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TMI Blog2016 (7) TMI 1052X X X X Extracts X X X X X X X X Extracts X X X X ..... f paper book together with the complete details of expenses incurred thereon. From the perusal of the said details and the various arguments advanced by the ld AR, we are convinced that the said expenditures were incurred wholly and exclusively for the purpose of business of the assessee as they are related to staff training expenses, continuing education programme expenses, expenses on technoforecast (international journals) and recruitment expenses - Decided against revenue Disallowance made on account of foreign currency loss - CIT(A) deleted the addition - Held that:- We find that the issue is squarely covered by the decision of the Hon’ble Supreme Court in the case of Woodward Governor of India P Ltd vs CIT reported in (2009 (4) TMI 4 - SUPREME COURT ) in favour of the assessee. The revenue was not able to bring any contrary decision in this regard. Disallowance made on account of software expenses - CIT(A) deleted the addition - Held that:- We find that the ld CIT-A had given categorical findings with regard to each and every disallowance made by the ld AO. We also find from the evidences filed in the paper book, the expenditure incurred are only towards licence fees p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thra Ravi, JM For The Revenue: Shri A. K. Pandey, JCIT, Sr. DR For The Assessee: Shri K. M. Gupta, AR ORDER Per Shri M. Balaganesh, AM: Both these cross appeals by revenue and assessee for Asst Year 2003-04 i.e. ITA No.1521/K/2013 and ITA No. 2033/K/2013 are arising out of order of CIT(A)-XX, Kolkata vide appeal No.148/CIT(A)-XX/Circle-2/2011-12/Kol dated 01.02.2013 and the appeal by revenue for Asst Year 2005-06 i.e. ITA No. 1523/K/2013 is arising out of order of CIT(A)-XX, Kolkata vide appeal No. 150/ CIT(A)-XX/Circle-2/2011-12/Kol dated 04.02.2013. Assessments were framed by Addl. CIT, Range-2, Kolkata and DCIT, Cir-2, Kolkata u/s. 143(3) of the Income tax Act, 1961 (hereinafter referred to as the Act ) for AYs 2003-04 and 2005-06 vide his separate orders dated 23.03.2006 and 24.12.2008 respectively. All the appeals are taken up together for the sake of convenience. ITA No. 2033Kol/2013 Asst Year 2003-04 Assessee Appeal 2. The only issue to be decided in the appeal of the assessee is as to whether the interest subsidy received by the assessee in the sum of ₹ 86,90,000/- could be brought to tax in the facts and circumstances of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Sahney Steel and Press Works Ltd vs CIT reported in (1997) 228 ITR 253 (SC) , the interest subsidy received by the assessee should also be treated as revenue receipt. 2.2. On first appeal, the ld CITA held that the interest subsidy should not be taxed as revenue receipt but the same needs to be reduced from the cost of the asset and assessee is entitled to claim reduced depreciation accordingly. Aggrieved, the assessee is in appeal before us on the following grounds:- 1. That under the facts and circumstances of the case, the Learned Commissioner of Income Tax (Appeals) [hereinafter referred to as Ld.CIT(A) ] erred in confirming the action of the Assessing Officer to treat the subsidy aggregating to INR 86,90,000/- received by the appellant towards interest on loan taken for procurement of capital asset as revenue receipt. 2. That even after allowing the alternate ground of the appellant to reduce the interest subsidy from written down value (WDV) of the assets, the Ld. CIT(A) erred in confirming the order of the assessing officer to treat the same as revenue receipt. 3. That the Ld. CIT(A) erred in noting that interest subsidy was added in the WDV, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tribunal for the Asst Year 2002-03, submitted that the interest subsidy related to interest capitalized in the books and not related to any interest accrued and charged in the profit and loss account during the financial year 2002-03 relevant to Asst Year 2003-04 for which he referred to the interest details given in page 32 33 of the paper book explaining that the assessee had debited its capital account with the interest on loan taken from Exim Bank for the purpose of the new project at Salt Lake (i.e Interest was capitalized). The ld AR stated that the interest on Exim Bank Loan were allocated against the various capital additions expended in the said project and was not claimed as deduction u/s 36(1)(iii) in any of the respective assessment year. The subsidy that has been paid by the West Bengal Industrial Development Corporation Ltd is against the interest paid by the assessee on the Exim Bank Loan which was borrowed for setting up of the new project at Salt Lake. However, this aspect has not been properly represented before this tribunal during the appellate proceedings for the