TaxTMI 
TaxTMI 
TaxTMI 
2015 (6) TMI 526
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....in confirming the disallowance of expenses incurred on purchase of software for updating the existing data processing system of the appellant company amounting to Rs. 23,28,270/- considering the same as capital expenditure. 2.1 That the Ld. CIT(A) erred on facts and in law in not appreciating the fact that claim for similar expenditure as revenue expenditure in the past has been upheld by the Hon'ble Tribunal and that the same has been accepted by the department. 3. That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming the disallowance of bad debts written off amounting to Rs. 4,49,69,588/-. 3.1 That on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding the appellant's claim for bad debts to be premature without appreciating that under the provisions of section 36(1 )(vii) of the Act, a claim for bad debt had to be allowed in the year in which the debt is written off as bad. 4. That on the facts and in the circumstances of the case, the learned CIT (A) erred in upholding an ad-hoc disallowance u/s 14A of the Act amounting to Rs. 2,92,000/- i.e. 5% of the gross dividend income: on acc....
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....wance u/s 14A on account of expenses Rs. 15,00,000/-. v) Disallowance on account of payments to club Rs. 48,925/- (this addition was deleted by Ld. CIT(A) and revenue has not challenged it before us). vi) Disallowance of deferred revenue expenditure Rs. 12,22,63,212/- vii) Disallowance on account of provision for foreign exchange loss Rs. 1,16,44,767/- 3. Aggrieved with the additions, assessee filed appeal before Ld. CIT(A) and Ld. CIT(A) partly allowed relief to the assessee by recording his findings in respect of various additions by holding as under: "a. Depreciation on Software :- 2.3 I have considered the appellant submissions with reference to the facts and record and also the binding Judicial decisions on the given issue. Although a decision has been rendered In favour of the appellant in its own case in the first appeals for A Y. 96-97 to Assessment Year 1999-2000, with the decision of the ITAT in the case of Maruti Udyog (92 ITD 119 f(Delh), the earlier decision in first appeal in the appellant's own case or earlier years might not hold good. In the case of Maruti Udyog, the ITAT held as under: - "The issue, as to whether expenditure on acquisition of software w....
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....the factors might be relevant. But the death of the Principal officer of the creditor company, might not be really material. It is correct that the nature of information required to decide whether a debt is bad would depend on the particular circumstances of each case. In the case under appeal, no matter that the case of Grapco has been admitted by the BIFR equally relevant is the issue as to whether there are no assets from which the debt can be recovered in the foreseeable future. The issue is critical in so far as the' loan advanced by the appellant to Grapco on 27 09.95 was secured against collateral. 3.4 The collateral schedule to the loan agreement contains the details of the following assets which have been pledged against the loan. The assets are (1) Breton - slab polishing machine - 1 No. - Location at Banglore (2) Budiam Brazing tensioning machine - 1 No. - Balasore (3) Budiam Brazing tensioning machine - 1 No. - Banglore (4) Single head automatic polishing machine - 2 No. - Balasore (5) Circular edge cutting machine - 1 - Balasore (6) Wimac block saw -1 No. - Balasore (7) Wimac block saw - 1 No. - Banglore (8) Hermonite cranes - 2 No. - Orissa (9) Excavator of tata ....
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....covery procedures under-the Code of Civil Procedure are available for enforcement of contractual rights, mortgage, hypothecation, lien etc. In fact under the Code, there is a right of direct private sale of the secured assets, in case of default. The appellant's loan agreement in fact contains a clause to that effect I agree with the views of the A.O. that from the report of the CA and the collection agent, there is no clear finding that the hypothecated assets were not with Grapco. Even when the collection agents would locate two of the machines at Grapco premises at Balasorem such communication was not acted upon by the appellant in order to enforce recovery by sale o such asset as per the loan agreement with Grapco. I agree with the views of the A.O. that only when the proceedings in BIFR are concluded in the case of Grapco and from whatever recoverable asses, the dues are ascertained and apportioned among lenders to Grapco then only the bad debts of the appellant could be said to have been rationally quantified with certitude. Till the finalization of the proceedings at the BIFR the bad debts claims of the appellant against dues of Grapco are premature. The addition is sus....
