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TMI Blog2015 (7) TMI 526X X X X Extracts X X X X X X X X Extracts X X X X ..... ided against revenue. Capitalization of the expenditure incurred on software development - Held that:- The issue in appeal is squarely covered by the Special Bench decision in the case of Amway Products Vs. DCIT (2008 (2) TMI 454 - ITAT DELHI-C ). Therefore, we direct the Assessing Officer to allow the same as a revenue expenditure - Decided against revenue. Disallowance of repair and maintenance expenditure of the building - Held that:- As a result of this expenditure no new asset had been created and the expenditure was incurred mainly for the purpose of maintaining the existing buildings. Therefore, the ratio laid down by the Hon’ble Supreme Court in the case of Ballimal Naval Kishore Vs. CIT (1997 (1) TMI 3 - SUPREME Court) is squarely applicable.- Decided against revenue. Disallowance of commission paid to Managing Director - Held that:- It appears from the material on record that the commission to the Managing Director was paid on par with the other employees of the company and therefore the provisions of Section 36(1)(ii) have no application. The ratio laid down in the case of AMD Mertplas Pvt. Ltd vs. CIT, (2011 (12) TMI 320 - Delhi High Court ) is squarely applicable to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in the circumstances of the case where the Id AO made an addition of ₹ 2,01,442/ - by disallowing TS 16949 certification charges of ₹ 2,68,589/- which were treated as capital expenditure being classified as Intangible Assets after allowing depreciation @ 25%, the Id CIT(A)-X, New Delhi was wrong in directing the Id AO to treat 50% of expenses as capital in nature and the remaining as revenue. iii. That the Id CIT(A)-X, New Delhi, was wrong in sustaining the addition of ₹ 1,82,000/- made by the Id AO by disallowing Software development and maintenance charges amounting to ₹ 4,55,000/- which were treated as capital expenditure after allowing depreciation @ 60%. iv. That the Id CIT(A)-X, New Delhi, was wrong in sustaining the addition of ₹ 7,19,675/- made by the Id AO by disallowing Building Repair and Maintenance Expenses amounting to ₹ 7,99,639/- which were treated as capital expenditure after allowing depreciation @10%. v. That the Id CIT(A)-X, New Delhi, was wrong in sustaining the addition of ₹ 37,48,450/- made by the Id AO u/ s 36(1 )(ii) of the' Act' by disallowing commission paid to Managing Director being part of remune ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an appeal was filed before the CIT(A) who vide order dated 13th February, 2013 partly allowed the grounds of appeal. Aggrieved by this order, the assessee is before us with the present appeal, which we shall now deal with ground-wise. ITA No. 2750/Del/2013 for AY 2005-06: 5. Ground no. 1 relates to the disallowance of the research and development expenditure. The submission made before the CIT(A) on this disallowance of R&D expenditure are as follows: "Addition of ₹ 6,93,653/-: Disallowance of Research and Development expenditure The company has its own computerized R&D Department which test each and every component used in manufacturing process as well as the finished product to check whether the technical specifications are maintained or not. The basic function of the Research and Development Department is as under: a. To analyze the technical requirements of the final product as per the specifications of the Original Equipment Manufacturers and other customers and to design samples of finished product. b. To devise details, design samples and other technical specifications and parameters for purchase of various components to be procured from the vendors. c. To ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upport ISO/TS 16949 as a valid supplier approval mechanism. There are recognized certification bodies, which satisfies the supporting vehicle manufacturers, who after conducting audit issues the certificates. The certificate validity generally is three years. The audit may be necessary again in case or changes/modification in the ISO/TS 16949 document or as and when required by the customer. 14. During the year an amount of ₹ 2,68,859/- was incurred under this head detailed as under: a. ₹ 1,80,570/- were paid to M/S Det Norske Veritas, the auditors for conducting audit. b. ₹ 84,600/- to M/s Goel Departmental Store on account of stationer used for compliance TS 16949 documentation, and c. ₹ 3,419/- miscellaneous expenses. 15. The expenses are incurred on recurring basis as per the requirement of the automotive industry (lA TF) for the purpose of certification of existing systems which are in place as per the requirement of ISO TS 16949 document and the certification agency after conducting audit only certifies that the system as required are in place and this is not a case of one time expenditure once for all or acquiring any licenses/business or co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tware results into accrual of advantage of enduring nature i.e. more than two years it may be capitalized provided functional test is also satisfied. 