2015 (8) TMI 557 - AT - Income Tax

Disallowance of software expenditure - revenue v/s capital expenditure - Held that - In view of the ratio laid down by the Hon ble Bombay High Court in CIT Vs. Raychem RPG Ltd. (2011 (7) TMI 953 - Bombay High Court), where the expenditure has been incurred for facilitating the business and which does not form part of profit making apparatus, then the software expenditure is to be allowed as revenue expenditure. The assessee was the acquisition of software programmes which in turn, were utilized to conduct day-to-day business activities more efficiently. Further, the expenditure incurred on upgradation of the system i.e. conversion from R3 software to MySAP license was required at regular intervals and such upgradation was to gain operational efficiency in the areas of the sales, distribution and production planning. Since the expenditure had been incurred to facilitate efficiency in the business resulting in more profitability, the said expenditure is to be allowed as revenue expenditure - Decided in favour of assessee. Disallowance of deduction claimed under section 35D - Held that - Undisputedly the expenditure was incurred by the assessee for increasing share capital thus it is capital in nature. Thus, the same cannot be considered for computing deduction u/s 35D of the Act. See Brooke Bond India Ltd. Vs. CIT (1997 (2) TMI 11 - SUPREME Court) and Punjab State Industrial Development Corporation Ltd. Vs. CIT (1996 (12) TMI 6 - SUPREME Court ).- Decided against assessee Disallowance made out of various heads of expenditure - Held that - The first expenditure considered by the Assessing Officer was the staff welfare expenses which included canteen expenses of ₹ 6,21,189/- and staff welfare expenses of ₹ 8,49,177/-. The said expenditures included expenses on lunch, tea, refreshments, picnic and gift coupons, etc. and out of the same, 5% was disallowed for personal/non business purpose. We find no merit in the said plea of the authorities below, where the expenditure has been incurred both on canteen and staff welfare expenses. Accordingly, we direct the Assessing Officer to delete the addition of ₹ 73,518/-. Expenditure was on account of entertainment expenditure on gifts and on general expenses AO had disallowed 5% of the said expenditure for non-business purpose and entertainment of personal guests. The assessee is a limited company and there is no merit in the said disallowance having been made without coming to the conclusion as to a particular expenditure being incurred for non-business purpose. We find no merit in the adhoc disallowance made at 5% under the said head; hence, we direct the Assessing Officer to delete addition Expenditure on lease rent on vehicles, on petrol vehicle maintenance and for vehicle taxes and registration. Out of these amounts, lump sum disallowance of ₹ 1,00,000/- was made being for personal in nature. The case of the assessee being a limited company, there is no warrant for any personal expenses and hence, expenditure of ₹ 1,00,000/- is directed to be allowed. Another set of expenses were the Guest house expenses- and telephone expenses following the earlier line of reasoning that in the case of a company, there is no merit in disallowance on account of personal use and hence, we direct the Assessing Officer to delete the addition.Similarly, ₹ 50,000/- was disallowed out of business promotion expenses which was not warranted in the absence of particular expenditure having been pointed out by the authorities below. No disallowance on account of personal usage can be made in the hands of the assessee. Rejection of claim of deduction of premium paid towards lease of land - Held that - In the facts of the case before us also, the assessee had made lump sum payment to MIDC for the acquisition of leasehold rights in land and such payment made by the assessee was for holding the land for a period of 95 years and hence, was of enduring nature. Consequently, the said expenditure claimed by the assessee as revenue in nature is not allowable in the hands of the assessee as deduction. Disallowance of amortization of leasehold premium over the period of lease - depreciation on such leasehold rights - Held that - Pune Bench of the Tribunal in M/s. Drilbits International P. Ltd. Vs. DCIT 2011 (8) TMI 1083 - ITAT PUNE relating to assessment year 2006-07, vide order dated 23.08.2011 had considered the issue of allowability of depreciation on leasehold rights of land and had held that no such depreciation is allowable to the assessee on the premise that a person holding freehold land would not be allowed depreciation on such land and where the person holds leasehold rights in the land if depreciation is allowed, then it would place the person holding freehold land to be at dis-advantage and the same is not justifiable. The Tribunal also held that the leasehold rights in the land were not intangible assets. - Decided against assessee. Expenditure incurred towards interest subsidy on housing loans to the employees of the assessee - CIT(A) allowed as business expenditure under section 37(1) - Held that - The assessee during the year under consideration had made provision for interest on housing loans to the employees totaling ₹ 25,90,959/-. The said expenditure was incurred on account of reimbursement of interest cost on housing loans obtained by the employees. Where the said benefit forms part of employee compensation package and is provided as per the Human Resource Policy adopted by the assessee company vis- -vis of its employees, then such expenditure incurred by the assessee is wholly and exclusively incurred for the purpose of carrying on the business. The expenditure of providing benefit to the employees had been considered by the assessee as part of the salary cost of the respective employee and the perquisites value of such benefit being allowed to the employees had been worked out as per Rule 3 of the Rules, the said expenditure is thus, recognized by the provisions of the Act as an allowable expenditure. Where the law itself envisages the provision of such benefit to the employees, which in turn, is considered by the assessee as part of its salary cost, the