Asst Year 2002-03. He further fairly stated that the assessee in view of the smallness of the amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... West Bengal Incentive Scheme 1999 sanctioned under Commerce Industries Department s Notification No. 580-CI/H dated 22.06.1999 and amended from time to time, to approve and sanction a New Incentive Scheme for large, medium and small scale industrial units as under. It would be pertinent to reproduce the relevant clauses of the said scheme as under:- 1. Short Title: This Scheme may be called the West Bengal Incentive Scheme, 2000 (hereinafter referred to as the 2000 Scheme) for Industrial Projects of large, medium and small scale units (hereinafter referred to as Units) to be set up in the State. 9. Interest Subsidy: 9.1. An eligible Industrial unit for its approved project will be entitled to Interest Subsidy to the extent of 50% of the annual interest liability on the loan borrowed from a Commercial Bank/Financial institution /NBFC approved by Reserve Bank of India, for implementation of the approved project, subject to a limit of ₹ 100.00 lakhs per year depending on the location of the unit as follows: i) Group B area : 5 years; ii) Group C area: 7 years. 9.2. The Interest Subsidy will be payable annually subject to subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation 10 to Section 43(1) of the Act. In the light of the above discussion, we are of the view that for the purpose of computing depreciation allowable to the assessee, the subsidy amount cannot be reduced from the cost of the capital asset. 2.5.3. We also find that the Hon ble Apex Court in the case of CIT vs Ponni Sugars Chemicals Ltd Ors reported in (2008) 306 ITR 392 (SC) had held as under:- 14. In our view, the controversy in hand can be resolved if we apply the test laid down in the judgment of this court in the case of Sahney Steel and Press Works Ltd. In that case, on behalf of the assessee, it was contended that the subsidy given was up to 10 per cent of the capital investment calculated on the basis of the quantum of investment in capital and, therefore, receipt of such subsidy was on capital account and not on revenue account. It was also urged in that case that subsidy granted on the basis of refund of sales tax on raw materials, machinery and finished goods was also of capital nature as the object of granting refund of sales tax was that the assessee could set up new business or expand his existing business. The contention of the assessee in that case w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy/assistance is given which determines the nature of the incentive subsidy. The form or the mechanism through which the subsidy is given are irrelevant. 15. In the decision of the House of Lords in the case of Seaham Harbour Dock Co. v. Crook [1931] 16 TC 333, the Harbour Dock Co. had applied for grants from the Unemployment Grants Committee from funds appropriated by Parliament. The said grants were paid as the work progressed the payments were made several times for some years. The Dock Co. had undertaken the work of extension of its docks. The extended dock was for relieving the unemployment. The main purpose was relief from unemployment. Therefore, the House of Lords held that the financial assistance given to the company for dock extension cannot be regarded as a trade receipt. It was found by the House of Lords that the assistance had nothing to do with the trading of the company because the work undertaken was dock extension. According to the House of Lords, the assistance in the form of a grant was made by the Government with the object that by its use men might be kept in employment and, therefore, its receipt was capital in nature. The importance of the judgment li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he entitlement as indicated in section 3 mentioned above, it is clear that the Government has decided to grant the subsidy by way of financial assistance to tide over the period of crisis for promotion of the industries mentioned in the scheme which have the manufacturing units in West Bengal and which are in need of financial assistance for expansion of their capacities, modernization, and improving their marketing capabilities and such subsidy for the financial year in question was only for that year and was equivalent to ninety per centum of the amount of sales tax paid by the industry concerned, for any quarter under the Sales tax Act in respect of sales of such goods. 15. We find that the principles laid down in the case of Sahney Steel and Press Works Ltd. [1997] 228 ITR 253 (SC), relied upon by Mr. Nizamuddin has been explained by the Supreme Court in a subsequent decision in the case of CIT v. Ponni Sugars and Chemicals Ltd. [2008] 306 ITR 392 (SC), relied upon by Mr. Poddar in the following terms (page 399) : In our view, the controversy in hand can be resolved if we apply the test laid down in the judgment of this court in Sahney Steel and Press Works Ltd. [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidy is given is irrelevant. 