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TMI Blog2019 (12) TMI 966X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income-tax(Appeals) erred in holding and treating the expenditure a sum of Rs. 75,10,303 incurred on payment of "License Fees" on renewal of software license as "Capital" in nature in place of "Revenue" claimed by the appellant. 2. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in holding "License Fees" as a part of "Software" and treating it as a capital expenditure as defined in income tax rules for Rates of depreciation disregarding the fact that License Fee was paid for one year only and proof in support thereof was provided in appellate proceedings. 3. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in disregarding the fact that the appellant has not purchased any new "Software" for its business. The Software were purchased in prior years and no expenditure was incurred on "Software Purchased". 3.1 That benefit of license fees is only for one year and no benefit of license fees payment can be drawn by appellant beyond that. Therefore no benefit of enduring nature have been taken by the appellant. 4. That the impugned order dated 10.06.2015 passed by the learned Commissioner of Income-tax (Appeals), Gurgaon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings, the Assessing Officer noted that the assessee has shown capital work-in-progress (CWIP) as on 31.03.2010 at Rs. 1,65,12,229/-. He, therefore, asked the assessee to give the details of working of CWIP and to submit why interest on CWIP should not be capitalized. Rejecting the various explanations given by the assessee, the Assessing Officer disallowed an amount of Rs. 19,81,467/- being interest @ 12% on different items of CWIP. 4.1 In appeal, the ld.CIT(A) deleted the addition by observing that the funds utilized by the assessee in CWIP were for the purpose of its ongoing business. CWIP was appearing in the balance sheet on account of the fact that there was a gestation period between the acquisition of capital assets and their use for the purpose of business. Further the assessee has substantial amount of own funds at its disposal which is much more than the CWIP. The Assessing Officer has not brought any nexus between the borrowed funds and the CWIP and, therefore, there can be no basis for disallowance of interest. Further, the Assessing Officer, in the subsequent two years, has not made any such addition. He accordingly deleted the disallowance made by the Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and machinery of the appellant business is in the shape of cranes, cement feeding plants etc. (c ) Its quiet understandable that the cranes or other machinery purchased from various suppliers cannot be put to use immediately at the time of purchase, due to time lag in transporting these items to various sites and thereafter assembling of various items as per the requirement. (d) The time period which is the gestation period from the date of its purchase/ payment till its "use "is being shown as CWIP. In the year under consideration, appellant had 17 projects in hand from locations as far away as, Mumbai, Chennai, Gurgaon, Cochin, Kolkatta etc. e) Only the purchase cost that has been incurred by the appellant has been shown in CWIP and no other costs have been incurred on the items shown in CWIP. 7.4 Before proceedings further it would be proper to examine the business of the appellant company. The appellant is engaged into the business of construction as a Contractor. It has fixed assets in the share of plant and machinery, furniture and fixture etc., on 31st March 2009, to the tune of Rs. 292.62 Cr. Out of these total fixed assets of Rs. 298.24Cr. i.e. 2% of the total f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of assessment proceedings as well as during the course of appellate proceedings reveal that there is a closing CWIP of Rs. 4,69,42,604/- as on 31.03.2009, which represents the following:- S.No. Particulars Amount (Rs.) 1. Capital Work in progress-construction plant and equipment 11,29,866 2. Capital Work-in-Progress - Cranes 4,37,38,406 3. Capital Work in Progress-Batching Plant 20,44,598 4. Advance (debit balance ) to creditors for fixed assets 29,734 Total 4,69,42,604 The above details makes it clear that the main part of CWIP represents expenditure incurred on cranes amounting to Rs. 4,37,38,406/- out of the total CWIP of Rs. 4,69,42,604/-. Similarly, there is an opening CWIP of Rs. 22,26,69,694/- as on 01.04.2008, and Rs. 1,65,12,229/- as on 31.03.2010. The above details makes it clear that the closing CWIP of Rs. 22,26,69,694/- standing in A.Y, 2008-09 has come down to Rs. 4,69,42,604/- in A.Y. 2009- 10 and Rs. 1,65,12,229/- in A.Y. 2010-11. The said details leaves no doubt that the time gap for putting CWIP into use is not more than one year in any case. The appellant has a net worth of Rs. 325.02 Crores against which there is a closing CWIP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest in AY 2011-12 wherein, on identical facts, no such disallowance was made. In these circumstances, the department cannot be allowed to agitate this issue in the year under reference. Accordingly, in our considered view, the order of Ld. CIT (Appeals) on this issue is well reasoned and warrants no interference and is hereby upheld. Consequently, ground nos. 2 and 3 are rejected." 