 11. The next ground of appeal is against deletion of disallowance of expenditure on ISO certification. 11.1 The Assessing Officer treated the sum as capital expenditure whereas learned CIT(A) following; the order of his predecessor for assessment years 1994-95 and 1995-96 held that the ISO certification is valid only for a period of 3 years and its utility in international business where the situation is dynamic and accreditation do not survive beyond the period of validity. He accordingly held that the expenditure is revenue in nature and allowable as such. This view was upheld by the Tribunal in the assessee's own case for the earlier years in ITA Nos. 50, 793 to 795, 742, 732 to 734, dated 31-3-2005 in paras 7 to 7.4 held that payment for ISO certification is to be regarded as a revenue expenditure. 11.2 Following the aforesaid order, this ground is to be dismissed. 12. The next ground of appeal is against deletion of disallowance of maintenance expenditure incurred on leased buildings. 12.1 The assessee incurred expenditure of Rs. 10,60,234 for repair and maintenance of premises....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... regarded as revenue expenditure. 12.4 We have considered the relevant facts and the arguments advanced. From the details of expenditure given, we find that it amounts to less than Rs. 20 per sq. ft. of the premises taken on lease. At the end of the lease period, the assessee cannot recoup anything from the expenditure incurred. Explanation to section 32 will apply provided the expenditure is capital in nature. Thus, merely because the sum is substantial, though not so substantial, looking to the operation of the assessee, the amount cannot be considered as capital expenditure. Even the grounds of appeal mentions that the expenditure incurred are 'maintenance expenditure'. Such maintenance expenditure does not partake the characteristics of acquisition of any capital asset. The expenditure is incurred after the building had been occupied and which requires normal maintenance expenditure, which cannot be classified as capital expenditure. We accordingly do not find any merit in this ground. The deletion of disallowance is accordingly upheld. 13. The next ground of appeal is against direction of learned CIT(A) to include the exchange rate fluctuation in the export turnover and ....