2012 (6) TMI 513 - AT - Income Tax

Valuation of Closing Stock - adjustment of excise duty and VAT - addition - assessee contended aforesaid inclusion to be revenue-neutral - Held that - It is not appropriate to include the closing Modvat in the figure of closing stock without modifying the figures of purchases, sales and opening stock. Hence, keeping in view that the assessee is following consistent method of accounting and Tribunal in assessee s own case for AY 2005-06 and 2006-07 has decided in favor of assessee. Hence, CIT(A) was fully justified in deleting the addition. Deduction u/s 80IB - dis-allowance in respect of interest income on ground that same cannot be said to have been derived from industrial undertaking - interest income assessed under the head income from other sources - Held that - Since the interest income has been assessed under the head income from other sources, therefore, the assessee is entitled to the deductions u/ 57(iii). Software expenses, Website expenses - Revenue or Capital expenditure - Held that - Expenditure incurred on software and website are allowable as revenue expenditure. Loss incurred on discontinuation of assignment for installation of software system - business loss or capital loss - Held that - Since aforesaid expenditure has been incurred for installation of software system (ERP) which was discontinued due to commercial expediency as going on ahead with such system may not be in line with the company s requirement, therefore, the loss incurred by the assessee is allowable as a business loss. Export incentives - Revenue contended the same to be shown as separate income rather reducing it from cost of purchases of materials - Held that - CIT(A) has rightly observed that consumption of raw material and packing has been increased by the provisions of export incentives of Rs.(13,142,053). Thus, deduction u/s 80IB stands reduced accordingly and AO has erred in treating the aforesaid expenses as income. In absence of any contrary finding, order of CIT(A) is upheld. Foreign exchange rate difference loss on account of conversion of CC limit to FCNRB (DL) working capital loan - business loss or capital loss - Held that - Foreign currency exchange loss relates to the working capital loan and thus, allowable as business loss. Dis-allowance deleted.

Issues Involved:
1. Adjustment of excise duty and VAT under Section 145A.
2. Disallowance of deduction under Section 80IB in respect of interest income.
3. Disallowance of netting of interest.
4. Disallowance of software expenses, business loss on discontinuation of assignment for installation of software system, and website expenses.
5. Relief allowed by CIT(A) in allowing export incentives.
6. Deletion of disallowance of foreign currency loss.

Issue-wise Detailed Analysis:

1. Adjustment of Excise Duty and VAT under Section 145A:
The AO observed that the assessee did not include excise duty in the valuation of closing stock and added various amounts to the total income. The CIT(A) held that resultant changes must be added to the assessee's income, and VAT is payable at the time of sales, not on closing stock. The Tribunal found that the AO's addition was not justified as the assessee followed a consistent method of accounting, and there was no change in the accounting system. The Tribunal upheld the deletion of the addition of Rs. 1,13,19,681/- and remanded the matter of other additions to the AO for verification.

2. Disallowance of Deduction under Section 80IB in Respect of Interest Income:
The AO disallowed the deduction claimed by the assessee under Section 80IB for interest income, assessing it under 'income from other sources.' The CIT(A) upheld this decision, referring to the Supreme Court's decision in Liberty India. The Tribunal agreed that the assessee is not entitled to deduction under Section 80IB for interest income but allowed the deduction of interest paid on borrowed funds under Section 57(iii).

3. Disallowance of Netting of Interest:
The CIT(A) did not adjudicate on the issue of netting of interest. The Tribunal remanded the matter to the CIT(A) for fresh adjudication in light of the Supreme Court decision in ACG Associated Capsules Pvt. Ltd.

4. Disallowance of Software Expenses, Business Loss on Discontinuation of Assignment for Installation of Software System, and Website Expenses:
The AO treated software expenses as capital expenditure. The Tribunal, following various judicial precedents, held that software expenses are revenue in nature and allowable as business expenditure. The Tribunal also allowed the business loss of Rs. 5,00,000/- incurred due to discontinuation of the ERP system installation as a business loss. Website expenses were also allowed as revenue expenditure.

5. Relief Allowed by CIT(A) in Allowing Export Incentives:
The AO treated export incentives as separate income, while the CIT(A) held that these were correctly reduced from raw material costs. The Tribunal upheld the CIT(A)'s order, finding no contrary material from the Revenue.

6. Deletion of Disallowance of Foreign Currency Loss:
The AO disallowed the foreign exchange loss, considering it as capital in nature. The CIT(A) allowed the loss, stating it was related to working capital. The Tribunal upheld the CIT(A)'s decision, relying on Supreme Court judgments in Woodward Governor India P. Ltd. and ONGC Ltd., which allow such losses as revenue expenditure.

Conclusion:
The assessee's appeal was partly allowed for statistical purposes, and the Revenue's appeal was dismissed. The Tribunal's decision was based on consistent accounting methods, judicial precedents, and proper verification of facts and figures.

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