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TMI Blog2017 (7) TMI 1435X X X X Extracts X X X X X X X X Extracts X X X X ..... [hereinafter referred to as the CIT(A)] erred in upholding the action of the Additional Commissioner of Income-tax, Range 7(1), Mumbai (ACIT) in disallowing expenditure of Rs.46,69,343/- in connection with Software treating the same as capital expenditure." 3. At the outset, the learned Counsel for the assessee drew our attention to the details of software expenses mentioned by AO in his order which reads as under: - Details of Software expenses Web Site Development Charges 118,900 BPOS - Software License fees 470,500 Software Modification 28,000 Software package-Stock-in-Transit accounting 25,450 Software package-Samples accounting 48,250 Software package modifications/enhancements 39,700 Software package-SBU Ill accounting 15,250 Software package-Evaluation 2000 7,851 Anti-virus software 14,900 Internet (tunnel) software charges 14,448 Mecklai-Software to manage forex accounting /reporting 682,500 Bank reconciliation software 501000 Payroll Software Pc based 250,000 AMC for payroll software 480,250 Templates for various forms on PC( e.g. travel claim) 20,000 Software 15,000 Crystal Report Software for writing reports 73,000 Software pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, at the same time directed the AO to withdraw the depreciation allowed. Aggrieved by this revenue is before us. The ld DR strongly supported the findings of the AO, Counsel for the assess strongly relied upon the decision of the Hon'ble Delhi High Court in the case of Asahi India safety glass limited 245 CTR 529. We have considered the rival submissions and perused the orders of the lower authorities. It is not in dispute that the expenditure has been incurred on application software. The Hon'ble Delhi High Court in the case of Asahi Safety Glass ltd.(Supra) has held that application software are of revenue in nature as the AO has not doubted that the expenses were on application software therefore respectfully following the decision of the Hon'ble Delhi High Court, findings of the CIT(A) are confirmed. Appeal of the revenue is dismissed." 5. The matter was not carried further in appeal. On query from the Bench the learned Sr. DR stated that the issue to cover in favour of the assessee. After hearing the both the sides and going through the facts and circumstances of the case, we find that this issue has been settled by Tribunal in all the earlier years and factually the expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Para 37 of its order which reads as under: - "37. Ground no. 7 relates to disallowance of Rs.23,18,653/- being 20% of foreign travelling expenses. Both parties agreed that identical issue has been decided by the Tribunal in assessee's own case in A.Y. 1991-92, 1992-93 & 1993-94. We have carefully considered the order of the Tribunal for A.Y. 1993- 94 in ITA No. 334/Mum/1997. We find that a similar issue has been decided by the Tribunal while deciding ground no. 5 of that appeal at para 26 of its order. We find that the Tribunal has given finding at para 31 on page 10 of its order, wherein it has followed the decision of the Tribunalin assessee's own case for A.Y. 1991-92 and 1992-93 and deleted the additions sustained by the CIT(A) the facts being identical. We have no hesitation in following the findings of the Tribunal in assessee's own case (Supra) disallowance sustained by the CIT(A) are deleted. This ground is accordingly allowed. Alternative plea raised by the assessee is dismissed." 9. After hearing both the sides and going through the facts of the case, we are of the view that the issue is fully covered up in favour of assessee and against the Revenue. Respectfully f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the Tribunal allowed the claim of foreign visitors expenses consistently in all these years and he similarly referred to the order of Tribunal in ITA No.498/Mum/2003 whereby vide Para 40 & 41 of the Tribunal's order the issue was allowed as under: - "40. Ground no. 9 relates to the disallowance of total air fare expenses incurred on foreign visitors, this issue has been discussed by the AO at page 36 vide para 17 of his order. The AO has followed the findings of A.Y. 1994-95 and disallowed the entire expenditure incurred on foreign visitors. When this addition was challenged before the CIT(A), the CIT(A) considered the grievance of the assessee at para 17 of page 36 of its order. The CIT(A) was convinced with the expenditure on travelling of foreign directors and directed the AO to allow this expenditure of Rs.5,56,647/-. However, for the remaining amount, the CIT(A) observed that the assessee has failed to establish the business relevance of the expenditure and confirmed the balance. 41. Aggrieved by this finding, assessee is before us. Counsel for the assessee submitted that in earlier year i.e. A.Y. 1992-93 and 1993-94 similar disallowances have been considered by the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticals etc. It is not in the business of hiring machinery. The machinery hire charges therefore cannot be regarded as accruing from the main business activity and do not therefore constitute the operational income of the appellant company. In this view of the matter the action of the AO in treating machinery hire charges as covered by explanation (baa) is upheld in principle. However, in view of the decision of the Special Bench of the Tribunal in Lalson's case (supra) I agree with the alternative contention of the appellant that 90% of only the net amount of machinery hire charges is to be reduced from the profits of the business. The AO is directed to re-compute the deduction u/s 80 HHC by reducing 90% of the net machinery hire charges from the profits of the business." 