2016 (4) TMI 1319 - AT - Income Tax

Disallowance made on account of excise duty - Held that - As decided in assessee s own case for Asst Year 2006-07 CIT(A) has not erred and justified in deleting the disallowances made on account of excise duty Disallowance made on account of shifting expenses - Held that - We find that the assessee has not constructed or set up any new factory in replacement of an existing one. It is a case where certain machineries have been shifted from an existing factory to another existing factory when the former had been closed down. In order to achieve a synergy of production line certain assets were dismantled and transferred to an existing plant. Therefore the shifting had not been done to increase the profit earning capacity of the assessee or an enduring benefit of the asset as such - such expenditure cannot be treated as capital expenditure and in these circumstances the ld.CIT(A) has rightly deleted the addition Disallowance made on account of software expenses - Held that - As decided for Asst Years 2003-04 & 2004-05 which had relied on the principle laid down by the by the Special Bench of Delhi Tribunal in the case of Amway India Enterprises 2008 (2) TMI 454 - ITAT DELHI-C held the use of any ERP package in the case of manufacturer like the assesese-Company is generally for coordinating and rationalizing its functions and business process in order to ensure that the business is carried on more efficiently and effectively and by applying the functional test the expenditure incurred on ERP package in our opinion cannot be treated as capital expenditure as it does not result in creation of any new asset or advantage of enduring nature in the capital field. We therefore direct the Assessing Officer to allow the deduction claimed by the assessee on account of expenditure incurred on upgradation of ERP and implementation thereof treating the same as revenue in nature Disallowance made on account of capital work in progress - Held that - We hold that the disallowance of interest has been made by the Learned AO merely based on surmise and conjecture. In view of the aforesaid facts and circumstances we find no infirmity in the order of the Learned CIT -A in deleting addition - Revenue appeal dismissed.

Summary

Issues Involved:
1. Deletion of disallowance made on account of excise duty amounting to ?2,94,52,808/-.
2. Deletion of disallowance made on account of shifting expenses amounting to ?62,00,000/-.
3. Deletion of disallowance made on account of software expenses amounting to ?1,36,32,019/-.
4. Deletion of disallowance made on account of capital work in progress amounting to ?89,20,627/-.

Issue-Wise Detailed Analysis:

1. Deletion of Disallowance on Account of Excise Duty:
The first issue is whether the Learned CIT(A) was justified in deleting the disallowance of ?2,94,52,808/- made on account of excise duty. The Assessing Officer (AO) observed that the excise duty was included in the valuation of inventory, and the total sum of ?30,70,83,637/- was included in the valuation of year-end closing stock of finished goods. The AO noted that the issue had not reached finality as the department's appeal for A.Y. 2004-05 was pending before the Calcutta High Court. The AO disallowed the excise duty on opening stock for A.Y. 2008-09, amounting to ?27,76,30,829/-, which was already disallowed in A.Y. 2007-08, to avoid double addition. The CIT(A) deleted the disallowance based on the tribunal's orders for previous years. The tribunal found that the issue was covered by the Calcutta High Court's decision in the assessee's favor for A.Y. 2006-07, and thus, dismissed the revenue's ground.

2. Deletion of Disallowance on Account of Shifting Expenses:
The second issue is whether the CIT(A) was justified in deleting the disallowance of ?62,00,000/- made on account of shifting expenses. The assessee had shifted machinery from one plant to another without adding new assets or enhancing the value or life of the assets. The AO treated the expenses as capital in nature, but the CIT(A) deleted the disallowance. The tribunal referred to the Special Bench of Kolkata Tribunal in JCIT vs ITC Limited and the Supreme Court's decision in Empire Jute Company Ltd vs CIT, which held that such expenditures are revenue in nature if they facilitate trading operations without adding new assets. The tribunal upheld the CIT(A)'s decision and dismissed the revenue's ground.

3. Deletion of Disallowance on Account of Software Expenses:
The third issue is whether the CIT(A) was justified in deleting the disallowance of ?1,36,32,019/- made on account of software expenses. The assessee incurred expenses on renewal of user licenses, routine maintenance, support services, AMC, routine upgradation, and leaseline charges for ERP/SAP software. The AO treated these expenses as capital in nature, but the CIT(A) deleted the disallowance. The tribunal referred to its previous orders and the Special Bench of Delhi Tribunal in Amway India Enterprises Ltd vs DCIT, which held that such expenses are revenue in nature as they do not create new assets or enduring benefits. The tribunal upheld the CIT(A)'s decision and dismissed the revenue's ground.

4. Deletion of Disallowance on Account of Capital Work in Progress:
The fourth issue is whether the CIT(A) was justified in deleting the disallowance of ?89,20,627/- made on account of capital work in progress. The AO allocated proportionate interest expenditure towards capital work in progress, assuming that the borrowings were for capital expenditure. The assessee argued that the borrowings were for working capital requirements and that no specific loans were taken for capital work in progress. The CIT(A) deleted the disallowance, and the tribunal found that the AO had not provided evidence of specific borrowings for capital work in progress. The tribunal held that the disallowance was based on surmise and conjecture, and upheld the CIT(A)'s decision, dismissing the revenue's ground.

Conclusion:
In conclusion, the tribunal dismissed the revenue's appeal on all grounds, upholding the CIT(A)'s deletions of disallowances on account of excise duty, shifting expenses, software expenses, and capital work in progress. The decisions were based on judicial precedents and the facts of the case.