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....nder the Act. In the case of Eicher Ltd. 101 IT R 369 (Del.), it has been said "The words "in relation to" income which is exempt under the Act, no doubt appear it be broad at first impression but on deeper examination, and read in conjunction with the word "incurred". it seems that these are restrictive words, restricting the power of the AO to estimate a part of the expenditure incurred by the assessee as relatable to exempted income. It seems that implicit in the expression "in relation to" is the concept that the AO should be in a position to pin point, with an acceptable degree of accuracy, the expenditure which was incurred by the assessee to produce non taxable income. The word "incurred" signifies that the expenditure must have been actually incurred and not notionally. Reading both the above mentions expression together the conclusion seems escapable that the expenditure which the AO seeks to disallow u/s 14A should be actually incurred and so incurred with a view to producing non taxable income". Similar view in the context of section 80M is available in the case of Punjab State Industrial Corp. Ltd. Vs DC IT 102 ITD 1 (Chd.)(SB). I agree with the views of the appellant ....
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....ly direct or proximate expenditure but 'also other expenses attributable to or in relation to the exempt income, Reliance was placed on the parity of reasoning as given in Distributors (Baroda) Pvt. Ltd. Vs Union of India 155 ITR 120 (SC). In the case under appeal, the appellant is mistaken in assuming that in the absence of any direct relatable expenses, the indirect expenses cannot be computed with regard to the earning of exempted income for the purposes of sect.cr 14A. The fact that the appellant has an investment portfolio of Rs. 309.67 crores at the yearend up from Rs. 140.00 crores in the earlier year would fairly suggest that its investment department is fairly robust and active. To Invest in a particular share or financial instrument. to stay invested or to offload tile Investment are strategic decisions, calling for skill, energy, time, factors which can be measured in money as quantifiable expenditure. While agreeing that disallowance of 25% of the expenses would be unreasonably high, I hold that certain disallowances by invoking the provision of section 14A would be in order, which would comprise expenses in the nature of management salary, communication expenses, ....
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....for running the business or working it with a view to earn profit. The decision in the case of Empire Jute Company Limited vs CIT 24-ITR- 1 (Hon'ble Supreme Court) and India Cement Vs. CIT 68 IR 502 (SC) have been relied upon. It has been submitted that deferment of expenditure is allowable only on specified expenses under the .... u/s 35D for .... Preliminary expenses etc. That since legislature has not provided any amortization of expenses of the nature 'present in the instant case, it will be against the intent of the legislature to amortize such expenses. Decisions in the case of Hindustan Commercial Bank Limited Vs. R.E. 21 ITR 353 (All), Kedamath June Manufacturing Company Limited Vs. CIT 82 ITR 363 (SC) have been relied on in support of the appellant's arguments. 6.1 I have examined the issue in appeal. Although it is correct that no one test or principle or criterion is paramount or conclusive or has universal application to decide the question of amortizing such kind of expenditure, ultimately the question will have to depend upon the facts and circumstances of each case. The A. O. has relied on the decision in the-case of Madras Industrial Investment Corpora....
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....relevant during the year in appeal. Since the appellant has been following a system of accounting where interest expenditure or expenses related to raising of loan funds have been allocated in the accounts pari pasu with the period of user for the relevant year in question, it cannot be the case that the method of accounting regularly followed by the appellant has been rejected by the department. In fact the revenue has supported the appellant in its presentation of accounts relating to spread over of expenditure involving raising of loan funds. The appellant has identified the interest and finance charges relatable to raising of loan funds and has proportionately allocated those expenses to its accounts for the year under appeal. If one were to allow claim of expenses made in the computation relating to the unamortized portion, it is correct that the procedure would result in distortion of correct profit. The Supreme Court in case supra has given its decision on the extent to which an assessee can claim expenditure on discount on debentures. To the extent of Rs. 3.98,74,672/- pertaining to the appellant's claim under that Head (within deferred revenue expenses), the decision ....
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....Syndicate to the two expenses under the head of commercial paper discounting charges and forward cover premium on foreign currency loan and to disallow the claim of deferred revenue expenditure. In so far as debenture issue expenses are concerned, it has been stated that these have incurred on stamp duty, legal and professional expenses in connection with issue of debentures for funding of working capital requirements of the company, There is also full justification to rely on the Decision in the case of Madras Industrial Syndicate in respect of this expense also, I agree with the A.O. that the decision in the case of Madras Industrial Syndicate (225 ITR 802 (SC)) holds good and in that view of the matter, here is no case for allowing the appellant's claim of deferred revenue expenses. The A O. may also refer to the appellant's claim of deferred revenue expenses in respect of debenture issue expenses. There is a specific provision in sec. 35-D dealing with this claim and the same has, to be considered under the specific provision and not under the general / residuary provision. If the claim of debenture issue expenses falls within the ambit of section 35-D. the AO. would ....
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....ated that there would be no reason for disallowing the claim of forex loss on the sole ground that the loss is notional. In the appellant's case, the system of accounting is mercantile. The system brings into debit expenditure, the amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately as it become due and before it is actually received The system of accounting followed by the appellant has been consistent over the years with regard to treatment in the accounts of profits and losses arising on foreign exchange fluctuation. There is thus consistency and definiteness with regard to recognizing the revenue impact of forex changes in rates. In view of the decision of Delhi ITAT in the case of ONGC Ltd., there would be no justification for disallowing the claim of forex losses holding such loss as notional. I agree with the submissions of the appellant and accordingly hold that the loss arising on foreign exchange fluctuation has arisen on revenue account or as a part of the circulating capital of the appellant, embarked in its business, and such loss is not contingent. The ground is allowed." 4. Aggrie....
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....as the assessee's software gets obsolete / redundant in a short span of time and required regular updation. Ld. A.R. placed his reliance on the following case laws: i) CIT v. Asahi India Safety Glass Ltd. 203 Taxman 277 (Del.) ii) CIT v. Amway India Enterprise 346 ITR 341 (Del.) 8. Ld. D.R. however strongly placed his reliance on the orders of authorities below and submitted that specific rate of depreciation is allowed on software and, therefore, it is a capital asset eligible for depreciation at specified rate as provided in the Act. 9. We have heard rival parties and have gone through the material placed on record. We find that Ld. CIT(A) himself supported a finding that in earlier year, the assessee was allowed deduction on account of software by ITAT and we further find that during the year 1995-96 to 1997-98, Hon'ble Delhi High Court had also confirmed the order of ITAT and had dismissed the appeal of Revenue. We further observe that Hon'ble Delhi High Court had recorded a finding of fact that expenditure was incurred on M S Office and not on customized software and had therefore, confirmed the ITAT order. In the present case, the A.O. had noted in the assessment ....
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....gone through the material placed on record. From the facts of the case, we observe that the assessee is a NBFC and advancing loans is one of the main objects of the company and the assessee had advanced loan to one of its customers namely Grapco Industries in ordinary course of money lending business and it is also a fact that the amount recoverable form the loanee has been written off in the books of accounts of assessee. It is also observed that the assessee had classified the loan recoverable from Grapco Ltd. as a non performing asset as per RBI norms as noted at para 5.3 of A.O.'s order. The A.O. and Ld. CIT(A) has not allowed the claim of assessee holding that deduction is allowed in respect of bad debts which is written off as irrecoverable in the accounts and not in respect of any debt which may be written off in its accounts. Both the authorities below has held that primary condition for allowing the bad debt is that it should have become bad and only then it can be written off as irrecoverable. Ld. CIT(A) has held that only when proceedings in BIFR are concluded in the case of Grapco and after recovering whatever is recovered , the dues of assessee can be ascertained. Howe....
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....-99 by the Tribunal in I.T.A. No. 1523/ Del./2003 and our attention was invited to paper book page 35. Ld. A.R. further submitted that the assessee has not incurred any interest expenses in order to make investments in these investments as the assessee had invested out of cash accruals and that too in earlier years. He further argued that no notional deduction in terms of administrative expenses can be made in the absence of any finding of actual incurring of expenditure; the Ld. A.R. relied upon the following case laws: a) CIT Vs Hero Cycles Ltd. 323 ITR 518 b) CIT Vs Taikisha Engineering India Ltd 370 ITR 338 c) CIT Vs Maxopp Investment Ltd. 203 Taxman 364 d) CIT Vs UTI Bank Ltd. 32 Taxman.com 370 10. In view of above facts, Ld. A.R. submitted that Ld. CIT(A) has passed reasonable and speaking order as far as interest expenditure is concerned and moreover, the issue of interest expenses is already covered in favour of assessee by the order of Tribunal in Assessment Year 1998-99. It was argued that as regards administrative expense, the issue is covered in favour of assessee by various judgements. 11. Ld. D.R. on the other hand submitted that for earning exempt income, expen....
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....incurred mentioned in Section 14A referred to accrual expenditure and not some imaginary expenditure and the accrual expenditure as contemplated u/s 14A is the actual expenditure in relation to earning of exempt income and, therefore, had held that if no expenditure is incurred in relation to exempt income no disallowance can be made u/s 14A of the Act. However, we find that the provisions of Section 14A are mandatory in nature and sub-section (3) of Section 14A applies to the cases where assessee claims that no expenditure has been incurred in relation to income which does not form part of total income under the said act. In other words, sub-section (2) deals with cases where the assessee specifies incurrence of some expenditure in relation to income which does not form part of total income whereas sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both the cases, the A.O. should be satisfied with the contents of the claim of assessee in respect of which, expenditure or no expenditure as the case may be and without this satisfaction he cannot embark upon to determine the amount of expenditure in accord....
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.... 1996-97 and 1997-98 vide order dated 30.01.2015 placed at paper book pages 189-213 of compilation of judgements. Ld. A.R. submitted that in the case of assessee's group companies also i.e. SBI card and Payment Services Pvt. Ltd., similar issue had been decided in favour of assessee by Hon'ble High Delhi Court and a copy of which was placed at paper book pages 214- 232 of compilation of judgements. Ld. A.R. submitted that the issue was further covered in favour of assessee by the following judgements: i) Taparia Tools Ltd. Vs JCIT in civil appeal NO.6946-6948 of 2004 (S.C.). ii) CIT Vs Citi Financial Consumer Finance Ltd. 335 ITYR 29 iii) CIT Vs Panacia Biotech Ltd. in I.T.A. No. 22 & 24/2012 (Del. H.C.) 16. Inviting our attention to Section 37 of the Act, Ld. A.R. submitted that as per Section 37, the expenses of capital and personal expenses has to be disallowed while calculating the business income of the assessee. Ld. A.R. submitted that the expenses incurred were not of personal nature neither they were of capital nature and there is no class of deferred revenue expenditure in the income tax Act. He submitted that Ld. A.O had relied upon the decision in case of Madras ....
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....red revenue expenditure. The said decision is not applicable to the facts of the present case. The Hon'ble Supreme Court considered the applicability of accounting standard XI in that context only. As far as the present issue is concerned, we find that this issue is no more Res-integra in view of following decisions: 1. 335 ITR 29 in the case of CIT vs. Casio India Ltd., wherein the Hon'ble Delhi High Court held that direct selling expenses, stamping fee and commission paid to the selling agents in the case of assessee who was financing the higher purchase of vehicles and homes and the period of such financing were ranging from less than 1 year upto 5 years was allowable in the year in which the expenditure was incurred and not over 5 years; 2. 308 ITR 199 in the case of CIT vs. Salora International Ltd., head note reads as under: "For the assessment year 2001-02, the assessee had incurred. Advertising expenditure of about Rs. 3.08 crores for launching of its products and the AO held that the expenditure was of an enduring nature and treated one-third of it as capital expenditure. The Tribunal, confirming the findings of the Commissioner (Appeals) that the expenditure w....
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....ures were to be redeemed. By raising the money collected under the said debentures, the assessee could utilize the said amount and secure the benefit over number of years. 5. In CIT vs. Citi Financial Consumer Fin. Ltd. (20ll) 335 ITR 29 (Del.), a Division Bench referred to Industrial Finance Corp. of India (supra) and then quote a passage from the decision of the Supreme Court in CIT Vs. Empire Jute Co. Ltd. vs. CIT (1980) 124 ITR 1 (SC): 1 3. At this stage, it would be of advantage to discuss the judgment of Supreme Court 111 Empire Jute (1980) 124 ITR 1 (SC) which repelled the theory of expenditure of enduring nature, in a great measure. In that case, the SC noted that by decided cases, the courts evolved various tests for distinguishing " between the capital and revenue expenditure but the test is paramount or conclusive. Every case has to be decided on its facts keeping in mind the broad picture of whole operation in respect of which the expenditure has been incurred. At the same time, a few tests formulated by the courts were taken note of One such test which was specifically spelled out and may be relevant for our purpose was "when an expenditure is made not only once and ....