expenditure having been incurred wholly and exclusively for the purpose of carrying on the business, is duly allowable as business expenditure under section 37(1) of the Act. Upholding the order of CIT(A), we dismiss the ground of appeal No.1 raised by the Revenue - Decided in favour of assessee. Addition made on account of expenditure incurred on set up of SAP Implementation - CIT(A) delted addition - Held that - the assessee had made investment in the ERP package and following the ratio laid down in CIT Vs. Bhor Industries (2003 (2) TMI 20 - BOMBAY High Court) we hold that the assessee is entitled to the claim of deduction under section 37(1) of the Act. The Assessing Officer while deciding the issue had allowed 1/3rd on cost as being relatable to the year and the balance sum of ₹ 29,33,577/- was disallowed. The assessee had only booked ₹ 1,30,271/- in Profit Loss Account as allowable expenditure but in the computation of income had claimed the entire expenditure of ₹ 46,89,760/- to be allowed under section 37(1) of the Act. In contrast to which the Assessing Officer had allowed 1/3rd of the total expenditure. In other words, the plea of the assessee that the expenditure incurred for the purpose of business of the assessee has been partly accepted by the Assessing Officer. However, balance of the expenditure has not been allowed in the hands of the assessee being deferred revenue expenses, which plea is not to be applied in view of the various decisions of in Kedarnath Jute Mfg. Co. Ltd. Vs. CIT (1971 (8) TMI 10 - SUPREME Court) Upholding the order of CIT(A), we dismiss the ground of appeal No.2 raised by the Revenue. Working of disallowance of notional interest on interest free loans advanced to the subsidiary companies - Held that - The CIT(A) noted the explanation of the assessee that assessee had advanced the said loan of ₹ 3.32 crores on 30.03.2001 and no interest was received for two days during current financial year since 30.03.2001 was the Friday and the funds became available to the subsidiary company only on 02.04.2001 which was Monday. The assessee was charging interest on the said advance from the next financial year onwards. The CIT(A) in view of the facts and circumstances, held that no interest was chargeable in the year, since the funds became available to the subsidiary company only on 02.04.2001. We find merit in the claim of the assessee in this regard. Admittedly, the loan was given on 30.03.2001 by the assessee to its subsidiary company which was a Friday. The loan became available to the subsidiary company on 02.04.2001 i.e. on Monday after clearance from the Bank and interest on the said loan was charged from the next financial year. In the facts and circumstances of the case, we find no merit in the order of Assessing Officer in charging notional interest on the said advances made, which became available to the subsidiary company only from the next financial year. Upholding the order of CIT(A), we dismiss the ground of appeal No.3 raised by the Revenue Disallowance of provision for expenditure in respect of benefit under Bhavishya Kalyan Yojanano (BKY) as an employee welfare scheme - Held that - On the perusal of the order of Tribunal in assessee s own case for the earlier years, it is apparent that the Tribunal has come to a finding that the liability of the assessee has not crystallized in the year under consideration, since the said liability would only arise on the happening of certain events which would happen in the future, hence the liability is a contingent liability. The issue of the liability having been worked out on the basis of AS-15 or scientific method is different aspect of the issue, but the first point to be considered is the nature of liability i.e. whether it had arisen in the year under consideration or it would arise on the happening of certain event in future. The finding of the Tribunal in the case of assessee was that the liability to pay under BKY Scheme or Mediclaim Insurance Scheme would only arise on the happening of certain events in future and consequently, the Tribunal came to a finding that the liability having not been crystallized during the year under consideration was a contingent liability and was not allowable in the hands of the assessee. We are in conformity with the finding of Tribunal in this regard and applying the same, we hold that assessee is not entitled to the claim of allowance of provision for expenditure under BKY Scheme of ₹ 54,16,204/- and also the provision made for expenditure in respect of Mediclaim Insurance Coverage Scheme amounting to ₹ 19,53,311/-. However, as held by the Tribunal, the assessee is entitled to claim of expenditure in respect of benefit payable to Ex-employees, who have retired fulfill the conditions of the Scheme.. Accordingly, we direct the Assessing Officer to determine the deduction on account of BKY Scheme and Medical Insurance Scheme, in view thereof, the grounds of appeal aised by the assessee are thus, partly allowed by way of remand. Exclusion of export turnover pertaining to the Software Technology Unit from the eligible export turnover for the purpose of computing the deduction under section 80HHE - Held that - 80HHC cannot be denied simply because the income of the industrial undertaking is exempt under sec. 10A. But even if two reasonable constructions of the relevant provisions are possible, that construction which favours the assessee, must be adopted - CIT v. Vegetable Products Ltd. 1973 (1) TMI 1 - SUPREME Court .We direct the Assessing Officer to include the export turnover of the EOU unit while computing the deduction under section 80HHE of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of software expenditure.
2. Disallowance of deduction claimed under Section 35D.
3. Ad-hoc disallowance of various business expenditures.
4. Rejection of claim of deduction of lease premium.
5. Allowability of interest subsidy on housing loans to employees.
6. Expenditure on SAP Implementation.
7. Disallowance of notional interest on interest-free loans to subsidiary.
8. Disallowance of provision for BKY and Mediclaim Insurance Coverage.
9. Exclusion of export turnover for computing deduction under Section 80HHE.

