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TMI Blog2011 (5) TMI 373X X X X Extracts X X X X X X X X Extracts X X X X ..... lready been set out above - CBDT Circular No. 779, dated 14-9-1999 - The facts as claimed by the assessee have not been disputed by the revenue. The auditors in their report have certified that the claim under section 36(1)(xi) of the Act has been correctly made - there is no evidence to show that there was any acquisition of a new computer system. Taking into consideration the intention behind the provisions as explained in the Board Circular and the facts of the assessee’s case, we feel that the claim of the assessee deserves to be accepted. - Decided in favour of the assessee Deduction u/s 80HHC - AO excluded income received by your appellant on account of sale of scrap and miscellaneous income from the profits of the business for the purpose of computing deduction under section 80HHC of the Act. - Held that:- Assessing Officer to include the income received by the assessee on account of sale of scrap, lease rentals and camera repair charges for the purpose of computing deduction under section 80HHC of the Act. - IT APPEAL NO. 7306 (MUM.) OF 2003 - - - Dated:- 18-5-2011 - N.V. VASUDEVAN, J. SUDHAKAR REDDY, JJ. M.M. Golvala for the Appellant. Mrs. Kusum Ingale for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closing inventory (C A/B) 2,930,628 The assessee further explained the total purchase made during the year were Rs. 432,11,68,702, the total exchange loss debited to the Profit and Loss Account is Rs. 1,03,82,810 and the closing stock of the inventories as on 31-3-2000 was Rs. 121,96,83,030. Thus, the amount of foreign exchange loss which can be attributed to closing inventory on a proportionate basis was Rs. 29,30,628. 3. The Assessing Officer however was of the view that the value of the closing stock should be increased by the foreign exchange loss which can be attributed to closing inventory on a proportionate basis viz., Rs. 29,30,628. According to the Assessing Officer, the inventory has to be valued after taking into account the above loss. On this reasoning the Assessing Officer added a sum of Rs. 29,30,268 to the total income. 4. On appeal by the assessee the CIT(A) confirmed the action of the Assessing Officer. 5. Before us it is not in dispute that identical issue was considered by this Tribunal in assessee s own case in assessment years 1996-97 to 1998-99, 2000-01 and 2001-02 in ITA Nos. 4543/M/01, 7580/M/01, 3314/M/02, 3196/M/02, 4574/M/03 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of purchases. He thus not only confirmed the disallowance of Rs. 25,91,000 but made a further addition of Rs. 1,01,38,710 on account of loss on maturity of forward contract relatable to stock at the year end. The assessee is aggrieved and is in appeal before us. 13. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position. 14. We find that the issue in appeal is now squarely covered by the Hon ble Supreme Court s judgment in the case of CIT v. Woodworth Governor India (P.) Ltd. 312 ITR 254, wherein Their Lordships have held that additional expenditure on account of foreign fluctuation in respect of purchases and estimated loss on that account at the year end is to be allowed as an "exchange loss in the profit and loss account and is against the cost of raw materials". Their Lordships have given a specific illustration at Page 266 of the report which unambiguously demonstrates the accounting treatment of such loss. It is thus free from any doubt that the estimated contracts which have not matured by the year end is also be allowed as a deduction in computation of business income. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y your appellants on making its non-Y2K compliant computer system into a Y2K compliant computer system, and erred in holding that the Appellants have virtually replaced the entire computer system, and therefore, not complied with the provisions of section 36(1)(xi) of the Income-tax Act, 1961 (hereinafter referred to as the Act )." 7. The assessee in the computation of income claimed as deduction a sum of Rs. 2,48,74,502 under section 36(1)(xi) of the Act. As per the provisions of section 36(1)(xi) of the Income-tax Act, 1961 inserted by the Finance Act, 1999, any expenditure incurred by the assessee, on or after 1-4-1999 but before 1-4-2000, wholly and exclusively in respect of a non-Y2K compliant computer system, owned by the assessee and used for the purposes of his business or profession, so as to make such computer system Y2K compliant computer system shall be allowed as a revenue deduction. For the purposes of this clause, "computer system" has been defined to mean, a device, or collection of devices (including input and output support devices and excluding calculators which are not programmable and capable of being used in conjunction with external files), or more of whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital or revenue. As per this Annexure out of the total expenditure of Rs. 2,48,74,502 a sum of Rs. 44,44,896 was revenue expenditure and the remaining expenditure was capital. 