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TMI Blog2013 (4) TMI 315X X X X Extracts X X X X X X X X Extracts X X X X ..... quently proportionate depreciation should be taken into account because that is the depreciation "actually allowed" - in favour of the assessee. Software development expenses - revenue v/s capital - Held that:- The assessee has incurred the expenses on the upgradation of the computer hardware and the software. The expenditure has not been incurred for starting new hardware or software. The upgradation of the computer will not make the expenditure to be capital in nature. The CIT(A), following the decision of Amway India Enterprises -vs- DCIT (2008 (2) TMI 454 - ITAT DELHI-C) deleted the addition made by the AO. The decisions relied on by the D.R. are not applicable in the case of the assessee - in favour of the assessee. Provision for diminution in the value of the investment and provision for contingency written back for ascertaining the book profit under section 115JB - CIT(A) deleted the addition - Held that:- The case of the assessee is duly covered by Explanation 1(i) of section 115JB of the Income Tax Act. The CIT(A), after appreciating the documents, has given the clear-cut finding that both the provisions written off by the assessee were not allowed as deduction whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... related to 100% agricultural operation and SLP is pending before the Hon'ble Supreme Court against the decision of Calcutta High Court in the case of AFT Industries Ltd.-vs-CIT (270 ITR 167) in the light of which Ld. CIT(A) decided the issue in favour of the assessee. 2. That on the facts and circumstances of the case, Ld. CIT(A)-IV, Kolkata has erred in directing the A.O. to allow the claim of the assessee of 4,50,62,522/- on account of depreciation since the amendment to section 43(6) was introduced in Parliament to show intention of legislature as clearly mentioned in Hon'ble finance Minister's speech in Parliament and accepting the decision will defeat the purpose of legislature. 3. That on the facts and circumstances of the case, Ld. CIT(A)-IV, Kolkata has erred in law in deleting the addition of 20,00,000/- incurred by the assessee on software development expense treating it as revenue expenditure, without appreciating the fact that software development is not restricted to only one year and the assessee will get enduring benefit just like a capital goods. 4. That on the facts and circumstances of the case, Ld. CIT(A)-IV, Kolkata has erred in law in directing the A.O. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gence or deliberate inaction on the part of the Revenue. We are, therefore, of the view that the decision of the Hon'ble Supreme Court in 348 ITR 7(SC) will not affect the assessee. We accordingly condone the delay and admit the appeal filed by the Revenue. 3. Ground no.1 relates to the deletion of addition on account of cess on green leaf. This issue is covered by the decision of the Hon'ble High Court in the case of AFT Industries Ltd. -vs- CIT 270 ITR 167 in favour of the assessee. The decision of the Hon'ble High Court is binding on us. In view of this fact, we dismiss the ground no.1 taken by the Revenue. 4. Ground no.2 relates to the claim of depreciation by the assessee. The AO refused to allow the assessee's claim on the ground that the entire depreciation at the relevant rate was allowed in computing the business income to which Rule 8 was applied. The AO even noted the decision of the Hon'ble Supreme Court in the case of CIT-vs- Doom Dooma India Ltd. 310 ITR 392 but observed that the section 43(6) was amended by the Parliament by Finance Act 2009 but the amendment was clarificatory in nature and therefore, he disallowed part of the depreciation claimed by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware was revenue or capital in nature. By AO's own admission the appellant is not in the business of developing software but it is engaged in growing, manufacture, sell and export of tea. The assessee owns 54 Tea Gardens situated in remote parts of North-Eastern India. The assessee's Head Quarters is located in Calcutta from where the operations at these tea gardens are controlled and managed. For the purpose of managing operations at the gardens the appellant adopts technological tools such as computers. The expenditure on developing computer software was incurred to enable the appellant to utilize its existing computer net-work more efficiently and effectively so that operational efficiencies could be improved. It is not the case of the AO that the assessee acquired and installed entirely new computer hardware and software. As claimed by the assessee it was already using computers at its Tea Gardens. The expenditure on computer software development incurred during the year enabled the appellant to co-ordinate networking of its existing computer operations at all gardens. The software merely coordinated operations of the