16. In the case before us, the object of the subsidy is for expansion of their capacities, modernization, and improving their marketing capabilities and thus, those are for assistance on capital account. Similarly, merely because the amount of subsidy was equivalent to 90 per cent. of the sales tax paid by the beneficiary does not imply that the same was in the form of refund of sales tax paid. As pointed out by the Supreme Court in the case of Senairam Doongarmall v. CIT reported in [1961] 42 ITR 392 (SC) ; AIR 1961 SC 1579, it is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure, and makes it fall within capital or revenue. Thus, in the case before us, the amount paid as subsidy was really capital in nature. 2.5.5. We also find that the Hon ble Apex Court in the case of CIT vs Shree Balaji Alloys in Civil Appeal No. 10061 of 2011 dated 19.4.2016 had held as under:- The issue raised in these appeals is covered against the Revenue by the decision of this Court in Commissioner of Income Tax, Madras Vs. Ponni Sugars and Chemicals Ltd. , reported in (2008) 9 SC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this issue is that the ld AO observed that depreciation on leased cars amounting to ₹ 49,78,576/- was claimed by the assessee and assessee was asked to explain as to why the depreciation should be allowed on the cars which are not owned by it. In response to this, the assessee filed a written submission by placing reliance on the Board s Circular No. 9 of 1943 together with copies of the lease agreement. The ld AO disallowed the depreciation on leased cars amounting to ₹ 49,78,576/- in the assessment. Before the ld CITA, the assessee stated that it had claimed depreciation on owned vehicles amounting to ₹ 32,47,999/- and depreciation on leased assets amounting to ₹ 17,30,577/-. The assessee stated that the assessee had taken vehicle on finance lease. As per the terms of the agreement, all obligations to maintain the cars lies with assessee i.e the Hirer and the terminal option to procure the asset lies with assessee under separate letter dated 12.8.2002. The assessee even has an option to sell the asset at the end of the lease term. It was argued that by obtaining the right to sell the vehicles within 3 months from the end of the lease period, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The appellant argued that even on their owned vehicle no depreciation was allowed. After careful consideration of the facts of the case, I find that so far the leased vehicles are concerned, the A.O. was justified in disallowing the depreciation thereon. So far the judgment cited by the appellant in the case of Indus Ind Bank Ltd. Vs. Addl. CIT reported in 19 Taxmann.com 173 (Mum)(SB), the facts of both the cases are not identical. However, the A.O is directed to allow depreciation on appellant's owned vehicles. Further, the alternative argument of the appellant that if the depreciation on leased vehicles is disallowed than they would be eligible to get the lease rental (net of interest element), in this regard, I find merit in the submission of the appellant. The ground of appeal is accordingly decided. 4.3. Aggrieved, the revenue is in appeal before us on the following ground:- 1. Whether on the facts and the circumstances of the case the Ld. CIT(A)-XX, Kolkata has erred in directing the AO to allow lease rental payment of ₹ 38,24,645/- although the assessee did not claim the same? 4.4. The Ld DR stated the claim of lease rental was not made by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... speakers in the technical seminar organized by the assessee. Such momentoes are given as a token of appreciation and express the gratitude of the assessee towards such speakers who have enlightened the participants by sharing his experience and knowledge. It was submitted that M/s Urila Entertainment was engaged to arrange for some programmes during the intervening period of the Continuing Education Programme to entertain the participants who were going through a residential training programme. Similarly payment towards purchase of Mont Blanc Pen given to a senior foreign executive who had attended a business discussion for preparation of technoforecast feedback. Technoforecast is a global journal published by the world wide firm. Each country gives a detailed industry wise analysis of the present law for doing business in that country along with its recommendation for each industry. The assessee conducted a detailed survey among industry houses and then make a presentation requiring their feed back on the various options / models and business analysis prepared by the assessee. Thereafter the industry wise analysis is posted