21. In the present case 'a production software' is acquired, however, as the Software could not be used for the purpose of production no enduring benefit ever accrued to the company and keeping in view the fact that it also could not satisfy the functional test the amount of expenditure will remain a revenue expenditure which cannot be capitalized. 22. In view of the above, the action of Id. AO to treat the above expenditure as capital in nature was wrong, unwarranted and unjustified and the expenditure which is incurred wholly and exclusively for the purpose of business is a revenue expenditure allowable u/s 37(1) of the Act and the addition made on this account deserves to be deleted." 7.1 The learned CIT(A), after considering the submissions and the evidence on record, had dismissed the ground of appeal. Hence, the assessee had come before us raising this ground of appeal. 7.2 It was submitted before us by the learned AR that the software developed was not successful and usage of software was suspended therefore, it cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itions, plaster and replacement of ceiling. 3. Renovation of existing 94,560/- An existing facility where lab existing plaster was replaced with tiles and replacement of old wooden partitions. 26. It is apparent that each and every expenditure incurred related to the existing structures/building and facilities, which required repair/replacement/renovation and no new/fresh structure of any nature whatsoever came into existence. Further, the expenses incurred are immaterial considering the magnitude and size of gross block of factory building. 27, In view of the above the Id AO was wrong and unjustified to disallow the expenses relating to repair and maintenance of building and capitalize them under the head factory building and hence the addition amounting to ₹ 7,19,675/- made by the Id AO by disallowing building repair and maintenance expenditure amounting to ₹ 7,99,639/- while allowing depreciation @ 10% deserves to be deleted. 8.1 The learned CIT(A) after considering the above submission, confirmed the additions by holding that the expenditure resulted in creation of new asset. Aggrieved by this order, the assessee company is before us. 8.2 It was submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company. 31. The Id. AO held that the commission has been paid to the Managing Director who was also a shareholder. Section 36(1)(ii) has been specially inserted to ensure that companies do not avoid tax by distributing profits to their members/shareholders as bonus or commission instead of dividend. In the instant case, it is clear that profit which would have been otherwise paid to the aforesaid managing director as dividend has been diverted in the form of commission. By diverting the sum of ₹ 37,48,450/- as commission to director, the assessee has only reduced the corpus available for distribution as dividend. Thus, commission paid to the managing director at ₹ 37,48,450/-was disallowed as not allowable u/s 36(1) (ii) of the Act. 32. The observation of the Id AO is against the legal provisions and settled law. Submitted that bonus or commission paid to an employee is allowable under this clause subject to the condition specified u/s 36(I)(ii) of the Income Tax Act 1961 (section 10(2) (x) of the Income Tax Act, 1922). The condition is that the sum paid to the employee as bonus or commission should not have been payable to him as profits or dividend if it had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal filed by the Revenue. The first ground of appeal relates to the allowance of the deletion of 50% of addition out of expenditure incurred for T.S. Certification. Since we have already held in the assessee's appeal that the expenditures incurred in connection with the TS Certification are revenue in nature, this ground of appeal filed by the Revenue is dismissed. 12. The next ground of appeal is about the point of time of taxability of DEPB incentives on the exports made by the appellant. This issues is no more res integra and is covered by the Hon'ble Supreme Court decision in the case of Topman Exports Pvt. Ltd. Vs. CIT, (2012) 342 ITR 49 (SC) wherein the Hon'ble Supreme Court held that the DEPB credit chargeable as income under Section 28(iiib) in the year in which the assesee applied for DEPB credit against the exports made and therefore, we restore this issue back to the file of the Assessing Officer with the direction that the income on account of DEPB credit should be taken into account only in the year in which the assessee had applied for the credit against the export made. Accordingly, this ground of appeal is partly allowed for statistical purposes. Thus, the appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X
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