Detailed Analysis:

1. Disallowance of Software Expenditure:
The assessee incurred software expenses totaling Rs. 37,81,284/-, including Windchill and Pro-engineer software, SAP upgradation, and others. The Assessing Officer (AO) treated these as capital expenditures, allowing depreciation at 25%. The CIT(A) upheld this view, except for annual subscription charges. The Tribunal, referencing CIT Vs. Raychem RPG Ltd., held that software facilitating business operations without forming part of the profit-making apparatus should be treated as revenue expenditure. Consequently, the Tribunal allowed the expenditure as revenue expenditure.

2. Disallowance of Deduction Claimed Under Section 35D:
The assessee claimed a deduction of Rs. 3,08,000/- under Section 35D for expenses related to increasing authorized share capital. The AO disallowed this, and the CIT(A) upheld the decision, referencing Supreme Court judgments in Brooke Bond India Ltd. and Punjab State Industrial Development Corporation Ltd. The Tribunal concurred, dismissing the assessee's appeal.

3. Ad-hoc Disallowance of Various Business Expenditures:
The AO made ad-hoc disallowances on several business expenditures, including entertainment, lease rent, guest house, telephone, staff welfare, and business promotion expenses, citing personal/non-business use. The CIT(A) upheld these disallowances. The Tribunal, noting the company's nature and lack of specific evidence of personal use, directed the AO to delete these ad-hoc disallowances.

4. Rejection of Claim of Deduction of Lease Premium:
The assessee claimed a deduction of Rs. 3,91,80,000/- for lease premium paid to MIDC, not claimed in the original return. The AO and CIT(A) rejected this claim based on Goetz India Ltd. The Tribunal, referencing CIT Vs. Pruthvi Brokers & Shareholders, held that appellate authorities could consider such claims and proceeded to decide the issue. The Tribunal, following JCIT Vs. Mukund Ltd., held that the lease premium was capital expenditure and not allowable as revenue expenditure. Depreciation on leasehold rights was also disallowed, following Drilbits International P. Ltd. Vs. DCIT.

5. Allowability of Interest Subsidy on Housing Loans to Employees:
The AO disallowed Rs. 25,90,959/- as interest subsidy, not considering it for business purposes. The CIT(A) allowed it, referencing Supreme Court judgments in Walchand & Co. Pvt. Ltd. and Sasoon J David & Co. (P) Ltd. The Tribunal upheld the CIT(A)'s decision, recognizing it as part of the salary cost and allowable under Section 37(1).

6. Expenditure on SAP Implementation:
The assessee incurred Rs. 46,89,760/- for SAP licenses and consultant salaries, deferred over 36 months in books but claimed fully in the return. The AO allowed only 1/3rd, treating it as deferred revenue expenditure. The CIT(A) allowed the full amount as revenue expenditure, referencing CIT Vs. Raychem RPG Ltd. The Tribunal upheld this, allowing the full expenditure under Section 37(1).

7. Disallowance of Notional Interest on Interest-Free Loans to Subsidiary:
The AO disallowed notional interest on Rs. 3,32,21,920/- advanced to Tata Technologies, USA. The CIT(A) noted the loan was given on 30.03.2001 and interest charged from the next financial year, thus no interest was chargeable for the current year. The Tribunal upheld the CIT(A)'s decision.

8. Disallowance of Provision for BKY and Mediclaim Insurance Coverage:
The AO disallowed provisions for BKY (Rs. 54,16,204/-) and Mediclaim (Rs. 19,53,311/-) as contingent liabilities. The CIT(A) upheld this, referencing the Tribunal's earlier decision in the assessee's case. The Tribunal, referencing Rotork Controls India (P) Ltd. Vs. CIT, upheld the disallowance but allowed deduction for benefits payable to ex-employees under the schemes.

9. Exclusion of Export Turnover for Computing Deduction Under Section 80HHE:
The AO excluded export turnover of the STP unit for computing deduction under Section 80HHE, which the CIT(A) upheld. The Tribunal, referencing Serum Institute of India Ltd. Vs. ACIT, directed the inclusion of the export turnover of the EOU unit while computing the deduction under Section 80HHE.

Conclusion:
The Tribunal allowed the appeals partly in favor of the assessee, granting relief on software expenditure, ad-hoc disallowances, SAP implementation costs, and inclusion of export turnover for Section 80HHE. It upheld disallowances on lease premium, Section 35D deduction, and provisions for BKY and Mediclaim. The Revenue's appeal was dismissed.