for publication . In order to conduct such survey and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case. 6.1. The brief facts of this issue is that the assessee made certain reimbursement of expenses in foreign currency to its Associated Enterprises and on restatement of the same, incurred exchange fluctuation loss of ₹ 4,33,760/- and claimed the same as revenue expenditure as it was incurred only in the discharge of its contractual obligations and in the normal course of its business. The ld AO however felt that the said loss needs to be borne only by the Associated Enterprises to whom reimbursements were made and accordingly disallowed the same in the assessment. The assessee stated that the aforesaid amount represents the foreign currency loss arising from the restatement of out of pocket expenses receivable in US dollars from foreign clients. The loss has been booked by restating the foreign debtors in view in the fall in the exchange rate as per the existing Accounting Standard 11, which prescribes that in order to reflect the true and fair view the said debtors/bill has to be restated at the exchange rate on the last date of the accounting year. The assessee placed reliance on the decision of the Hon ble Supreme Court in the case of Woodward Governor of India P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce made on account of software expenses in the sum of ₹ 48,28,899/- in the facts and circumstances of the case. 8.1. The brief facts of this issue is that the ld AO observed that assessee had debited a sum of ₹ 1,34,90,366/- to the profit and loss account and disallowed a sum of ₹ 13,35,562/- as capital costs. The ld AO directed the assessee to explain why the remaining sum of ₹ 1,21,54,804/- should not be treated as capital costs. The ld AO observed that the assessee replied that most of the expenses were attributable to annual or quarterly renewal fees which , by their nature, were revenue costs. The ld AO on preliminary verification of the said reply found that ₹ 96,90,173/- is attributable to such renewals and disallowed the remaining sum of ₹ 24,64,628/- (1,21,54,804 96,90,173) straight away in the assessment . Later the ld AO proceeded to verify the details of ₹ 96,90,173/- extensively, wherein , he observed that the following expenses were not attributable to annual or quarterly renewals and were in fact capital in nature :- Application user perpetual-full use software updates (from oracle) - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the said expenditure was incurred on account of an annual license fee for a specific number of users for using the Lotus Communication system for a period of one year. The software or the copyright of the software was never acquired by the appellant. Hence the action of the Assessing Officer in concluding that such expense was not an annual charge is factually incorrect and disallowing such amount is not legally tenable. As per section 32 of the LT. Act, it is clear that the assessee would be entitled to depreciation only when the assessee acquires the license. Incidentally such acquisition of licenses deals with outright purchase of software along with its copyrights, which would enable the assessee to exploit the rights to such software commercially. In other words, if the assessee would have acquired the right to tile software in a manner to have been able to reproduce the software by copying the same and thereafter selling it commercially, then the view taken by the Assessing Officer would have been correct. However a license for use of application software which needs to be renewed after a lapse of time or even otherwise would not be termed as a capital expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents by making reference to the relevant pages of the paper book containing the details of expenses and the evidences in support of the same. He argued that the ld AO made ad hoc disallowance of ₹ 24,24,628/- without making any specific reference to the bills and details filed before him and the sum of ₹ 24,24,628/- could never be traced from the total details filed by the assessee. With regard to disallowance made in the sum of ₹ 2,62,108/- , he argued that the same represent charges payable to Oracle India Pvt. Ltd. as annual fee towards technical support on Oracle Software and with regard to ₹ 21,02,163/- , he stated that the same represents amounts paid for lotus communication on account of annual licence fee for 2150 users as could be evident from the invoice itself for using the Lotus Communication System for a period of one year. He argued that the assessee did not derive any enduring benefit in the capital field and accordingly prayed for confirmation of the order of the ld CITA in this regard. 8.6. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee in this regard. We fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. The second issue to be decided in this appeal of the revenue is as to whether the ld CITA is justified in deleting the disallowance of bad debts in the sum of ₹ 1,36,38,982/- in the facts and circumstances of the case. 9.1. The brief facts of this issue is that the assessee claimed a total sum of ₹ 1,36,38,982/- as bad debts in the return. The ld AO observed that the assessee had written off the debts due from the following parties:- 1. Calcutta Municipal Corporation 2. Chhatisgarh Satate Electricity Board 3. Bengal Chamber of Commerce and Industry 4. Eicher Motors Ltd. 5. Essar Power Ltd. 6. ONGC Ltd. 7. Kotak Mahindra Bank 8. Jindal Steel Limited 9. Tata Motors Ltd. 10. Tata Tea Ltd. 11. TISCO The ld AO observed that these concerns are credit worthy companies and some are governmental bodies and the assessee had recovered substantial portion of the debts from them pertaining to other transactions. The assessee had not brought any evidences to prove that there were some disputes with regard to recovery of the said dues. He also observed that some of the bad debts written off included certain sums receivable from its own sist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecome irrecoverable. However, despite the amendment, disputes on the issue of allowability continue, mostly for the reason that the debt has not been established to be irrecoverable. The Hon'ble Supreme Court in the case of TRF Ltd. In CA Nos. 5292 to 5294 of 2003 vide judgment dated 9.2.2010, has stated that the position of law is well settled. After 1.4.1989, for allowing deduction for the amount of any bad debt or part thereof under section 36(1)(vii) of the Act, it is not necessary for assessee to establish that the debt, in fact has become irrecoverable; it is enough if bad debt is written off as irrecoverable in the books of accounts of assessee. 4. In view of the above, claim for any debt or part thereof in any previous year, shall be admissible under section 36(1)(vii) of the Act, if it is written off as irrecoverable in the books of accounts of the assessee for that previous year and it fulfills the conditions stipulated in sub section (2) of sub-section 36(2) of the Act. We hold that the Circulars issued by the CBDT are binding on the revenue. In view of the aforesaid facts and respectfully following the apex court decision and the CBDT Circular, we fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... XX We find that the assessee had not even claimed the write off of service tax in its books of accounts by way of charge to profit and loss account. We find that the ld AO had merely made this addition without understanding the accounting treatment of the assessee vis a vis its income tax return. We find that there is no basis for the ld AO for making this addition as the profit and loss account is not at all hit by the said write off of service tax portion. Hence we hold that the ld CITA had rightly deleted the addition. Accordingly, the ground no. 3 raised by the revenue is dismissed. 11. The last issue to be decided in this appeal of the revenue is as to whether the ld CITA is justified in deleting the disallowance on account of recruitment expenses in the sum of ₹ 20,51,000/- in the facts and circumstances of the case. 11.1. The brief facts of this issue is that the ld AO observed that the assessee regularly recruits professionals through recruitment consultants and pays professional fees to the said agencies. The said fees are charged to P L Account and is allowed as revenue cost. However, during the year, it was noticed that in two iso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e agreement with the ld AR that no enduring benefit is obtained by the assessee pursuant to incurrence of recruitment expenses paid to recruitment agency for appointing two members for the senior position in the assessee company. We find that this aspect is also adjudicated by the co-ordinate bench decision of Delhi Tribunal in the case of DCIT vs M/s Sapient Corporation Pvt Ltd in ITA NO. 1856 (Del) of 2010 for Asst Year 2005-06 dated 8.4.2011 wherein , the Delhi Tribunal, by placing reliance on its earlier decision in the case of Sony India P Ltd vs DCIT in para 83 , held that recruitment expenses were incurred in the ordinary course of business and no capital asset has been acquired by the assessee. The recruitment and training expenditure had been incurred by the assessee to facilitate its business operations more profitably and efficiently. The recruitment is an on-going process and does not bring into existence any capital asset. Under these facts and circumstances and respectfully following the co-ordinate bench decision of Delhi Tribunal, we do not find any reason to interfere with the order of the ld CITA in this regard. Accordingly, the ground no. 4 raised by the revenu ..... 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