2018 (10) TMI 281 - AT - Income Tax

Provision for impairment of stocks - method of valuation of stock - inventory consisted of old/used stock which was categorized as defective, but, repairable stock and demo stock. These stocks were valued at their net realizable value. - Held that - The immediately preceding assessment year i.e., 2004-05 Tribunal approved the assessee s method of valuation of the old/used stock and stock meant for demo purpose. As noticed that the assessee was following this method of valuing closing stock consistently. This led to the vindication of the assessee s stand. The Revenue assailed this order before the Hon ble Delhi High Court. The Hon ble jurisdictional High Court in its judgment in CIT vs. Hughes Communication India Ltd. 2011 (12) TMI 710 - ITAT DELHI ), has approved the view taken by the Tribunal on this issue. Since the facts and circumstances of the instant ground are mutatis mutandis similar to those of the immediately preceding year, respectfully following the precedent, we order to delete the addition of ₹ 6,13,176/- sustained in the first appeal. The alternate prayer made for increasing the value of the opening stock of the relevant assessment year by ₹ 90,35,298/- is dismissed as similar ground of the assessee for preceding year, reducing the value of closing stock to this extent, has been accepted by the Tribunal. Addition being credit balance of sundry creditors which were static for the last three years or more - Held that - AR supplied a chart showing that a sum of ₹ 2,32,743/- payable to its vendor, namely, Noisecon, was paid on 17.06.2008 and the remaining amounts were written back as its income in the accounts for the year ending 31.03.2009. On a pertinent query, the details of such write back in the accounts of the next year could not be pointed out by the ld. AR to demonstrate that such a sum was actually offered for taxation in the year of write back. We, therefore, direct the AO to verify the assessee s claim in respect of writing back of the amount in a later year and ensure that such an amount gets offered to taxation in terms of Explanation to section 41(1) of the Act. Disallowance of Regulatory expenses - revenue or capital expenditure - Held that - On going through the above Memorandum, we fail to appreciate as to how such a payment is an annual charge. Prima facie, it appears to be a onetime fee, payable by the assessee, in respect of each site. The ld. AR was required to draw our attention towards some further literature or material to indicate the nature of payment, which he could not readily point out. Thus ends of justice would meet adequately if the impugned order on this score is set aside and the matter is remitted to the AO. Disallowance of Software expenses - nature of expenses - revenue or capital - Held that - Hon ble Delhi High Court in CIT vs. Amway India Enterprises 2011 (11) TMI 4 - DELHI HIGH COURT , has held that expenditure incurred on purchase of application software is allowable as revenue expenditure. Similar view has been taken in CIT vs. Asahi India Safety Glass Ltd. 2011 (11) TMI 2 - DELHI HIGH COURT by holding that the expenditure incurred by the assessee on software is allowable as revenue expenditure, more so, when it is towards purchase of an application software. When we consider the detail of software expenses incurred by the assessee, it becomes manifest that the same is liable to be treated as a revenue expenditure and not a capital expenditure. Addition on account of licence fee which was held by the AO to be capital in nature - Held that - CIT(A) has, in fact, restored the matter to the file of AO by giving certain directions. Technically, he has no power to remit the matter to the AO for a fresh decision. However, on merits, we find that the direction given by him is in substance germane to the issue and decisive in appreciating the deductibility or otherwise of the amount. We, therefore, set aside the impugned order in so far as the restoration of the matter is concerned. However, adopting the direction, we require the AO to verify the assessee s claim in the hue of the portion extracted above from the impugned order. Disallowance of WPC charges paid to DOT for obtaining the frequency/spectrum from Wireless Planning Commission in terms of licence agreement with DOT - Held that - it is noticed that the assessee made a claim before the AO that a sum of ₹ 1.33 crore and odd was paid as royalty to WPC for obtaining frequency/spectrum. The ld. AR stated that the payment was a recurring cost payable on the basis of use on year to year basis. On a pertinent query, the precise nature and necessary details of such payment could not be provided. In the given circumstances, we set aside the impugned order and remit the matter to the file of the AO for examining the nature of such payment. Disallowing deduction in respect of foreign exchange loss arising due to restatement of outstanding liabilities - Held that - The Hon ble Supreme Court in CIT vs. Woodward Governor India (P) Ltd. . 2009 (4) TMI 4 - SUPREME COURT has held that the loss suffered by the assessee in respect of revenue liability on account of exchange difference as on the date of balance sheet is an item of expenditure liable for deduction u/s 37(1) in the year of accrual. In this view of the matter, the direction given by the ld. CIT(A) to the AO for allowing deduction if the restatement of liability is on revenue account and not allowing the same, if it is on capital account, does not warrant any interference. Although, technically, the direction given by the CIT(A) is not possible in view of his limit on the power to restore an issue to the AO, but, we adopt the same as our direction to the AO for consideration and decision on the issue raised in these grounds. Addition holding that the stock was not reconciled - Held that - As observed from the annual report of the assessee for the year under consideration that there is no difference in the value of last year s closing stock becoming as opening stock for this year. The difference is only in certain quantities. The auditors have mentioned that It is not practicable to furnish quantitative information in view of the considerable number of items diverse in size and nature. Such a note has been given while giving the figures of purchases, turnover and stocks. In view of the note of the auditor, it is clear that quantitative information was neither complete nor precise. As, admittedly, there is no difference in the value of last year s closing stock becoming opening stock of this year, there can be no rationale in making any addition on account of difference in quantities because of the admitted position stated by the auditor that there are considerable number of items diverse in size and nature. We, therefore, order to delete the addition

