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TMI Blog2011 (2) TMI 1509X X X X Extracts X X X X X X X X Extracts X X X X ..... 3A, Metro Chambers, 69/71, Trinity Street, Mumbai. ₹ 6,86,02,085 (ii) M/s. Manna Foods Pvt. Ltd. (hereinafter referred to in short as MFPL ) having registered office at 48, Lavelle Road, Bangalore. Rs.11,65,96,400 Rs.18,51,98,485 The assessee stated that the said advances were given to above two concerns, viz., JBMFPL and MFPL, as working capital advances to meet their day to day operations. The assessee in the assessment year under consideration has claimed loss on account of irrecoverable working capital advances. The assessee stated that these advances were in the nature of business loss incurred in the course of business as both the parties expressed their inability to repay the aforesaid advances. 4. The A.O. proceeded to examine the nature of the advances given by the assesseecompany to JBMFPL and MFPL. He has stated that both the abovenamed concerns, viz., JBMFPL and MFPL, did not need such a large amount of working capital advances. Both the concerns utilized the amount given by the assessee-company in giving loans and advances to others and also to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rying on of the business of bakery products. Neither it is incidental to it. The A.O. has also considered the cases cited by the assessee stating that write off of irrecoverable working capital advances is an allowable revenue expenditure, but has distinguished those cases on the ground that in all those cases the parties to whom the money was advanced were unrelated persons. The cases cited by the assessee before the A.O. are mentioned in para 25a of the assessment order, which are as under :- i) CIT vs. Mysore Sugar Limited [46 ITR 649 (SC)] ii) Indore Malwa United Ltd. vs. State of Madhya Pradesh [55 ITR 736 (SC)] iii) CIT vs. Jwalaprasada Radha Kishan [107 ITR 540 (All.)] iv) CIT vs. Inden Biselers [181 ITR 69 (Mad)] v) T.J. Lalvani vs. CIT [78 ITR 176 (Bom)] vi) P. Satyanarayan vs. CIT [116 ITR 803 (AP)] vii) CIT vs. Abdul Razak Co. [136 ITR 825 (Guj)] In view of the above, the A.O. disallowed claim of write off of advances made by the assessee and added the same to the income of the assessee. Being aggrieved, assessee filed appeal before the ld. C.I.T.(A). 5. On behalf of the assessee it was contended that the A.O. disallowed the claim of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the revenue for the said 2 concerns, were processing charges received from the appellant. It is not in dispute that the appellant had granted advances to these parties in the earlier years and in the books of the appellant these advances appeared as trading advances not loans. No interest was charged thereon. In the month of March 2004 the appellant executed subvention agreements with both the companies under which the appellant s right to receive back the trading advance was extinguished and thereby the appellant lost its right to recover back any sums from the said 2 companies. Pursuant to the said subvention agreement the appellant wrote off the amounts due from both the parties. In the books of the debtor companies also the amount waived by the appellant was credited in their respective Profit Loss A/cs. Fact leading to write off were disclosed in their respective Audited financial statements. Copies of the audited final accounts of both the debtors were filed from which it appeared that in the case of J.B. Mangharam Foods Pvt. Ltd. the following information was disclosed: During the year, the company has written back ₹ 6,86,02,085/- (P.Y. Rs.Nil) being workin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losses of the investee company the value of investment was permanently eroded for which provision was made in the books writing down value of investment. It is also not the case of the A.O. that the trading advances written off in the books of the contract manufacturers were advanced for the appellant s business. The advances were granted by the contract manufactures and always appeared in their books. In the circumstances when in the Subvention Agreement the appellant waived its right to receive the amounts advanced, the appellant irrevocably lost its right to claim the refund of sums advanced to both the parties. Under the circumstances the amount written off was certainly business loss of the appellant. In absence of the subvention agreement, other courses that were open for appellant was to grant increase in the processing charges to the contract manufactures out f which the appellant could have recovered its trading advance. In such case also the appellant would have been allowed deduction for the expenditure and the tax effect would have been the same. Under the circumstances if the appellant wrote off irrecoverable trading: advance in its books then such amount was allowable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l proceeding for recovery of advance would have adversely affected the appellant s economic interest as such course would have put the source of supply of biscuits, in jeopardy. In case of other 2 options the loss was required to be borne by the appellant. Having regard to the commercial considerations and expediency involved, the appellant chose to write off the trading advance pursuant to Subvention Agreement. It appeared that the Subvention Agreement were acted upon by the parties. In the books of the debtors the amounts written off were credited to the respective Profit Loss A/cs. Having regard to the totality of the facts therefore, I find that when the appellant actually wrote off the amounts pursuant to Subvention Agreements with the parties, the deduction was allowable. Accordingly, disallowance of ₹ 18,51,98,485/- is deleted. Hence the department is in appeal before the Tribunal. 