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TMI Blog2023 (6) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... eous and prejudicial to the interest of the revenue. - Decided in favour of assessee. - ITA NO.1341/MUM/2022 - - - Dated:- 3-4-2023 - SHRI KULDIP SINGH, HON'BLE JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER For the Assessee : Shri Nishant Thakkar Ms. Jasmin Amalsadvala For the Department : Smt. Shailja Rai ORDER PER S. RIFAUR RAHMAN (AM) 1. This appeal is filed by the assessee against order of Learned Principal Commissioner of Income Tax, Mumbai 1 [hereinafter in short Ld. Pr.CIT ] dated 27.03.2022 for the A.Y.2017-18. 2. Brief facts of the case are, assessee filed its return of income for A.Y. 2017-18 on 30.11.2017 declaring total income of ₹.NIL. The case was selected for Scrutiny under CASS and assessment was completed u/s. 143(3) of Income-tax Act, 1961 (in short Act ) on 28.12.2019 assessing the total income at ₹.1,47,45,062/- after addition on account of disallowance of depreciation on goodwill to the tune of ₹.24,41,40,229/- and provisions for doubtful debts of ₹.45,79,000/-. 3. Ld. Pr.CIT, Mumbai -1 while perusing the assessment records observed that assessee has claimed EDP e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as manage institutes, training centers in the field of beauty and wellness services. In addition to above, the Company is engaged in the business of converting raw materials and packing material into finished and semi-finished goods for its parent entity on job work basis. Further, during the year under consideration the Company has e-furnished its return of income under section 139(1) of the Act declaring loss to the tune of INR 23,39,74,167. The Company's case was selected for scrutiny proceedings and the jurisdictional assessing officer passed an order under section 143(3) of the Act post making certain additions computing income to the tune of INR 1,47,45,062. Being aggrieved by the said order, the Company has preferred an appeal before the Commissioner of Income Tax (Appeals) which is pending for disposal. Further, the Company humbly submits the following facts and explanations to the issues raised in the aforesaid notice: EDP expenses amounting to INR 2,84,82,194/- It is proposed to initiate revision proceedings u/s 263 on the basis that EDP expenses incurred by assessee are enduring in nature, thus should have been treated as capital expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding of the fact that the software purchased from M/s. C.A. India Technologies Pvt. Ltd. brought about better efficiency in the appellant's business as it enabled it to meet specifically user problem faced by the Respondent-Assessee. The impugned order also records the fact that in view of fast changing technology, software has to be regularly updated so as to keep pace with the changing technology. On the aforesaid facts the view taken by the Tribunal that the expenditure of Rs.38.90 Lakhs is on Revenue account is an entirely possible view. The Company also relies on the ruling of the Hon'ble Bombay High Court in case of PCIT vs. TATA AIG General Insurance Co. Ltd. [2020] 116 taxmann.com 492 (Bombay) wherein it was held that expenditure incurred by the taxpayer on purchase of hard disk and other peripherals categorized as EDP expenses in the books of accounts cannot be said to be capital in nature. In connection to above, reliance is also placed on the judicial precedent in case of CIT vs UHDE India (P) Ltd. (2014) 46 taxmann.com 259 (Bombay) wherein it was held that expenses incurred on account of software development in the nature of annual maintenance contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tantamount to gross miscarriage of settled judicial principles. In the light of above facts and judicial precedents, we humbly submit that the EDP expenses charged to the profit and loss account do not result in any benefit of enduring nature and thus cannot be categorized as capital expenditure. Royalty Expenses amounting to INR 2,77,23,272 It is proposed to initiate revision proceedings u/s 263 on the basis that no tax has been deducted On Royalty expenses debited to the P L account and thus, possibility of disallowance under section 40(a)(ia) of the Act need to be examined. Further, the expenditure also appears to be in the nature of capital expenditure and hence, disallowance under section 37(1) of the Act ought to have been examined. During the captioned assessment year, the Assessee has debited expenditure amounting to INR 2.77,23,272 under