Computers located in different gardens which were earlier wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g operations or enabling the management and conduct of the assessee 's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for on indefinite future. In other words, the functional test would become material and if on application of the same it is found that the expenditure operates to confer benefit in the revenue field, then the same would be revenue, irrespective of the duration of time for which the assessee acquires rights in a software. The period of advantage in the context of computer software should not be viewed from the point of view of different assets or advantage like tenancy or use of know-how because Software is a business tool enabling a businessmen's ability to run his business. Whether the expenditure operates to add the profit earning apparatus of the assessee (Functional Test): 57. The advantage which an assessee derives has to be seen. The nature of advantage has to be seen in a commercial sense. If the advantage is in the capital field then the same would be capital expenditure. If the advantage consists merely in facilitat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s forming part of the profit-making apparatus of the assessee. On the other hand, if such software is being used by an assessee engaged in the business of placement agency where the applications from persons seeking jobs are invited through e-mail and are also forwarded to the concerned clients through e-mail, the same may form part of profit-making apparatus of the assessee's business of placement agency and can be treated as a capital asset. (ii) As a general rule it may be stated that the more expensive the computer software the more it is likely to be a central tool of the business and the more enduring is likely to be its effect adding to the profit earning apparatus. If there are associated capital expenditure like purchase of new computer equipment for running the software developed under a project, then it can be considered as capital expenditure. This is especially the case where the new hardware is not merely desirable but necessary for this purpose. (iii) Degree of associated organizational change; similarly the degree of change intended in the way operations are carried out as a result of the Computer software, for example, savings in the number, and changes in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tended that the assessee has 54 tea gardens situated in remote parts of north-eastern India. The assessee's headquarters is located in Kolkata from where the operations are controlled and managed. For the purpose of managing the gardens, the assessee adopts technological tools such as computers. The expenditure on developing computer network was incurred to enable the assessee to utilize its existing computer network more effectively so that there could be improvement in efficiency. The assessee has not acquired any capital asset nor any benefit of enduring nature. The assessee was already using the computer at its tea gardens. The expenses incurred in the software development enabled the assessee to coordinate its existing computer operations at all tea gardens more effectively and efficiently. Development of the software is on going process because the system requires upgradation from time to time due to change and improvement in the technology. The expenses so incurred are merely the revenue expenses. In this regard, reliance was placed on the decision of Amway India Enterprises -Vs- DCIT 111 ITD 112 Delhi Special Bench. It was also pointed out that the decision of the Delhi Spe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /c. The assessee asked for the deduction but the AO rejected the claim of the assessee. The assessee went in appeal before the CIT(A). The CIT(A) deleted the addition by observing as under: "11. I have considered the submissions of the A/R's and have perused the copies of the Computation of total income, filed by M/s. Eveready Industries (India) Ltd M/s. George Williamson (Assam) Ltd for the earlier years. The tea business of the appellant earlier belonged to Eveready Industries (I) Ltd. and it was transferred to the appellant consequent to sanction of the scheme of arrangement approved by the Calcutta High Court which came in force from 1.4.2004. M/s. George Williamson (Assam) Ltd was amalgamated with the appellant with effect from 1.4.2005 after obtaining approval from the Calcutta Gauhati High Courts. It appeared from the information furnished by the A/R that Provision for Contingency was created by M/s. Eveready Industries (India) Ltd in its financial books for the year ended 31 March 2001. In the income tax return filed for the A.Y. 200 1- 02 in computing "book profit" u/s 115 JB M/s. Eveready Industries (India) Ltd did claim deduction for Provision for Contingency. In o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15JB of the Income Tax Act. The CIT(A), after appreciating the documents, has given the clear-cut finding that both the provisions written off by the assessee were not allowed as deduction where determination in the book profit for the assessment year 2001-02 and in the hands of George Williamson (Assam) Ltd. over determining book profit for the assessment years 1999-2000 to 2005-06, no contrary evidence was brought to our knowledge which may compel us to take a view different from the CIT(A). In view of the Explanation 1(i) of section 115JB, in our opinion, no interference is called for in the order of the CIT(A). We accordingly, dismiss this ground no.4. 