TaxTMI 
TaxTMI 
2026 (4) TMI 1104
X X X X Extracts X X X X
X X X X Extracts X X X X
....se was selected for scrutiny under CASS. The assessment was completed under section 143(3) of the Act by order dated 21.12.2018, determining the total income at Rs. 85,13,75,670/- under the normal provisions and computing book profit under section 115JB at Rs. 54,05,47,601/-. While framing the assessment, the Assessing Officer made the following observations and additions: While framing the assessment, the Assessing Officer made the following additions: (i) ERP / Software Expenses - Rs. 1,06,60,841/- (ii) Disallowance under Section 14A read with Rule 8D - Rs. 78,91,710/- (iii) Debenture Redemption Reserve under Section 115JB - Rs. 37,50,00,000/- 3. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). The CIT(A) examined the nature of ERP expenses and took note of the fact that an identical issue had been decided in favour of the assessee in its own case for A.Y. 2015-16 by the coordinate bench. Following the said decision, the CIT(A) held that the ERP expenses were incurred for smooth functioning of the business and did not constitute part of the profit-making apparatus. Accordingly, the CIT(A) directed the Assessing O....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction 115JB, the CIT(A) recorded that no disallowance of direct expenditure under Rule 8D(2)(i) had been made in the present case. Relying upon the judicial precedents cited by the assessee, the CIT(A) held that disallowance computed under section 14A read with Rule 8D cannot be added back while computing book profit under section 115JB of the Act. 6. The CIT(A) also examined the nature of Debenture Redemption Reserve and the computation mechanism under section 115JB. Relying upon judicial precedents, including decisions of the Hon'ble Supreme Court and the Hon'ble Bombay High Court, the CIT(A) held that DRR represents an ascertained liability and cannot be treated as a reserve for the purpose of Explanation 1 to section 115JB. The CIT(A) further held that rejection of the claim merely on the ground that it was not made in the original return was not justified. Accordingly, the addition of Rs. 37.50 crore to the book profit was deleted. 7. Aggrieved by the order of CIT(A) the Revenue is in appeal before us raising following grounds of appeal: 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs. 1,06....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erves its right to file further submission in the appeal. 8. We shall now proceed to adjudicate the grounds raised in the present appeal. Since each ground is independent and raises a distinct controversy, the same are taken up seriatim, and are dealt with ground-wise in the succeeding paragraphs. Deletion of disallowance of ERP / software expenses of Rs. 1,06,60,841/- (Ground No. 1 and 2) 9. By way of this ground, the Revenue has assailed the action of the learned CIT(A) in deleting the disallowance of Rs. 1,06,60,841/- made by the Assessing Officer on account of ERP / software expenses. The learned Departmental Representative (DR) took us through the relevant paras of the order of Assessing Officer. According to which the Assessing Officer noticed that the assessee had incurred ERP / software expenses aggregating to Rs. 1,42,14,454/-. On perusal of the audited financial statements, it was observed that the said expenditure had been capitalized under the head fixed assets. However, in the computation of income, the assessee had claimed the said expenditure as revenue in nature. Holding that the ERP expenditure resulted in an enduring benefit, the Assessing Officer treated....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Officer and the learned CIT(A), and examined in detail the break-up of software expenditure, invoices, and explanations placed on record by the assessee. We have also carefully considered the reliance placed by the assessee on the decision of the coordinate Bench of the Tribunal in its own case for A.Y. 2015-16 in ITA Nos. 1539 & 1594/Mum/2019, particularly paragraphs 21 and 22 thereof, wherein ERP expenditure was held to be revenue in nature. 12. At the outset, it is necessary to note that the allowability of software expenditure as capital or revenue is a fact-dependent determination, and the principle of consistency cannot be mechanically applied without examining the nature of software, rights acquired, and functional role of such software in the relevant assessment year. In the said decision for A.Y. 2015-16, the coordinate Bench, after examining the facts of that year, recorded a finding that the ERP expenditure incurred by the assessee consisted primarily of stand-alone licence fees and user rights, which did not form part of the profit-making apparatus but merely facilitated the conduct of business more efficiently. Applying the functional test, and relying upon the jud....
X X X X Extracts X X X X
X X X X Extracts X X X X
....3,465 Capacity-based licence (12 TB), system enhancement Capital expenditure 5 Lauren Information Technologies 4,14,941 Routine application software, as details not provided by the assessee Revenue expenditure 6 Lauren Information Technologies 10,75,644 Backup software (8 TB), infrastructure-level enhancement Capital expenditure 7 CSI Engineering Software Pvt. Ltd. 1,99,238 Structural engineering software, one-time perpetual rights Capital expenditure 8 Magnanimous Systems Pvt. Ltd. 2,65,381 Citrix XenServer, virtualisation platform, hardware enhancement Capital expenditure 9 Ricoh India Ltd. 96,18,320 SWOS Microsoft Office licences (605 users), one-time perpetual rights Capital expenditure 10 Softcell Technologies Ltd. 17,868 Utility licence, treated as profit making apparatus considering the nature of business of the assessee Revenue expenditure 11 VDA Infosolutions Pvt. Ltd. 3,77,232 IBM V7000 storage upgrade for hardware enhancement Capital expenditure 15. From the above, it is evident that capital software expenditure aggregates to Rs. 1,37,32,744/-, whereas revenu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....xpenditure amounting to Rs. 4,81,711/- shall be allowed as revenue expenditure. iii. The Assessing Officer is directed to recompute the depreciation accordingly, restricting the allowance to 30 percent where the asset was put to use for less than 180 days during the relevant previous year, after granting reasonable opportunity of being heard to the assessee. 20. Accordingly, the related grounds of appeal are partly allowed for statistical purposes. Disallowance under section 14A read with Rule 8D amounting to Rs. 78,91,710/- (Ground No.3 and 4) 21. By way of these grounds, the Revenue has challenged the action of the learned CIT(A) in holding that: * no disallowance of interest expenditure under Rule 8D(2)(ii) was warranted, and * the disallowance under Rule 8D(2)(iii) was required to be recomputed by considering only those investments which had yielded exempt income during the year, in accordance with the decision of the Special Bench in ACIT v. Vireet Investment Pvt. Ltd., and * the disallowance computed under section 14A could not be added back while computing book profit under section 115JB. 22. The learned DR pointed out that the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....owance of interest expenditure under Rule 8D(2)(ii) is called for. We, therefore, find no infirmity in the order of the learned CIT(A) on this aspect. 27. With regard to the disallowance under Rule 8D(2)(iii), we find that the learned CIT(A) has followed the binding decision of the Special Bench of the Tribunal in ACIT v. Vireet Investment Pvt. Ltd., and has merely directed the Assessing Officer to recompute the disallowance by considering only those investments which have yielded exempt income during the year. We do not find any error in this direction. 28. As regards the addition of disallowance under section 14A to the book profit computed under section 115JB, we note that the learned CIT(A) has held that no such addition is permissible in the absence of disallowance under Rule 8D(2)(i). This finding is in consonance with settled judicial position, and no contrary authority has been brought to our notice by the Revenue. 29. The Revenue, in its grounds, has placed reliance on CBDT Circular No. 5 of 2014 dated 11.02.2014 as well as on the decision of the Hon'ble Supreme Court in Godrej & Boyce Manufacturing Co. Ltd., in support of the disallowance made under section 14A r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....year. This direction is consistent with the statutory framework and does not run contrary to the ratio laid down in Godrej & Boyce. 33. Thus, neither CBDT Circular No. 5 of 2014 nor the decision of the Hon'ble Supreme Court in Godrej & Boyce Manufacturing Co. Ltd. supports the Revenue's case for sustaining the disallowance as originally computed by the Assessing Officer in the facts of the present case. 34. In view of the above discussion, Ground Nos. 3 and 4 raised by the Revenue are dismissed. Addition of Debenture Redemption Reserve (DRR) of Rs. 37.50 crores to book profit under section 115JB - (Ground No. 5 and 6) 35. By way of these grounds, the Revenue has assailed the action of the learned CIT(A) in deleting the addition of Rs. 37,50,00,000/- made by the Assessing Officer on account of Debenture Redemption Reserve (DRR) while computing book profit under section 115JB of the Act. 36. The Revenue has contended that the claim for reduction of DRR was not made in the original return of income and was raised only during assessment proceedings, and DRR represents a "reserve" and not an ascertained liability and, therefore, ought to have been added back to the net pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er of CIT(A) who accepted the submissions of the assessee. 39. The learned Departmental Representative supported the assessment order and reiterated that the claim was not made in the original return of income and was claimed in revised computation of income submitted during the course of assessment proceedings. 40. We have carefully considered the rival submissions, perused the orders of the lower authorities, and examined the notes forming part of the audited financial statements, particularly the disclosure under the head "Reserves and Surplus", as well as the revised computation of MAT liability placed on record. 41. From the notes to accounts, it is evident that the Debenture Redemption Reserve of Rs. 37.50 crores has been created during the year by way of transfer from the Statement of Profit and Loss. The accounting trail clearly shows that the assessee has first arrived at the profit for the year as per the Statement of Profit and Loss, and thereafter, out of such profits, an amount of Rs. 37.50 crores has been appropriated and transferred to Debenture Redemption Reserve. The said transfer is thus a post-profit appropriation and not a charge debited to the profit a....