TaxTMI 
TaxTMI 
2020 (8) TMI 174
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....es of the case and in law, the CIT(A) erred in confirming the addition of Rs. 1,94,03,906/- being expenses incurred on Enterprise Resource Planning ("ERP") and software expenses, holding the same as capital expenditure." ITA NO. 1957/Del/2016 (A.Y. 2003-04) "1. That on facts and circumstances of the case and in law, the CIT(A) erred in confirming the addition of Rs. 34,44,637/- being expenses incurred on Enterprise Resource Planning ("ERP") and software expenses, holding the same as capital expenditure." ITA NO. 1958/Del/2016 (A.Y. 2004-05) 1. That on the facts and circumstances of the case and in law, the CIT(A) erred in not directing the assessing officer to allow deduction of Rs. 2,87,484, being expenses relatable to the relevant assessment year but debited in the Profit & Loss Account of the subsequent assessment year(s). 2. That on the facts and circumstances of the case and in law, the CIT(A) erred in not directing the assessing officer to allow depreciation of Rs. 35,89,089, based on the revised depreciation chart filed during the course of assessment proceedings. 3. That on the facts and circumstances of the case and in law, the CIT(A) erred in not adjudicat....
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....of Rs. 1,27,04,048/- for the year as claimed by the assessee was allowed to be carried forward to subsequent years in accordance with the provisions of Section 74 of the Income Tax Act, 1961. The book profits in terms of Section 115JB was assessed at Rs. 5,92,24,133/- and the tax due thereon was fully adjusted against the taxes already paid by the assessee. Thus, the summary of the additions / disallowances made by the Assessing Officer are as follows: i) Interest on SDF loan: Addition of Rs. 63,90,848/- (ii) ERP, Software & Design Development & BPR Expenses: Addition of Rs. 81,62,280/- (iii) Short Charging of Interest on Loan/Advance to Carvanserai Ltd.: Addition of Rs. 90,95,883/- iv) Bad Debts written off: Addition of Rs. 5,83,352/- v) Commission: Addition of Rs. 91,834/- vi) Dividend Income: Addition of Rs. 3,00,000/- 4. Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee. 5. As regards to Ground No. 1 relating to ERP and software related expenses amounting to Rs. 1,16,60,400/-, the Ld. AR submitted that the assessee is a public limited company engaged in the business of manufac....
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....s, production, etc. The software provides capability to surpass the boundaries between departments in an organization and the integrated modules work together and support the individual departments. The Ld. AR submitted that the Assessing Officer failed to appreciate that aforesaid expenses incurred merely facilitated the day-to-day business operations and did not result in any enduring benefit in the capital field, ignoring the following facts: i) ERP is a standardized software and not a customized software. Further, ERP is an application software and not an operating software; ii) The software does not involve transfer of any technology for the production of any particular product nor it is an integral part of any particular machinery used in manufacture of finished products by the assessee; iii) The assessee only had the limited right to use the software for the purpose of business; the assessee cannot copy, translate, disassemble, etc., the software; iv) The assessee has a non-exclusive license to use the software and proprietary information; v) The ownership and title in all the intellectual property rights, including patent, trademarks, service mark, copyright and t....
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.... * CIT vs Associated Cement Companies Ltd: 172 ITR 257 (SC) * Alembic Chemical Works Co. Ltd vs CIT: 177 ITR 377 (SC) The aforesaid expenditure on computer software too, it is submitted, did not result in an enduring benefit in the capital field and, therefore, the same is not in the nature of capital expenditure. The Hon'ble Delhi High Court in the case of CIT vs K & Co. 181 CTR 378 upheld that the order of the Tribunal holding that expenditure incurred by assessee on maintenance of computer and their upgradation including development of software was in the nature of revenue expenditure and did not give rise to any substantial question of law. The Ld. AR relied on the decision of Hon'ble Delhi High Court in the case of CIT vs GE Capital Services Ltd. 300 ITR 420 (Del) wherein purchase of MS Office software was held to be of revenue nature since it was not custom built and would have required alterations. The Ld. AR also relied upon the decision of the Hon'ble Delhi High Court in the case of CIT vs Asahi India Safety Glass Ltd. 346 ITR 329. Revenue's appeal against the aforesaid decision was dismissed by the Hon'ble Supreme Court vide order dated 05.07.2012 in SLP (C) CC 10108/....