11. The major expenditure on Y2K was incurred in respect of the following : "1. The assessee was using Netware 3.11 and Netware 4.11 as its operating system. However, for Netware 3.11, the Y2K patches were not available and hence the assessee had to be upgraded to Windows NT platform. A letter dated 29-5-1998 from one Novell India, about the necessity to upgrade to windows NT platform was filed by the assessee. 2. Windows NT platform is not compatible with Computers/laptops 386/486 which are supported by DOS. No BIOS chips were available for 386/486 P.C. s and hence the assessee had to replace them by Pentium PC s. Evidence regarding such necessity was also filed by the assessee." 12. In the light of the facts regarding replacement of existing software and Pentium PC s, the assessee explained the break-up of the expenses. The following expenditure was incurred towards the same : "Replacement for netware Operating System Rs. 24,14,948 Additional Memory required for runni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he year 1995, the assessee computerized most of its operations and connected all its offices and factory locations with the Corporate Office. The connection was made using Vsat technology. The Vsat connections comprised of 2 different types of technologies viz., PAMA TDMA. The corporate office was also connected with the parent company with a 64K link to Stuttgart (Germany). All these offices have their own internal local area networks and these networks in turn were connected to the parent company. A diagram showing the network connected was also attached. 18. The assessee further explained the need to connect all the desktops in the organization because the assessee ran a centralized business application called SUN Systems which had to be consolidated at the regional office and this data then to be transmitted to the parent company. Further such centralized system enabled easy access to data at all locations. Further the assessee also used an e-mail application called MS-Mail for internal as well as external office communications. The assessee also used electronic software distribution to facilitate quick and easy distribution of new and updated software versions (e.g., anti- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terminals, components, server etc. are removed and replaced, without replacing the entire network, such expenditure on replacement would be considered as expenditure qualifying for the deduction, inasmuch as it would satisfy the condition of conversion. The assessee submitted that it may so happen that while replacing the system or its part, one may have to adopt for improved or a better part, which may be incidental and which may enhance the speed or storage space, etc. It was submitted that in that case also, the condition should be considered as satisfied having regard to the dominant objective of conversion. Further, replacement of old parts by improved parts is inevitable because of rapid technical developments in the field of information technology. 20. The assessee submitted that the CBDT in Circular No. 779, dated 14-9-1999 explained the intention behind insertion of sub-clause (xi) to section 36(1) of the Act. According to the CBDT the provisions were inserted with a view to encourage the business entities to make their existing computer systems Y2K compliant at the earliest, to provide for allowability of 100 per cent deduction, in computing the profits and gains of bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant company had computer network system and substantial portion of the system was Y2K compliant. In the audit report, the auditors have specifically admitted that substantial portion of system as a whole was Y2K compliant. Out of total claim, the appellant had purchased new Pentium, P.C s of Rs. 1,06,69,147. There is no supporting evidence to establish that earlier P.C s were not Y2K compliant. The appellants have virtually replaced the entire computer system and claiming such expenses under section 36(1)(xi) of the Income-tax Act. Thus, the amount of Rs. 2,48,74,502 is not considered as incurred wholly and exclusively to make non-Y2K Compliant system, so as to make it a Y2K compliant computer system. Accordingly, the Assessing Officer s action in disallowing the deduction under section 36(1)(xi) is upheld in principle. However, the Assessing Officer is directed to consider alternative claim of the appellant for allowing of the revenue expenditure of Rs. 44,44,896, out of which Rs. 28,99,901 has been incurred for purchase of office application software. The Assessing Officer is directed to verify the nature of these expenses. In case, same are found to be revenue in nature and ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " It is only where the satisfactory Y2K compliance certification cannot be done that system was replaced. According to the assessee only some components of the entire network like operating system, PC s etc., which could not be upgraded using the Y2K upgrade patches as evidenced/certified by outside vendors, internal reports etc., were replaced in order to render the entire system Y2K compliant. Such replacement was essentially required to make the entire network Y2K compliant. Thus, the assessee submitted that by such replacement it cannot be said that the assessee has discarded the existing computer system, since only the certain components mentioned above had been replaced whereas the other components of the computer system continue to exist. 26. The case of the revenue on the other hand that the provisions contemplate only expenditure to make non-Y2K computer, Y2K compatible and where expenditure is incurred towards replacements of either the system or software, the same is acquisition of new computers and only depreciation would be allowed in such cases. 27. The issue now boils down to as what is the meaning to the given to the expression "expenditure incurred wholly and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce would be replacement of a computer system and not expenditure incurred to make non-Y2K compliant computer system Y2K compliant. This is the view of the revenue. The case of the assessee on the other hand is that the purpose behind the provisions as explained in the circular and the definition of computer system as given in the Act, would show that even where a device which forms part of the computer system is required to be replaced to make it Y2K compliant, the same would qualify for deduction under section 36(1)(xi) of the Act. According to the revenue these are beneficial provisions and a liberal construction has to be adopted. This view is also a possible view. 29. The CBDT Circular No. 779, dated 14-9-1999 would be useful in resolving the controversy. In this circular the CBDT has explained that the provisions are meant to encourage business entities to make their existing computer systems Y2K Compliant so that the business entities run their businesses smoothly without hindrance and to avoid possible disruption in the economic activities of the country as a whole. The circular refers to expenditure whether capital or revenue incurred in respect of existing non-Y2K comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was any acquisition of a new computer system. Taking into consideration the intention behind the provisions as explained in the Board Circular and the facts of the assessee s case, we feel that the claim of the assessee deserves to be accepted. We therefore hold that the expenditure as claimed by the assessee as deductible under section 36(1)(xi) of the Act should be allowed as deduction. Thus ground No. 2 of the assessee is allowed. 31. Ground No. 3 raised by the assessee reads as follows :-- "3.The CIT(A) has erred in law and on the facts in confirming the Assessing Officers stand of excluding income received by your appellant on account of sale of scrap and miscellaneous income from the profits of the business for the purpose of computing deduction under section 80HHC of the Act." 32. The assessee included a sum of Rs. 52,35,000 on sale of scrap as part of the income from business while computing deduction under section 80HHC. Similarly the assessee also claimed miscellaneous income of Rs. 10,92,000 as part of the income from business while computing deduction under section 80HHC of the Act. The break up of the miscellaneous and other income is as follows : ( a ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and decided in favour of the assessee in ITA No. 6350/Mum./08. 34. As far as Packing and forwarding expenses recovered from the customers are concerned, we are of the view that the same would go to reduce the expenses already debited in the profit and loss account and would go to increase the profits from the business. It has direct nexus with the operational activities of the assessee. "Profits of Business" for the purpose of section 80HHC of the Act has been defined to means the profits of the business as computed under the head "Profits and gains of Business or profession". Therefore they have to be included in the profits of business for computing deduction under section 80HHC of the Act. For identical reason, rebate on sale from Bayer, cash discount earned from suppliers and bad debts recovered would "Profits of Business" for the purpose of section 80HHC of the Act. As far as income described as Kodak China towards training at Goa is concerned, we are of the view that the nature of this income has not been properly explained and in this circumstances, we have to confirm the order of CIT(A). As far as Bond money received from employees and other income at regions and factori ..... X X X X Extracts X X X X X X X X Extracts X X X X
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