TaxTMI 
TaxTMI 
2024 (8) TMI 1755
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....the learned Commissioner of Income Tax (Appeals) - 9 ['CIT(A)'/ AO, has on facts and in law: Excluding provision for doubtful debts in computing Book profits under section 115JB of the Income tax Act, 1961 ('the Act'): 1. erred in upholding the AO's action of adding back the provisions for doubtful debts amounting to Rs. 11,29,70,000 to the book profits under clause (c) to Explanation 1 of section 115JB of the Act without appreciating the facts of the Appellant. 1.1. erred in not following the principles of Apollo Tyres Ltd. vs Commissioner of Income Tax, Kochi (255 ITR 273) wherein the Hon'ble Supreme Court of India held that Minimum Alternative Taxes (MAT) under section 115JB of the Act is a self-contained code and the AO has no jurisdiction to alter the book profit except to the extent provided in the explanation to section 115JB of the Act; Disallowances of expenditures: 2. erred in upholding the AO's action of disallowing the expenses claimed under section 37(1) of the Act amounting to Rs. 12,77,839; 3. erred in upholding the disallowance of expenses amounting to Rs. 10,00,000 as determined by th....
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....fits of the business instead of considering the net amount of Rs. 63,66,53,406 credited to profit & loss account for the purpose of computing deduction under section 10A of the Act. Computing incorrect amount of interest under section 234D of the Act. 7. The Ld. AO erred in computing incorrect amount of interest under section 234D of the Act on the excess refund issued amounting to Rs. 39,11,505. - Initiating penalty proceedings 8. Initiation of penalty proceedings under section 271(1) (c) of the Act. Additional Grounds: Deduction in respect of education cess and secondary and higher secondary education cess paid under section 37(1) of the Act 9. The Appellant prays that the education cess and higher secondary education cess on income tax paid for the year under consideration ought to be allowed as a deduction under Section 37(1) of the Act while computing the total income. To restrict and refund the Dividend Distribution Tax ('DDT) deposited on dividend distributed / paid to the Non-resident shareholders in terms of applicable Double Taxation Avoidance Agreement ('DTAA') 10. The Ld.AO/ CIT....
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.... not adjudicated separately. 6. Ground No.1 of the assessee relates to addition of provision for doubtful debts amounting to Rs.11,29,70,000/- in computing the book profits u/s 115JB of the Act. The brief facts with regard to this ground are that, the Ld. AO made an addition on account of provision for doubtful debts amounting to Rs.11,29,70,000/- to the total income of the assessee and added the same in computing the book profits u/s 115JB of the Act. 6.1 Feeling aggrieved by the order passed by Ld. AO, the assessee filed appeal before the Ld. CIT(A) who dismissed the claim of the assessee as per his observation under para no. 4.1 of his order, which is reproduced as under: " I have considered the arguments of the assessee and have gone through the relevant provisions of the act and the Hon'ble supreme court decision cited above. As per the explanation 2, 115JB clause (c) any amount set aside to provisions made for meeting liabilities other than ascertained liability can be added back to the book profits, Therefore, as long as the provision is made on adhoc basis it becomes an unascertained liability and hence Apollo Tyres Ltd. decision will not be of any help t....
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..... He opposed to the admission of the additional evidence filed by the assessee. 6.4 We have heard the rival contentions and gone through the record in the light of submissions made by the either side. At the outset Ld. AR during the course of argument had submitted party wise details of provision made for doubtful debts without application for admission of additional evidence supported by any affidavit. The admission of these documents at this stage after lapse of 10 years is not justified and hence cannot be considered. Otherwise also the party wise list submitted by the assessee without any supporting evidence or reasons for making the provisions and without writing off their balances in the books of accounts, in our opinion can not be treated as an ascertained liability. As per the provisions contained under Explanation-1(c) to section 115JB of the Act, only provisions in the nature of ascertained liability can only be deducted for the purpose of calculation of book profit. In our opinion the provisions for doubtful debts amounting to Rs.11,29,70,000/-created by the assessee should not be deducted for the purpose of computation of the book profits u/s 115JB of the Act. Hen....
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....med as deduction. Hence we upheld the action of the Revenue Authority with regards to disallowance on accounts of various expenditure for Rs.12,77,839/- and Rs.11,51,001/- . As far as adhoc disallowance of Rs. 10,00,000/- is concerned, no details as well as any evidence/vouchers were produced before the revenue authorities in support of the expenditures claimed as deduction in case each of the expenditure were less than Rs. 1,00,000/-. Hence the Ld. AO made an adhoc disallowance of Rs. 10,00,000/- on this account. In our considered view once an expenditure have been decided to be allowed, without rejecting the books of accounts of the assessee, no disallowance can be made on adhoc basis. Hon'ble Supreme court in the case of Principal Commissioner of Income Tax v. R.G. Buildwell Engineers Ltd, 99 taxmann.com 284(2018), dismissed the SLP filed against the order of hon'ble High Court, wherein the hon'ble high court upheld the order of Tribunal setting aside adhoc disallowance of expenses claimed on ground that assessee's books of account were not rejected. Hence respectfully relying on the said findings of the hon'ble court in the case of Principal Commissioner of ....
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.... 7.1 On perusal of the details furnished it is seen that in case of many entries there is not even a mention of the name of the person to whom the cheque was issued. Further, it is also observed that in case of various entries only description written is "miscellaneous vendor" From these details it is clear that, as pointed by Assessing Officer, there can be no further claim by the creditors whose names are also not known. When the creditor itself is not identifiable there is no doubt that such unclaimed liability can be treated as remission of liability u/s. 41(1). Therefore, Assessing Officer is directed to add back the amounts which do not have any name or a description of "miscellaneous vendor." With regard to the entries where the names of the creditors are available assessee is directed to prove before the Assessing Officer with cogent evidence that the liability still exists. ln case the assessee is not able to prove the same to the satisfaction of the Assessing Officer. Assessing officer is directed to add back the relevant amount' Assessing Officer would delete the addition in respect of the amount pertaining to the parties who could be identified and in who....
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....ed the same as capital expenditure and held that the same is eligible for depreciation @ 25%. 9.1 Feeling aggrieved by the order passed by Ld. AO, the assessee filed appeal before the Ld. CIT(A), who also treated the expenditure as capital expenditure and held that the same is eligible for depreciation @ 60%, as per his observation under para no. 8 & 8.1 of his order, which is reproduced as under: " 8. Disallowance of computer software expenses by treating them as capital expenditure (Rs. 19,24,31,255/-); During the assessment proceedings it is observed that the assessee purchased certain software and claimed the expenditure as revenue. When questioned as to why the same should not be treated as capital expenditure, it was stated that the expenditure was incurred for running the business more efficiently and hence the same qualifies as revenue expenditure. Assessee in support relied on the decisions in the case of Asahi India Safety Glass (245 CTR 529), Southern Roadways Ltd., (183 Taxmann 234), IBM India Ltd (290 ITR 183). Assessing Officer, after considering the explanation of the assessee and after examining the nature of software purchased, held that the purchases a....
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....lant has incurred expenses of Rs.52.32 crores on software and maintenance services. Most of the software and maintenance services are made by the parent company and allocated to all group companies using such software licenses and services. These software expenses help in efficient running of the business and hence revenue in nature. with the ever-changing technology, the software requires regular up- gradation and maintenance (generally on annual basis). Hence, the expenditure cannot be considered to result in enduring benefit or capital in nature. 11. The detailed break up of the expenditure of Rs.19,24,31,255 incurred towards IT Equipment and Maintenance charges were furnished before the Ld. AO on 8 October 2013 and enclosed as Page 114 to 1 1 6 of the factual paper Book. 12. The Ld. AO has considered the payment for purchase of software and software maintenance as purchases in the nature of profit earning apparatus or enhancement of such apparatus because they are used in server virtualization and cloud computing and therefore, the purchases are capital in nature. The Ld. AO has treated the licenses as intangible assets, which are eligible for depreciation of ....
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....ouse utilisation and treated as part of block of assets should be allowed, despite the same being in the nature of royalty as per Explanation to section 9(1)(vi) of the Act and no TDS u/s.194 of the Act having been deducted, section 40(a)(i) of the Act. The High Court following the decision of earlier bench decided the question of law in favour of the Assessee. However, the dispute in Appellant's case is not on whether the payment made constituted royalty or not and whether TDS was applicable on the same. The dispute in Appellant's case is whether the software maintenance expenses paid were revenue in nature and not capital nature. 15. Accordingly, it is stated that the issue in case of Wipro Ltd. was whether the payment was for computer software amounted to royalty and whether TDS was applicable on the same. However, in the present facts of the Appellant, the issue is not whether the payment for obtaining licenses of software and software maintenance would be royalty or not and whether there would be any tax required to be deducted at source. The issue here is whether the expenditure incurred would be revenue or capital in nature. 16. Also it is submitted t....
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.... in such a situation are the functional tests and the test of enduring benefit. An advantage is to be considered as of enduring nature if the benefit accruing is not of a transient nature but is of such durability as to justify it being treated as a capital asset. It is, thus, necessary that in order to treat any expenditure as capital expenditure, the same should result in accrual of advantage of enduring nature and such benefit should accrue to the assessee in the capital field. What exactly is meant by accrual of benefit in the capital field is that the said benefit should form part of the profit- making apparatus of the assessee's business. The decision of Special Bench has been confirmed by the Delhi High Court. 19. Further, Appellant also wishes to place reliance on the following decisions wherein it is held that software expenses or software and IT maintenance expenses are allowable as revenue expenditure: ● Asashi India Safety Glass Limited (ITA Nos. 1110 & 1111/2006) dated 04 November 2011 (Delhi HC) (Refer page 662 to 669 of Legal Paper Book) ● ITC Infotech India Ltd. (I.T.A No.4851Ko112019) dated 23 October 2019 (Kolkata Tribuna....
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....rs and has an enduring advantage or if the cost incurred for the initial purchase or development of the software or if expenditures that result in substantial upgrades or enhancements that significantly increase the software's efficiency or extend its useful life or if the entity owns the software outright and can use it for an extended period. Hence, the classification is primarily based on the nature of the benefit derived from the software and the duration over which it is expected to provide those benefits, which require the verification of the vouchers along with the books of accounts. Therefore we remand the matter back to the file of the Ld. AO to verify the each & every vouchers and decide as per law whether the expenditure are in the nature of revenue expenditure or capital expenditure in accordance with our observation made as above after providing an opportunity of being heard to the assessee. Accordingly, we allow this ground of the assessee for statistical purpose. 9.5 Hence the Ground No.5 of the assessee is allowed for statistical purpose. 10. Ground No.6 of the assessee relates to excluding the gross amount of foreign exchange gain on hedging with forward ....
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.... 10B in respect of its entire income including profits derived from forward contracts - Whether since forward contracts had been taken in respect of 46 per cent of export turnover and it was not an isolated transaction. In view of Explanation 2 to section 28, profit from forward 6 contracts was to be assessed as profit from speculation business - Held, yes - Whether since for purpose of computing deduction u/s. 10B, speculation business cannot be considered as business of undertaking. Assessing Officer was justified in rejecting assessee's claim for deduction in respect of profits derived from forward contracts - Held, yes." 12.2 As the exchange gain in the present case is also from forward contracts or marked to market difference, the gain in basically in the form of speculation / notional gain and hence is not eligible for deduction u/s. 10A. Coming to the other argument of the assessee that the Assessing Officer ignored the net result of foreign exchange gain by not reducing the losses incurred it is seen that the other gain / losses are not hedging losses but are related to foreign exchange realisation loss / gain, arising out of export proceeds as against the hedg....
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....ld that the assessee had loss in realisation of export proceeds due to foreign exchange fluctuation and the gain is due to hedging operations to cover the risk of variations in forex. Since these two items are on different footing, the Hon'ble CIT(A) has held that the Ld. AO has rightly treated the exchange loss in realisation of export proceeds as part of the export proceeds whereas the hedging gain would not form part of the export turnover. The Hon'ble CIT(A) has held that the hedging gains are basically sort of speculation gains/notional gains which are not part and parcel of export activity. 24. At the outset, it is submitted, that the forex gain entered into by Appellant on forward contract is not speculative in nature and are closely linked to the Appellant's export of services to its AEs. The said fact has been affirmed by Hon'ble Jurisdictional Tribunal in Appellant's own case for AY 2012-13 (Refer page 456 to 467 of Factual Paper Book) and AY 2014-15 (Refer page 434 to 455 of Factual Paper Book), wherein following the decision of Hon'ble Supreme Court in case of Woodward Governor India Pvt Ltd, ITAT has allowed hedging loss as deduction fr....
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....be eligible for deduction under section 10A of the Act. There must be a relation between the item and the business to be eligible for deduction u/s 10A. 31. Accordingly, Section 10A specifically provides a formula for computation of profits derived from export of articles or things or computer software' and section 10AA(7) of the Act. uses the expression "profits of the business of the undertaking. being the unit' which is unlike the deductions specified in sections 80I, 80IA, 80IB, etc which do not provide for a specific formula to arrive at the qualifying profits i.e. 'profits and gains derived by/from an undertaking'. 32. We also wish to submit that the term "profits of the business of the undertaking" is far wider in its scope than 'profits and gains derived by/from an undertaking'. 33. In this regard, the Appellant wishes to place reliance on the decision of the Full Bench decision of Hon'ble Karnataka High Court in case of Hewlett Packard Global Soft Ltd. [2018] 403 ITR 453 (Karnataka) (FB) wherein the Hon'ble High Court has held that the word "derived by an undertaking of the business" in Section 10A and 10B are far ....
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.... for computing the profit derived by the undertaking from export. Thus, the provisions of sub-section (4) of section 10B of the Act mandate that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of export turnover by the total turnover. Thus, even though sub-section (1) of section 10B refers to profits and gains as are derived by a 100% EOU, the manner of determining such eligible profits has been statutorily defined in sub-section (4) of that section. Both sub-sections (1) and (4) are to be read together while computing the eligible deduction u/s 10B of the Act. We cannot ignore sub- section (4) of section 10B which provides specific formula for computing the profits derived by the undertaking from export. As per the formula so laid down, the entire profits of the business are to be determined which are further multiplied by the ratio of export turnover to the total turnover of the business. In case of Liberty India (supra), the Hon'ble Supreme Court has dealt with the provisions of section 80-IA of the Act wherein no formula was laid down for computing the profits derived by the undertaking which has spe....
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....fficer as business income. The CBDT Circular No. 564 dated 5th July, 1990 reported in 184 ITR (St.) 137 explained the scope and ambit of section 80HHC and the mode of determination of profits derived by an assessee from the export of goods. I.T.A.T., Special Bench in the case of lnternational Research Park Laboratories Ltd. (supra), after following the aforesaid Circular, held that straight jacket formula given in sub-section (3) has to be followed to determine the eligible deduction. The Hon'ble Supreme Court in the case of P.R. Prabhakar v. CIT [2006] 284 ITR 584/154 Taxman 503 had approved the principle laid down in the Special Bench decision in lnternational Research Park Laboratories Ltd. (supra). ln the assessee's own case the I.T.A.T. in the preceding years, after considering the decision in the case of Liberty lndia (supra) held that provisions of section 108 are different from the provisions of section 80-IA wherein no formula has been laid down for computing the eligible business profit. 80. In view of the above discussion, question No.2 is answered in affirmative and in favour of the assessee. Accordingly, the assessee is eligible for claim of deduction ....
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....ing effect to the appellate order. Accordingly, the ground no. 7 of the assessee is allowed for statistical purposes. 11.1 Hence the ground no. 7 of the assessee is allowed for statistical purposes. 12. Ground No.10 & 11 of the assessee relates to refund of excess Dividend Distribution Tax (" DDT"). This ground has been raised by the assessee as an additional ground. The fact related to this ground are that the assessee has paid dividend of Rs. 153.61 crore to its UK based non resident shareholders and paid the DDT to the tune of Rs. 26.10 crores on the same. The Ld. AR submitted that the assessee has paid DDT u/s 115O of the Act, which is in excess of the rate prescribed under DTAA. The Ld. AR further submitted that the coordinate bench of ITAT in assessee's own case in ITA no. 1249/HYD/2017 dated 16/04/2021 held in favour of the assessee. Hence relying on the decision of the ITAT, the Ld. AR prayed before the bench to restore the matter to file of the Ld. AO for refund of excess DDT paid by the assessee. 12.1 Per contra, the Ld. DR opposed the submission of the Ld. AR and opposed to grant of any refund to the assessee. 12.2 We have heard the rival contentions and ....
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....fore should not be allowed as expenditure in computing the income under the head profit and gains of business. In support of his argument the Ld. DR relied on the decision of Delhi Tribunal in the case of Ranbaxy laboratories Ltd. Vs. ACIT (124 TTJ 771), in which the ITAT held that, "issue of shares at below market price results into short receipt of share premium. Accordingly, it was held that since it is not an actual loss for which no liability is incurred, the same is not allowable under the provisions of the Act." He also submitted that subsequently Mumbai Tribunal in the case of M/s. VIP Industries Ltd. (2010-TIOL-654) and Hyderabad Tribunal in the case of Medha Servo Drivers (P) Ltd. Vs. ACIT (IT.A 1099/ Hyd/2006, A.Y. 2003-04, I.T.A. 1114/Hyd/2008, A.Y. 2004-05, ITA 749/Hyd/2006, A.Y. 2003-04) followed the decision of Delhi Tribunal and held that the difference between the market price and grant price, being contingent in nature and a notional loss, is therefore not allowable. Hence relying on all the case laws cited above, Ld. DR prayed before the bench to disallow such expenditure and upheld the order of the Ld. AO. 17. Per Contra the Ld. AR relying on the decision of ....