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....no concept of deferred revenue expenditure. Once the assessee claims the deduction for the whole amount of such expenditure, even in the year in which it is incurred, and the expenditure fulfils the test laid down u/s 37 of the Act, it has to be allowed. Only in exceptional cases, the nature mentioned in Madras Industrial Investment Corporation Ltd. [1997J 225 ITR 802 (SC), the expenditure can be allowed to be spread over, that too, when the assessee chooses to do so. " 2. 338 ITR 177, Cyber Media (India) Ltd. In this case, interalia, held as under: "Once the Tribunal accepted that the assessee had regularly employed the hybrid system of accounting for income-tax purposes and it was only to adhere to procedure under the Companies Act that it changed bona fide to the mercantile system. it erred in concluding that the assessee's income for the purposes of income-tax proceedings could not hark back to the hybrid system. " 3. 19 SOT 13, Situ Electro Instruments (P) Ltd. vs. ITO has observed as under: 8.4 "This leads us with the only question as to whether it is permissible for the assessee to claim the entire expenditure as revenue expenditure while filing its return of income,....
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....751TR 191 (SC). 2) Kedarnatn lute Mfg* Co. Ltd. vs. CIT [1971] 82 ITR 363 (SC). 19.3 In view of above discussion, these grounds are allowed." 18. From the facts of the present case, we find that there is no dispute about the fact that assessee had incurred the expenditure and the expenses are not of capital nature, therefore, as per section 37 of Act, these are allowable in the year in which such expenditure has been incurred. The A.O. had relied upon the judgement of Madras Industrial Corpn. for disallowing a part of expenditure. However, in the judgement of Madras Industrial Investment, the Hon'ble Court had held that expenditure can be spread over a period of time provided the assessee decides to do so and therefore, from the above judgement it can be concluded that right to claim deferred revenue expenditure is given to assessee and not to revenue. In view of the above discussion and judicial precedents, we allow ground No.5 of assessee's appeal. 19. Now, we take up the appeal filed by revenue. The first ground of appeal is regarding grievance of Revenue with the action of Ld. CIT(A) by which he had deleted Rs. 12,27,50,000/- u/s 14A of the Act. This ground has already been....
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....an Molasses Company P. Ltd. (1959] 37 ITR 66. Relying on the said judgment, it was sought to be argued that the increase in liability at any point of time prior to the date of payment cannot be said to have gone irretrievably as it can always come back. According to the learned counsel, in the case of increase in liability due to foreign exchange fluctuations, if there is a revaluation of the rupee vis-a-vis foreign exchange at or prior to the point of payment, then there would be no question of money having gone irretrievably and consequently, the requirement of "expenditure" is not met. Consequently, the additional liability arising on account of fluctuation in the rate of foreign exchange was merely a contingent/notional liability which does not crystallize till payment. In that case, the Supreme Court was considering the meaning of the expression "expenditure incurred" while dealing with the question as to whether there was a distinction between the actual liability in presenti and a liability de futuro. The word" expenditure" is not defined in the 1961 Act. The word "expenditure" is, therefore, required to be understood in the context in which it is used. Section 37 enjoins th....
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.... deciding the question as to whether the word "expenditure" in section. 37(1) includes the word "loss" one has to read section 37(1) with section 28, section 29 and section 145(1). One more principle needs to be kept in mind. Accounts regularly maintained in the course of business are to be taken as correct unless there are strong and sufficient reasons to indicate that they are unreliable. One more aspect needs to be highlighted. Under section 28(i), one needs to decide the profits and gains of any business which is carried on by the assessee during the previous year. Therefore, one has to take into account stock-in-trade for determination of profits. The 1961 Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the profit and loss account the value of the stock-in-trade at the beginning and at the end of the year should be entered at cost or market price, whichever is the lower. This is how business profits arising during the year need to be computed. This is one more reason for reading section 37(1) with section 145. For valuing the closing stock at the end of a particular year, the value prevailing on the....