12. Ground no.5 relates to the deletion of interest receipt of Rs.1,59,90,313/- by the CIT(A), 40% of which was added by the AO as part of assessee's income of growing and manufacturing of tea, while determining the profit under section 115JB. Brief facts of the case are that the assessee used part of the business funds, which was temporarrily surplus, in granting loans and deposits for which the assessee earned the interest income. In the Profit Loss a/c., the assessee has debited gross interest paid on borrowed funds and se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t find substance in the AO's hypothesis that gross interest paid represented expenditure of tea business to which Rule - 8 was applicable whereas gross interest received represented non agricultural income to which Rule - 8 was not applicable. Having regard to the nature of business and composite nature of funds deployed, the only correct method was to set off interest received against interest paid. This proposition is accepted by the Jurisdictional Calcutta High Court in the case of Eveready Industries (I) Ltd in 1TA Nos 123 of 2000 dated 22.12.2009. In that case also the assessee engaged in business of growing and manufacture of tea had derived interest income which was assessed subject to application of Rule-8. In the regular income tax assessments, the AO did not assess interest income separately but considered the interest to be part of the composite business of growing and manufacture of tea thereby assessed only 40% of such income under central income tax assessment. The C I T in his order u/s 263 directed to AO to assess gross interest received as fully chargeable to tax under Central Income Tax. The Order of the CIT u/s 263 was upheld by the Tribunal. On further appeal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income shall be deemed to be the income liable to tax i.e. 60% of such income is regarded to be the agricultural income being exempt under section 10(1) of the Act. Now the question arises whether the interest income earned by the assessee can be regarded to be the income derived from the sale of tea grown and manufactured by the assessee. If it is regarded to be the income derived from the sale of tea grown and manufactured by the assessee, 60% of such interest income will be regarded to be the agricultural income and the assessee will be entitled for deduction, in view of Explanation 1(ii) to section 115JB. 15. The ld. D.R. before us vehemently relied that the interest income earned by the assessee on the surplus funds cannot be regarded to be the income derived from the sale of tea grown and manufactured. In this regard, he relied on the decisions of the Hon'ble Supreme Court in the cases of Liberty India -vs- CIT 317 ITR 218 as well as CIT-vs- Orchev Pharma (P) Ltd. 25 Taxmann.com 815(SC). The reliance was also placed on the decision of the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. -vs- CIT 262 ITR 278. We noted that the Hon'ble Supreme Court has noted in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit derived from the industrial undertaking. We noted that under Rule 8(1), the income must be directly derived from the sale of tea grown and manufactured only, then the Rule 8(1) will apply. The Rule 8(1) does not talk of that the income derived from tea business will be apportioned into the agricultural income and income from business. The interest earned by the assessee on the investment, even if temporarily made out of the funds, in our opinion, cannot be regarded to be the income derived from the sale of tea grown and manufactured by the assessee. This income may be regarded to be the income derived from the business of the assessee but it does not have a direct linkage with the income derived from the sale of tea grown and manufactured. The ld. A.R., even though vehemently relied before us on the decision of the Hon'ble Kolkata High Court in the case of Eveready Industries India Ltd. in ITA No. 123 of 2000. In this case, we noted that the Hon'ble High Court has held at page 16 and 17 as under: "As we have already narrated above that the assessee in this case procured loans from banks and other financial institutions for its tea growing and manufacturing business and part of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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