the head Royalty in P L account. This expense is covered under the trademark license agreement entered with its holding company, Hindustan Unilever Limited (CHUL). Accordingly, in consideration of the license rights granted by HUL to the Assessee, the Assessee was under an obligation to pay HUL, royalty for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fice to kindly drop the revision proceedings on account of the following: EDP expenses are routine in nature (incurred year on year) for efficient and smooth running of day-to-day business operations, EDP expenses are not to bring any benefit of Enduring nature to the Company and therefore cannot be categorized as capital expenditure. Adequate taxes have been withheld on Royalty payments made by the Company under Section 194J of the Act. Such expenses are tax deductible under section 37(1) of the Act as they have. been incurred wholly and exclusively by the Assessee for the purposes of its business and are not capital in nature. Treating such expenses as capital in nature will tantamount to gross miscarriage of settled judicial principles. Kindly take the above submission on record and acknowledge. If you have any questions on the submission, we request you to provide us/our authorised Representatives an opportunity of being heard in person and present our case. 6. After considering the submissions of the assessee, Ld. Pr.CIT rejected the submissions of the assessee and he observed that Assessing Officer has allowed deduction of ₹.2,84,82,194/- on ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer to reframe the assessment de novo 5. The appellant company craves leave to add to, to amend, to alter or modify any or all the aforesaid grounds of appeal. 9. At the time of hearing, Ld. AR of the assessee brought to our notice facts of this case that Assessing Officer has verified the EDP expenses claimed by the assessee and on royalty, Assessing Officer has verified whether the assessee has deducted TDS. 10. In this regard, he brought to our notice Page No. 249 of the Paper Book which is the notice issued by the Ld. Pr.CIT u/s. 263 of the Act. He compared the notice and the findings of the Ld. Pr.CIT in Page No. 7 of the order and submitted that Ld. Pr.CIT has left the proposition raised by him in the notice that such expenditure appears to be in the nature of capital expenditure and therefore disallowance u/s. 37 of the Act ought to have been examined. However, Assessing Officer neither made disallowance u/s. 40(a)(ia) or section 37 of the Act. However, he conveniently left this aspect while deciding the issue of EDP expenditure and royalty. Further, he brought to our notice Page No. 36 of the Paper Book which is the financial statement for the year under cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of section 263 of the Act. In this regard, he relied on the decision of the Hon'ble Bombay High Court in the case of CIT v. Chandan Magraj parmar [2022] 135 taxmann.com 55 (Bombay) 14. Further, he submitted that Ld. Pr.CIT has invoked Explanation 2 in his order, however, no such issue was informed in notice issued u/s. 263 of the Act. Therefore, he cannot invoke this issue in his order. In this regard he relied on the decision of the Coordinate Bench in the case of M/s.Vodafone India Limited v. Pr.CIT in ITA.No. 780/Mum/2021 dated 28.01.2022. Further, he relied on the decision of the Hon'ble Bombay High Court in the case of Pr.CIT v. TATA AIG General Insurance Co. Ltd., [2020] 116 taxmann.com 492. He submitted that as held in the above said decision EDP expenditure is a revenue expenditure, it cannot be treated as capital expenditure. 15. Further, he submitted that after considering the various details submitted by the assessee the Assessing Officer has taken one of the possible view to allow the claim of the assessee, now, Ld. Pr.CIT cannot impose his view on the Assessing Officer. 16. On the other hand, Ld.DR relied on the orders of the Ld. Pr.CIT an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r has issued various notices u/s. 143(2) and 142(1) and collected the various informations relating to TDS deduction on royalty payments as well as EDP expenses. From the record, we observe that it is not the case wherein Assessing Officer has not made any enquiry, however, he has carried out enquiries but he failed to discuss the same in the Assessment Order. In our considered view, the Assessing Officer has carried out certain verification, therefore the provisions of section 263 in particular Explanation 2 cannot be invoked in the present case. 19. