TaxTMI 
TaxTMI 
2011 (5) TMI 373
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....e assessee had debited a sum of Rs. 1,03,82,810 on account of foreign exchange fluctuation loss in respect of raw material and finished goods. The assessee explained the aforesaid loss in its letter dated 24-9-2002 filed before the Assessing Officer. According to the assessee, it was following the mandatory Accounting Standard 11 (AS-11) on 'Accounting for effects of changes in foreign exchange rates' issued by the Institute of Chartered Accountants of India (ICAI), which was mandatory from April1,1995. As mandated in AS 11, the assessee has recorded the purchases of all items other than fixed assets at the average rate of exchange prevailing in the month of booking the invoice. Any subsequent gain/loss on account of foreign exchange fluctuations is credited/debited to the Profit and Loss Account. Hence, a net amount of Rs. 1,03,82,810 was debited to Profit and Loss Account of the above referred assessment year in respect of the purchases made during the year. During the year, a part of the purchases were consumed and hence, the amount of foreign exchange fluctuation that can be attributed to closing inventory was only Rs. 29,30,628. The working of the same was under :-- Total E....
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....red, the assessee restored the booking the loss on unmatured contract at the year end. It was contended by the assessee that the revised accounting treatment was more appropriate and in consonance with the mandatory accounting standards prescribed by the Institute of Chartered Accountants of India (ICAI). While the Assessing Officer did not dispute the proposition that where accounting method has undergone changes due to the bona fide and valid reasons, it should be accepted, the Assessing Officer did add that whatever be the method of accounting followed, at the end of the day it must be such that "true and correct profits of the year ascertainable". The Assessing Officer was of the view that booking of loss on unmatured contracts will vitiate the true and correct picture of profits because such a loss will only be on estimate basis. He also noted that in a forward contract, liability arises only when contract matures and is not, therefore, ascertainable in advance. Based on this logic, the Assessing Officer made an addition of Rs. 25.91 lakhs on account of loss claimed on unmatured contracts. Aggrieved, assessee carried the matter in appeal before the ld. CIT(A) but without succe....
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....ing it into account for computing the closing stock value. A co-ordinate Bench of this Tribunal, in the case of IBM Global Services India (P.) Ltd. v. Dy. CIT 114 ITD 265, has even after taking into mandatory Accounting Standard - 2, held that the value of closing stock is not to include the liability on account of exchange valuation. We are not inclined to take any other view of the matter than the view so taken by the co-ordinate Bench which is squarely applicable on the facts of the present case. Respectfully following the Hon'ble Supreme Court judgment in the case of Woodworth Governor (supra) and co-ordinate Bench decision in the case of IBM Global Services (supra), we uphold the grievance of the assessee. Accordingly, we direct the Assessing Officer to delete the impugned additions of Rs. 25,91,000 and Rs. 1,01,38,710. The assessee gets the relief accordingly." [Emphasis supplied] The Bench in assessee's own on identical issue held that loss on account of foreign exchange fluctuation in respect of inventory which is part of closing stock need not be taken into account for computation of closing stock value because the said expenditure is not to be taken into account for co....
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....rks in the Annexure to this Form, such deduction has been correctly claimed in accordance with the provisions of the said clause." 9. In Annexure to Form 3BA the Auditors have given the following remarks : "As represented by the Management, the Company has a computer network system consisting of several computers, servers etc. in operation. Though a substantial portion of the system was Y2K compliant, the total system as a whole was not Y2K compliant. Hence, to make the total system Y2K compliant by way of upgrading the non-Y2K compliant devices, the Company had to replace such non-Y2K compliant devices with Y2K compliant devices to make the total system Y2K compliant. The total expenditure incurred towards the same is Rs. 25,202,858. Included in this amount is an expenditure of Rs. 4,444,896 of revenue nature on up-gradation and making its software Y2K compliant. Further the Company received an amount of Rs. 328,356 on discarding some of its non-Y2K compliant devices. Thus the net amount of Rs. 24,874,502 (Rs.25,202,858 less Rs. 328,356) has been considered as expenditure incurred by the Company in respect of making its entire computer net-work system Y2K compliant." 10. ....
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....not Y2K compliant and which could not be made Y2K compliant. Hence the migration had to take place from Windows office 4.2 to M.S. office 97 which was then upgraded to MS Office 2000, which was Y2K compliant. An expenditure of Rs. 28,99,901 was incurred towards the same. 15. Remote line networks which allow the employees of Kodak to work from home were upgraded to Y2K compliant system by incurring an expenditure of Rs. 1,07,170 towards the same. 16. The assessee also gave a chart giving out the reasons for upgrading/replacing the existing non-Y2K components of network. The assessee pointed that only some components of the entire network like operating system, PC's etc., which could not be upgraded using the Y2K upgrade patches as evidenced/certified by outside vendors, internal reports etc., were replaced in order to render the entire system Y2K compliant. Such replacement was essentially required to make the entire network Y2K compliant. Thus, the assessee submitted that by such replacement it cannot be said that the assessee has discarded the existing computer system, since only the certain components mentioned above had been replaced whereas the other components of the com....
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.... like NSTL. Necessary certification was also taken from the respective vendor organizations to certify Y2K compliance. Where the vendor was unable to provide satisfactory Y2K compliance certification, due care was taken to either upgrade the system or replace the same so as to minimize or bring down the impact of Y2K to the assessee. Only in cases where the concerned vendor was unable to give assurances of complete Y2K compliance with patch upgrade, was the system replaced with a Y2K compliant system. 19. The assessee referred to the provisions of section 36(1)(xi) of the Income-tax Act, 1961, (Act) and submitted that as per the definition of a 'computer system' under section 36(1)(xi) of the Act, a single device or collection of devices or more of them is included. A network whether internal or external or connected to one another would mean a collection of devices which form part of the net-work. Accordingly, networking equipments like hubs, switches, routers, terminals, servers, P.C's printers, scanners, modems, operating systems, e-mail systems, various other components of the net-work etc., which depend on one another for user and usage would constitute computer system. The....
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....nd in computing the profits and gains from business, the expenditure should be allowed as deduction. 21. The Assessing Officer however was of the view that the claim of the assessee could not be allowed. In doing so the Assessing Officer held as follows : "On perusal of the details filed by the assessee-company, it has come to my notice that the expenditure has been incurred for purchase of new hardware/software which are Y2K compliant. Assessee-company has listed out around 112 items including hardware like SD RAM memory, RAM clips, Windows NT servers, server upgrades, IBM PCs, IBM NETFINITY servers & software like MS-Office 97, 2000, Lotus notes etc. It is preposterous to believe that the acquisition of these new capital assets can be used to make the existing non-Y2K compliant computer systems of the assessee-company into a Y2K compliant computer systems. The auditors themselves have pointed out that the assessee company has purchased Y2K compliant devices to replace the non-Y2K compliant devices." The Assessing Officer also referred to the Board Circular No. 779, dated 14-9-1999, wherein it has been observed by the Board that the deduction will not be allowable in resp....
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....,28,356). 24. We have heard the rival submissions. The learned counsel for the assessee reiterated the stand of the assessee as made before the revenue authorities. The learned D.R. reiterated the stand of the revenue as reflected in the orders of the revenue authorities. 25. We have given a careful consideration to the rival submissions. The break up of the expenses incurred by the assessee and the nature of the expenses and the explanation offered by the assessee as to why these expenses are to be allowed as revenue expenditure have already been set out above. The claim of the assessee was that there was necessity to connect all the desktops in the organization because the assessee ran a centralized business application called SUN Systems which had to be consolidated at the regional office and this data then to be transmitted to the parent company. Further such centralized system enabled easy access to data at all locations. In the year 1999 due to Y2K changeover, the assessee had to ensure that all the computer systems used within the organization were either made Y2K compliant (if possible) or replaced with Y2K compliant systems. The assessee had the following three choic....
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.... electronic instructions, - input data and output data - Performing functions (including but not limited to) of : - logic - arithmetic - data storage and retrieval; and - communication and control "Y2K compliant computer system" has been defined to mean a computer system capable of correctly processing, providing or receiving data relating to date within and between the twentieth and twenty-first centuries. 28. An analysis of the definition of computer system shows that it contemplates a device or collection of devices. Therefore the network which the assessee owned for the purpose of its communication facilities comprised of several devices and would qualify to be called a "Computer System". According to the assessee part of its computer system was Y2K compliant and only some of the devices which go to make its computer system had to be replaced either with hardware or software to make the entire computer system Y2K compliant. This fact has not been disputed by the revenue and wherever necessary the asse....
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....computer system will be eligible for depreciation at the prescribed rates. 30. In the present case, the facts are that there was an existing computer system and some of the devices which go to make the computer system were not Y2K compliant and could not be upgraded. To make the entire computer system Y2K compliant, some of the devices had to be replaced and some were upgraded wherever it was possible. Thus the entire computer system has not been discarded. The facts as claimed by the assessee have not been disputed by the revenue. The auditors in their report have certified that the claim under section 36(1)(xi) of the Act has been correctly made. In annexure to the report the auditors have also observed that according to the assessee it has a computer network system consisting of several computers, servers etc., in operation. Though a substantial portion of the system was Y2K compliant, the total system as a whole was not Y2K compliant. Hence, to make the total system Y2K compliant by way of upgrading the non-Y2K compliant devices, the Company had to replace such non-Y2K compliant devices with Y2K compliant devices to make the total system Y2K compliant. The remarks by the aud....
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....mputing deduction under section 80HHC of the Act. The reason assigned by the revenue was that these incomes are not derived from the operational activities of the assessee. Aggrieved by the order of CIT(A) on this issue, the assessee has raised ground No. 3 before the Tribunal. 33. We will take up for consideration each one of the above items. As far as excluding sale of scrap, Camera rent and expenses on repair of camera is concerned, the issue was considered by the Tribunal in its Consolidated order of the ITAT, Mumbai dated 31-5-2010 in the assessees own case for assessment years 1996-97, 1997-98, 1998-99, 2000-01 and 2001-02 (ITA Nos. 4543/M/01, 7180/M/01, 3314/M/02, 3196/M/02, 4574/M/03 and 8923/M/04) (pages 19 & 20, para 48). The Tribunal held as follows : "48. Both the representatives agree before us that the issue arising out of the aforesaid ground is mutatis mutandis identical to the issue decided by the Hon'ble Gujarat High Court in CIT v. Harjivandas Juthabhai Zaveri 258 ITR 785 and the Hon'ble Madras High Court in Fenner (India) Ltd. v. CIT 2451 ITR 803, wherein their Lordships have granted relief to the assessee for the reasons stated therein. Respectfully follo....