6. On behalf of the department, the ld. Departmental Representative submitted that both the concerns to whom the assessee made advances are associate concerns of the assessee and were contract biscuits manufacturers for the assessee. The ld. Departmental Representative submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ludes such expenditure as a prudent businessman incurs for the purpose of business. He submitted that the Hon ble Apex Court held that even if the expenditure may have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. He submitted that once it is established that there was nexus between the expenditure and purpose of the business, which need not necessarily be the business of the assessee itself, the revenue cannot justifiably claim to put itself in the arm of the businessman or in the position of the Board of Directors and assume the role to decide how much is the reasonable expenditure having regard to the circumstances of the case. The ld. A/R further submitted that on account of substantial loss to the said two concerns, the assessee decided not to insist for recovery and entered into subvention agreement dated 25th March, 2004 to waive all working capital advances. The ld. A/R submitted that if the assessee had not waived off the said working capital advances, both the concerns had negative network and could not carry on their operation. The ld. A/R submitted that merely because the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the A.O. at pages 10 12 of the assessment order and in the books of account of the assessee these amounts are shown as trading advances. The department has not disputed the above facts. No interest has been charged on the aforesaid advances given by the assessee-company. The Hon ble Delhi High Court has held in the case of Honda Siel Power Products Ltd. (supra) that where an advance is made by the assessee-company, manufacturing portable generator sets, to suppliers of tools and dies which are required for components of generator sets to ensure continued supply of components, such advances are in the nature of revenue expenditure, even though tools and dies purchased remained under the ownership of such manufacturers, because as a result of this arrangement there was a price advantage to the assessee-company. In the case before us we observe that the assessee-company has stated that on account of advances made by it to the abovenamed two concerns, viz. JBMFPL and MFPL, the assessee-company was assured competent rates in getting continued supply of biscuits manufactured on behalf of the assessee-company and as a result of this arrangement there was a price advantage to the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port and includes such expenditure as a prudent businessman incurs for the purpose of business and if the expenditure is incurred on the grounds of commercial expediency, it is allowable as business expenditure. We also observe that the department has not disputed the fact that if the assessee had not written off/waived the said advances given by it to these above two concerns, the said two concerns had negative network and could not carry on its operation. Therefore, we find merits in the contention of the ld. A/R that it would have affected adversely the business interest of the assessee-company and the decision was taken to write off the said advances in the course of its business operation. We agree with the ld. A/R that merely because the said concerns, to whom advances had been given, were associate concerns of the assessee-company, it could not alter the legal position to make the real loss into an hypothetical loss or a fictitious loss as contended by ld. Departmental Representative and/or held by the A.O. 9.1. In view of our discussions above, we uphold the order of ld. C.I.T.(A) in deleting the disallowance of ₹ 18,51,98,485/-, which was made by the A.O. Ground N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal field that the expenditure would be disallowable on an application of this test. 11. The Hon ble Supreme Court in one of its landmark decisions in case of Empier Jute Co. Ltd. vs.- CIT reported in 24 ITR Page 1 has held that advantage consists merely in facilitating the trading operations or enabling the management and conduct of the 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 an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. 12. Coming to the expenditure made by the assessee on account of software, we do find that the softwares, generally, do not have a long life. These softwares do not bring into existence a new asset or any benefit of an enduring nature. The buyer only acquires the software arid not the copyrights in such softwares itself. Accordingly, no new asset is being created nor any benefit of an enduring nature arises to the buyer. 13. We also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obalization, liberalization and computerization are taking place in the industry at a very fast speed, the software is very significant apparatus which brings qualitative improvement in the functioning of an organization. Thus, the software has to be updated very frequently. It becomes obsolete very fast. It does not create any new asset. It does not bring any long enduring benefit. Thus, the expenditure on software could not be held to be capital expenditure. Accordingly, the disallowance was to be deleted. 19. In view of the above and the judicial pronouncement, we find that the technology is changed at a rapid pace and it directly affects the way of business is done. Since the technology becomes obsolete very fast and as such no enduring benefit is enjoyed by investing in software packages as due to rapid development in the field of computer technology. New softwares are developed with more advanced features and technology. As a result, the existing software becomes redundant and needs to be replaced with new one and, therefore, no software has a life of more than a year and accordingly, in that case, the expenses incurred for the acquisition of the software has to be treate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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