Summary

Issues Involved:
1. Disallowance of 'Provision for impairment of stocks'
2. Addition of static credit balance of sundry creditors
3. Disallowance of 'Regulatory expenses'
4. Disallowance of 'Software expenses'
5. Addition on account of license fee treated as capital expenditure
6. Disallowance of WPC charges
7. Addition due to foreign exchange loss
8. Addition due to unreconciled stock

Issue-wise Detailed Analysis:

1. Disallowance of 'Provision for impairment of stocks':
The assessee contested the disallowance of ?6,13,176/- for impairment of stocks. The Tribunal referenced a previous ruling for the year 2004-05, where the method of inventory valuation by the assessee was accepted. The High Court had upheld this view. Given the similarity in facts, the Tribunal deleted the addition of ?6,13,176/-.

2. Addition of static credit balance of sundry creditors:
The assessee challenged the addition of ?28,36,293/- for static sundry creditors. The Tribunal directed the Assessing Officer (AO) to verify if the amount was written back in subsequent years and ensure it was taxed accordingly, following Section 41(1) of the Income-tax Act.

3. Disallowance of 'Regulatory expenses':
The assessee claimed ?39.58 lac as regulatory expenses, which the AO treated as capital expenditure. The Tribunal remitted the matter to the AO to determine if the payment was an annual charge or a one-time fee. If annual, it should be deductible; if a one-time fee, it should be capitalized.

4. Disallowance of 'Software expenses':
The AO capitalized ?31,25,979/- out of ?43,25,979/- claimed as software expenses. The Tribunal cited Delhi High Court rulings that application software expenses are revenue in nature and overturned the AO's decision, allowing the expenses as deductible.

5. Addition on account of license fee treated as capital expenditure:
The AO treated a license fee expense of ?5,72,27,706/- as capital expenditure. The CIT(A) directed the AO to verify if the payment was under the 1994 or 1999 agreement and whether it included penalties or interest. The Tribunal upheld the need for verification but set aside the CIT(A)'s order to remit the matter to the AO.

6. Disallowance of WPC charges:
The AO disallowed ?1,00,37,008/- out of ?1,33,82,678/- paid to DOT for WPC charges, treating it as capital expenditure. The Tribunal remitted the matter to the AO to verify if the payment was recurring and deductible or for acquiring a right and hence capitalizable.

7. Addition due to foreign exchange loss:
The AO disallowed ?39,53,944/- claimed as foreign exchange loss, treating it as notional. The Tribunal referenced the Supreme Court's ruling in Woodward Governor India (P) Ltd., which allows such losses as deductible if they are on revenue account. The Tribunal directed the AO to verify and decide accordingly.

8. Addition due to unreconciled stock:
The AO added ?8,50,938/- due to unreconciled stock quantities. The Tribunal noted that the auditors had indicated the impracticality of furnishing precise quantitative information. Since there was no difference in the value of the opening stock, the Tribunal deleted the addition.

Separate Judgments:
The Tribunal delivered a consolidated order covering multiple assessment years (2005-06, 2006-07, and 2007-08) and addressed similar issues across these years, providing consistent rulings and directions for verification and reconsideration by the AO where necessary.