8. Since the facts of the impugned assessment year are identical to the facts of the immediately preceding assessment year, therefore, respectfully following the decision of the Tribunal in assessee's own case, we find no infirmity in the order of the CIT(A) on this issue. Accordingly, ground of appeal No.1 raised by the Revenue is dismissed. 9. Ground of appeal No.2 by the Revenue and all the grounds raised by the assessee relate to part relief granted by the CIT(A) on account of disallowance of software expenses. 10. Facts of the case, in brief, are that the Assessing Officer, during the course of assessment proceedings, noted that the assessee company has claimed software expenses amounting to Rs. 97,64,993/-. He, therefore, asked the assessee to explain the nature of software expenses and to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the income of the assessee company." 12. Before the CIT(A), the assessee filed detailed submissions along with details of software expenses which include expenses on AMC, consumables, licence fee paid for renewal of software licence. Copies of various bills were also submitted by the assessee to substantiate that the expenditure incurred under various softwares was of recurring nature and no enduring benefit was derived. Relying on various decisions, it was argued that the action of the Assessing Officer is not correct. Based on the arguments advanced by the assessee, the ld.CIT(A) held that while the Assessing Officer erred in treating the AMC and consumables as capital expenditure, the treatment of licence fees in connection with software was rightly held to be of capital nature. 13. Aggrieved with such part relief granted by the CIT(A), the assessee as well as the Revenue are in appeal before the Tribunal. 14. We have heard the rival arguments made by both the sides and perused the orders of the authorities below. We find identical issue had come up before the Tribunal in assessee's own case for the immediately preceding assessment year. We find the Tribunal, vide ITA No.51 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure was incurred on the following three accounts. a) Annual Maintenance Cost b) Consumables c) Licence Fees. The details filed also reveals that there is no such item which is enduring in nature, rather expenses were incurred in purchase of various software items, licence fees for renewal of licences, consumables etc. with a limited shelf life. The expenditure incurred on AMC is definitely only for one year and no enduring benefit can be derived there from. Similarly licence fees are being paid only for one year and no enduring benefit is being derived there from. As far as consumable items are concerned there are various software's purchased for different purposes and the warranty for these software's were not exceeding twelve months. As these items are not for any enduring benefit the entire expenditure cannot be treated as "Capital Nature". The Hon'ble Delhi High Court in the case of CIT Vs. Amway India Enterprises (2012) 346 ITR 341 opined that expenditure incurred on purchase of software application and payment for consideration for acquiring licence to use those application would be allowed as revenue expenditure. Similarly, in the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the Ld. CIT (Appeals) and uphold the deletion of disallowance of software expenses. Thus ground no. 4 of the revenue's appeal stands dismissed." 15. Since the facts of the impugned assessment year are identical to the facts of the case for the immediately preceding assessment year, therefore, respectfully following the decision of the Tribunal in assessee's own case, we hold that the AMC, consumables and the software expenses are revenue in nature. We, therefore, dismiss the ground raised by the revenue and allow the grounds raised by the assessee on this issue. Accordingly, ground No.2 raised by the Revenue is dismissed and the grounds raised by the assessee are allowed. 16. Now, we take up ground No.3 and 3.1 raised by the Revenue. 