16. Now, the learned Counsel for the assessee stated that the CIT(A) should have directed the AO to take the entire receipt as business income. On the other hand, the learned Sr. DR supported the orders of the lower authorities. 17. We have heard the rival contentions and gone through the facts and circumstances of the case. We have considered the issue and find that Hon'ble Bombay High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfirmed. However, the alternative contention of the appellant that the opening stock of the following year should be increased by the MODVAT amount added to closing stock of the year under consideration is quite acceptable and the AO should accordingly adjust the opening stock of the following year." Aggrieved, now assessee is in second appeal before the Tribunal. 20. At the outset, the learned Counsel for the assessee stated that this issue is squarely covered in favour of assessee and against Revenue by the decision of Hon'ble Supreme Court in the case of DCIT vs Indo Nippon Chemicals Co. Ltd. (2003) 261 ITR 275 (SC) and also of Bombay High Court in the case of CIT Vs. Mahalakshmi Glass Works Private Limited (2009) 318 ITR 116 (BOM) wherein Hon'ble Bombay High Court in the case of Mahalakshmi Glass Works Private Limited (supra) held as under: - "1. The substantial question of law as raised in this appeal is as under: "Whether, on the facts and circumstances of the case and in law, the Hon'ble Tribunal was justified in confirming the order of the Commissioner of Income-tax (Appeals) whereby he directed the Assessing Officer to make adjustment of unutilized Modvat credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undervaluation at one end and not at the other is to raise an argument which their Lordships cannot accept." 4. We are in respectful agreement with the reasoning and the finding given by the Delhi High Court. 5. Apart from this, we find from the judgment of the Income-tax Appellate Tribunal that when counsel for the assessee contended that the closing stock of the previous year be taken as opening stock of the next year and that the Assessing Officer be directed to establish the valuation for closing stock as opening stock of the next year, the Departmental representative stated that he has no objection for the same. This concession has been recorded in the order." 21. Respectfully, following the Hon'ble Bombay High Court Decision in the case of Mahalakshmi Glass Works Private Limited (supra) and also upon the decision of co-ordinate Bench of the tribunal in the case of Sunshield Chemicals Private Limited v. ITO (2015) 64 Taxmann.com 161(Mum-trib.), we hold that unutilized MODVAT credit shall be added to the closing stock of the assessee as at year end which will also necessitate similar adjustments to opening stock in light of the aforesaid decisions cited by us. This issue o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany. From the value of the blocks of assets so adjusted the AO allowed depreciation in AYs 1998-99 and 1999-00 This closing WDV for AY 1999-00 was taken as opening WDV for the AY under the instant appeal and depreciation was allowed with reference to it. The main contention of the appellant is that depreciation be allowed to it on the basis of the WDV before demerger as reduced by the depreciation claimed in AYs 1997-98 to 1999-00. 2.2 An identical issue has been considered by my predecessor in the appeal of this appellant for assessment year 1997-98. For the reasons given in para 5 of the appellate order abovementioned, he upheld the action of the AO in not allowing depreciation on the assets transferred to CSCIL. Following the said decision, I had held likewise in AYs 1998-99 and 1999-00. For the same reasons for the AY under consideration also I uphold the action of the AO in not allowing depreciation on the assets transferred to CSCIL. Accordingly, this issue is decided against the appellants. 2.3 However, in deciding the issue the CIT(A)-XXIV had directed the AO to compute depreciation for A.Y. 1997-98 on the block of assets as reduced by the written down values of asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO, he held, that an assessee had to be the owner of a particular asset on which depreciation had been claimed, that the said assets had to be used for the purpose of its business, that the assessee was neither the owner of the assets transferred nor were same used for the business purposes during the year under consideration, that it had failed to satisfy the basic condition prescribed u/s.32 of the Act on the assets transferred to CSCIL, that the assessee was not justified in claiming that nothing should be reduced from its block of assets and that depreciation should be granted on the full block of assets as existing prior to the transfer of assets, that the reliance placed by the assessee on section 43(6)(c)(i)(B) of the Act was no help to it, that it could not be said that it had not received any consideration or moneys payable as envisaged under section 43 (6), that the AO had rightfully held that the assets transferred by the assessee were not without any consideration, that the shareholders of the assessee company received shares of CSCIL as per the scheme of arrangement sanctioned by the Hon'ble, High Court, that CSCIL had paid consideration to the shareholders of assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the purpose of recoupment by the Revenue of the benefit allowed to the assessee in the previous years does not alter the situation. 