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....re incurred by the assessee towards implementation of ERP system in the business, in the present modern era of fast changing technology, cannot be said to result in acquisition of any capital asset nor can be said to have resulted in any benefit of enduring nature, to be regarded as capital expenditure. Further, since the right to use the underlying software is acquired by the assessee to integrate the functioning of the business as a whole, no revenue per-se was generated by the assessee from any of such licensed software. The same merely resulted in the business operations being carried out more efficiently and smoothly. In fairness, the Ld. AR pointed out that the Tribunal in assessee's own case for the Assessment Year 2000-01 vide order dated 08.08.2008 in ITA No.2848/Del/2004 had set aside the aforesaid issue to the file of the Assessing Officer, following the decision of the Special Bench in the case of Amway India Enterprises 111 ITD 112 (Del) (SB) (supra). The Ld. AR submitted that however, after the said decision, there are direct decisions of the High Courts and the Tribunal referred supra, wherein similar expenditure incurred has been held to be allowable as revenue expe....
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....ssee as expenditure incurred on computer software does not constitute enduring benefit to term the same as capital in nature. Thus, the Assessing Officer as well as the CIT(A) failed to take cognizance of the decisions of the various High Court and the Apex Court as well as the nature of the expenditure incurred by the assessee. Hence, Ground No. 1 of Assessee's appeal is allowed. 8. As regards to Ground No. 2 relating to disallowance under Section 14A of the Act to the extent of Rs. 86,398/-, the Ld. AR submitted that during the year under consideration, the assessee earned dividend income aggregating to Rs. 17,27,950 from investment in various equity shares, which was claimed as exempt under Section 10(33) of the Act. The investment in the shares which yielded above exempt dividend income, had been made out of surplus funds available in earlier years. Since no expenditure was incurred by the assessee in relation to exempt dividend income, no disallowance under Section 14A of the Act was suo moto offered by the assessee. In the assessment order, the Assessing Officer made ad-hoc disallowance of expenses of Rs. 3,00,000 on the ground that some manpower/man hours alongwith the expe....
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....A of the Act, following the aforesaid the Hon'ble Supreme Court decision in Walfort Shares & Stock Brokers (supra), observed that disallowance under Section 14A can be effected only when a proximate cause for disallowance is established, stating the relationship of the expenditure with income which does not form part of the total income. The Ld. AR also relied upon the decision of the Hon'ble Delhi High Court in case of Maxopp Investment Ltd. 203 Taxman 364 wherein the Hon'ble High Court, while approving the contention raised by the assessee held that the term "expenditure incurred'' appearing in Section 14A(1) of the Act would mean "actual" expenditure incurred, held that no disallowance could be made under the said section where no expenditure has 'actually' been incurred by the assessee in relation to earning of the exempt income. Pertinently, the Hon'ble Supreme Court while affirming the aforesaid decisions of the Hon'ble Bombay and the Delhi High Court have repeatedly emphasized on the requirement of recording satisfaction. The Hon'ble Supreme Court in the case of Godrej & Boyce Manufacturing Co. Ltd vs DCIT, 394 ITR 449 (SC), while affirming the aforesaid decision, he....
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....is Rs. 3 lacs under section 14A of the Act, without appreciating that no expenditure was actually incurred for earning dividend income and without bringing any evidence on record to establish nexus between the expenditure and earning of dividend income. 9. The Ld. DR relied upon the Assessment Order. 10. We have heard both the parties and perused all the relevant material available on record. From the perusal of records, it can be seen that the Assessing Officer accepted the contention of the assessee that no expenditure has been incurred for earning the dividend income and therefore no disallowance under Section 14A was called for. Without appreciating this aspect, the Assessing Officer disallowed Rs. 3 lacs under section 14A of the Act on an ad-hoc basis, and while doing so the Assessing Officer has not established any nexus between the expenditure and earning of dividend income. The CIT(A) also failed to look into this aspect. Thus, Ground No. 2 is allowed. 11. In result, the appeal being ITA No. 1955/Del/2016 filed by the Assessee for A.Y. 2001-02 is allowed. 12. As regards Assessment Year 2002-03 & 2003-04, both these appeals are identical to Ground No. 1 of Assessment Yea....