17. Facts of the case, in brief are that the Assessing Officer, during the course of assessment proceedings, observed that the assessee has claimed the following expenses/provision for expenses in its accounts, the details of which are as under:- Provision for disallowed material other than (RMC) Rs. 34,65,157/- Provision for disallowed other subcontractor works. Rs. 1,41,61,380/- Purchase Sundries Rs. 3,73,669/- Disallowed Admini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of disallowance by the client is not allowable. The assessee has also not led any argument/evidence to show that the provision for expenses was an ascertained liability duly certified/accepted by the clients to have been incurred at their instance. As such the allowability of these provisions is totally and completely unacceptable. e. Contractor/Subcontractors provisions to the tune of Rs. 2,69,92,558/- are unsubstantiated that liability to incur the same was crystallized during the year itself. The assessee has not led any evidence to show that these expenses were indeed incurred as a certainty/established liability duly certified and acknowledged by the clients. f. Reliance is placed on the rulings of the Apex Court in the following cases: * Indian Molasses Co. (P) Ltd V. CIT (1959) 37ITR 66(SC) * CIT V. Gemini Cashew Sales Corpn. (1967) 65ITR 643(SC) 5.4 In view of the detailed discussion in the preceding paras, it is clear that the expenses/provision for expenses are not allowable. Accordingly, an addition of Rs. 5,35,66,402/-is made on account of disallowance of expenses/provision for expenses. Penalty proceedings u/s 271(1)(c) are separately initiated for furnishing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis and under this system, the client was supposed to reimburse the appellant, all costs involved in execution of work on actual basis plus a certain percentage of margin as agreed in the Agreement. During cost verification, certain costs incurred by the appellant were objected to by the client. In response to this, the appellant submitted further details which could meet the client's objections in most of the cases. However, in some cases the clients could not be convinced resulting in their disallowance. This was an ongoing process. During the year under consideration, the appellant filed details of material other than RMC amounting to Rs. 1,51,49,135/- which were initially objected to by the client and after prolonged discussions with the client, an amount of Rs. 1,16,83,978/- was recovered and the resulting amount of Rs. 34,65,157/- was claimed as disallowed cost. The appellant hastened to add that though the material cost of Rs. 34,65,157/- was disallowed by the client, this did not mean that it was a non genuine expenditure. The expenditure disallowed by the client was actually incurred by the appellant for executing the contract for which proper documentation like Invoic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ledger account with documentary evidence i.e. vouchers and bills were filed in support thereof. (e) Contractor / Sub-contractor Provision These were the provisions of sub-contractors and material for which works had already been executed / material procured. Further, corresponding revenue had also been provided against the said provisions in its profit and loss account under the head 'Construction & Project Revenue' which represented work executed but remained uncertified at the end of the year. The appellant submitted that, the said amount had been taxed twice/meaning thereby, that the amount was already included in the income as Unbilled Revenue under the head 'Construction & Project Revenue' and at the same time, it was disallowed by the Assessing Officer without giving deductions of the said amount. The AO disallowed the same due to non-providing the evidence relating thereto. It was stated that out of total provision of Rs. 16,57,86,202, the AO disallowed a sum of Rs. 2,69,92,558 for want of supporting documents and allowed remaining amount of i.e. Rs. 13,87,93,644/- since supporting documents to substantiate the same were provided. During the course of ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant's client does not mean that the expenditure was not incurred by the appellant for business purposes or it was an in genuine business expenditure. In support of incurring of the said expenditure, the appellant filed copies of Journal Vouchers in which the description of the invoices received by the appellant from its Sub Contractor / material supplier or any other services provided to the appellant for appellant's client were provided. The correspondence for disallowance of cost was also filed by the appellant during the course of appellate proceedings and it was clarified that all the payments to material suppliers / Sub contractors or in relation to administrative cost had been made through banking channel and due care of all statutory compliances had been made by the appellant. In cases where TDS was applicable, the appellant deducted the same and deposited with the Government. Hence these facts make it amply clear that the liability was actually incurred and there was no provision made without actual payment. (3) The AO, while making the disallowance of expenditure treated the disallowed cost by the appellant's client as inflated or unnecessary cost. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed cost was in the nature of contingent expenditure. She also stated that no evidences were filed to show that provisions of expenses was an ascertained liability duly certified / accepted by the client to have been incurred at their insistence. In this regard, I tried to ascertain whether the provisions for disallowed material / Sub contractor and administrative expenses were in the nature of "Provisions". It was observed that "Provisions" were shown by the appellant in its Balance Sheet under the heading "Current Liabilities & Provisions" and an amount of Rs. 15.21 crores had been shown under this head. The break-up of provisions was given in Schedule-10 of the Balance Sheet which reads as under:- Provisions for Leave Encashment Rs. 1.66 Crores Provisions for Other Employees Benefits Rs. 4.30 Crores Provisions for Shuttering Rs. 9.24 Crores Rs. 15.21 Crores The above "Provision" did not include the provision of materials / Sub contractors / administrative costs as mentioned by the AO in her order. It seems that she misunderstood the word "Provision" used in the nomenclature of the disallowed cost. The nomenclature "Provision" for disallowed material / Sub Contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of the matters dealt with therein, in computing the income referred to in section 28-... (vii) subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year." This position in law is well-settled, After April 1, 1989, it is not necessary for the appellant to establish that the debt, in fact, had become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the books of account of the appellant. In the case of the appellant, an amount of Rs. 2.62 Crores had been written off in the Books of Accounts in the nature of bad debt and after the amendment of Sec. 36 (1) (vii) of the Income Tax Act, 1961, with effect from 1st April, 1989, in order to obtain a deduction in relation to bad debt, it was not necessary for the appellant to establish that the debt, in fact, had become irrecoverable, it is enough if the bad debt is written off as irrecoverable in the accounts of the appellant. This view has been examined by the Hon'ble Supreme Court in the case of T.R.F Ltd v CIT [2010] 323 ITR 0397 and the same has been followed by various co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, considering the appellant's submissions and details/bills, supporting vouchers/documents etc, did not make any disallowance on this issue while completing the assessment u/s 143(3) of the Act. Even during the year under consideration, on submission of evidence and bills and other documents relating to this issue, the Assessing Officer allowed an amount of Rs. 14,13,01,716 and balance Rs. 2,69,92,558, for which bills/evidence were not submitted before the Assessing Officer had been disallowed by her. Thus, after the submission of bills of the remaining amount, which were found to be in order by the AO, there is no ground for any disallowance on account of contractor/sub-contractor provisions. 10. As regards disallowance on account of Sundry purchases to the tune of Rs. 3,73,669/- without assigning any reason in the Assessment Order, the appellant filed complete details of these expenditures on a perusal of which it was revealed that the expenditure was incurred during the year and was in the nature of purchase of small items like Chemical, Wire, Phenol, Broom, Acid, Plastering Powder etc and there were around 200 entries throughout the year in relation to the expenditure o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order of the CIT(A) on this issue is upheld and the grounds raised by the Revenue are dismissed. ITA No.2595/Del/2016 (A.Y. 2011-12) (By Assessee) 21. The grounds raised by the assessee are as under:- 1. That on the facts and in the circumstances of the case, the learned Commissioner of Income-tax(Appeals) erred in holding and treating the expenditure on software as "Capital" in nature in place of "Revenue" claimed by the appellant amounting to Rs. 42,04,644. The expenditure on software was incurred on payment of "License Fees" on renewal of software licenses. Payment of Rs. 4,10,852/- made on purchase consumables items were also disallowed by treating as "Capital" expenditure. 2. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in holding "License Fees" as a part of "Software" and treating it as a capital expenditure for the purpose of calculating Depreciation under income tax rules 5 only, disregarding the fact that License Fee was paid for one year only and proof in support thereof was provided in appellate proceedings. 3. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in disregarding the fact that the no benefi ..... 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