20. In the result, we do not find any error in the view expressed by the High Court in the judgment under appeal. We are in agreement with the reasoning and conclusion of the High Court in this case." Respectfully, following the above, we reverse the order of the FAA. We find that what was transferred, in the transaction in question, was not money. In our opinion, facts of the above case are quite similar to the case under appeal. We have also taken note offact that it is a case of demerger, not of sale or exchange. Last ground of appeal, raised by the assessee, is decided in its favour." We have observed that there is a newly inserted explanation 2A which is inserted by Finance Act 1999 with effect from 01-4-2000 to Section 43(6) of the 1961 Act which has not been considered by authorities below nor the assessee has brought the same to the notice of authorities below and hence we considered it appropriate to restore the issue to the file of the AO for de-novo adjudication of the issue in accordance with law in the light of newly inserted exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , appeal dismissed. Respectfully, following the above order, of the Hon'ble High Court, we dismiss Ground No.3." 27. We find that this issue has been decided by the Hon'ble Bombay High Court in assessee's own case, respectfully following the same, we allow this issue in favour of assessee in term of the decision of Hon'ble Bombay High Court. 28. The next common issue in this appeal of ITA No. 5981/Mum/2004 for AY 2000-01 of Revenue's appeal and the CO No. 114/Mum/2005 of assessee's appeal is as regards to the deletion of addition of estimated freight component in the closing stock. For this Revenue has raised following ground No. 3: - "3. On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the AO to delete the addition of Rs.27,42,71 1/- on account of estimated freight., component in the closing stock." And assessee in its CO has raised following ground No.2: - "2. The respondents submit that the AO be directed to increase the value of the opening stock of the subsequent year i.e. assessment year 2001-02 by a similar amount in case the AO's action of enhancing the value of closing stock on account of estimated pro-rata freight on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deducted. It is in this context, that they held that a method of valuation of closing stock has been adopted by, it is erroneous or unsound or unacceptable or is against accounting or commercial practice, the same can be discarded. In case, this principle is not attracted because the incurring expenses on freight or cartage outward or packing expenses purposes of transporting the goods have not added any stock. They are post manufacturing expenses are to be as selling expenses. Normally, the manufacturing are debited to the manufacturing account whereas the expenses are debited to the profit & loss account. According to the Advanced Accounts by R.N. Carter (1939 Rev. Edn., Page-32), carriage inwards increases the cost of the goods purchased and is hence debited to trading account whereas carriage outwards is a selling expenses and is debited to profit & loss account. In the present case, the goods manufactured by the assessee had to be distributed to the depots across the country from the centralized distribution depot at Bombay and the transporting cost is purely for the purpose of selling the goods. The packaging expenses are not the expenses are not expenses incurred in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -96 identical issue was decided against the AO. Respectfully, following the order of the Tribunal for earlier years, ground no.4, filed by the AO stands dismissed. Ground no.3 of CO is treated as infructuous." Respectfully following the above Ground No.5 is dismissed. 14. Expenditure incurred by the assessee on transit houses maintained by it is the subject matter of sixth Ground of appeal. While deciding the appeal, filed by the assessee, the FAA deleted the disallowance of Rs.6.88 lakhs made by AO u/s.37(4) of the Act. 14.1. We find that while deciding the appeal for the AY 1991-92 to 1996-97 the Tribunal had partly allowed the expenditure incurred by the assessee on transit houses, that the food and beverages expenditure were allowed by the Tribunal, that the other expenses were disallowed, that the department did not challenge the orders of the Tribunal before the Hon'ble High Court. The order of the Tribunal for AY 1996-97 at para no.16 deals with the issue as under: "16. Ground no.6, filed by the AO, is about deletion of disallowance of Rs.9.69 lakhs u/s.37(4) of the Act, in respect of expenditure incurred by the assessee on transit houses maintained by it at Gore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of CIT(A) in directing the AO to delete the incremental liability accrued on account of payment of pension under voluntary retirement scheme in respect of the orders of the assessee's erstwhile Bhandup Unit. For this Revenue has raised following ground No. 4 and assessee in its cross objection No. 114/Mum/2005 for AY 2000-01 has raised this issue in ground No. 3 which reads as under: - In Revenue's Appeal "4. On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the AO to delete Rs.2,86,15,972/- on account of incremental liability. In cross objection of assessee's appeal "3. The respondents submit that the AO be directed to allow deduction for payment of Rs.4,25,44,937/- if the action of the AO in not allowing deduction of Rs.2,86, 15,972/-, accrued on account of the payment of pension under the Voluntary Retirement Scheme (hereinafter referred to as VRS) in respect of the workers of the appellants of their erstwhile Rhandup unit is upheld." 32. At the outset, the learned Counsel for the assessee drew our attention to Para 5.2 and 5.3 of CIT(A)'s order which reads as under: - "5.2 The said liability for YRS was provided for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's total income. The AO has discussed this issue on para 12 on page 32 of his order, wherein the AO followed order of 1993-94 and 1994-95 for disallowing the incremental liability of Rs.3.90 crores. When the matter was agitated before the CIT(A), the CIT(A) has considered this issue of the assessee at para 13 of page 33 of his order wherein the CIT(A) has followed the decision of his predecessors for A.Y. 1993-94 and 1994-95 and confirmed the disallowance made by the AO. Before us, the counsel for the assessee drew our attention to page 134 of the paper book which is internal page 15 of order of the Tribunal in assessee's own case for A.Y. 1994-95 in ITA No. 2874/Mum/1999 and ITA No. 2720/Mum/1999. It is a say of the counsel that the Tribunal in that order has restored this issue back to the file of AO. Following the findings of the Tribunal for A.Y. 1993-94, the Ld. DR also agreed to the submission of the counsel, we have carefully gone through the orders of the lower authorities and the order of the Tribunal. We find that the Tribunal in its order at para 40 has followed the findings given by the Tribunal in A.Y. 1993-94 and has restored this issue back to the file of AO to exa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ula has been introduced whereby if the business is of composite nature then the proportionate profit relatable to the export business is to be found out by multiplying the profits of a business by export turnover and dividing the product by total turnover. This formula finds place in section 80 HHC (3) as it stood at the relevant time. Under clause (b) to the Explanation of section 80HHC, export turnover is defined to mean sale proceeds received in India by the assessee in foreign exchange. Under the said definition, export turnover is defined to mean the sale proceeds of any goods which are exported out of India but which will not include freight or insurance. Clause (ba) defines total turnover to exclude freight or insurance. This clause (ba) explains the turnover in a negative manner so as to exclude freight or insurance. Therefore, a combined reading of the above two clauses show that they include anything which has nexus with the sale proceeds. Correspondingly, they show that they exclude everything which has no nexus with the sale proceeds. Further, the meaning of export turnover in clause (b) of the Explanation to section 80HHC, therefore, clearly show that export turnover d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tory levies in the denominator, namely, total turnover. Therefore, the turnover should be restricted to such receipts which have element of profit in it. It is the only actual sale price which is relevant. Anything charged by the assessee by way of excise duty and sales tax cannot be taken into account as they do not have any element of profit. Even according to the accounting principles, such levies do not form part of profit and loss account. In fact, they are shown as liability in the balance sheet. In the circumstances, the above two items cannot be included in the total turnover. We prefer this interpretation as it advances the object sought to be achieved by the Legislature. Lastly, we are of the view that sales tax and excise duties are levied under separate enactments which have different objects. We are concerned with section 80HHC which is a separate code by itself. Hence, the general definition of the word 'turnover' or the case law dealing with the said definition under Sales Tax Act which is a State levy, cannot be imported into section 80HHC of the Act. Hence, we do not find any merit in these appeals." 37. The learned Counsel for the assessee similarly in respect to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm the order of CIT(A). This issue of Revenue's appeal is dismissed. 39. The next issue ITA No. 5981/Mum/2004 for AY 2000-01 of Revenue's appeal is against the order of CIT(A), deleting the disallowance made by the AO on account of expenditure in relation to exempt income under section 14A of the Act. For this Revenue has raised flowing ground No. 6: - "6. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance made by the AO on account of the expenditure incurred in connection with earning of interest income exempt u/s. 10(15) ignoring the fact that the Bombay High court in the case of CIT vs. General Insurance Corporation (125 Taxman 374) had decided the issue regarding deduction u/s.80M. In the instant case, the disallowance has been made in respect of expenditure incurred on earning exempt income and such expenditure is expressly disallowable vide the provisions of Sec.14A of the I.T. Act which have been introduced by the Finance Act 2001 with retrospective effect from 1.4.1962." 40. After hearing both the sides and going through the facts, we find that the CIT(A) following the decision of Hon'ble Bombay High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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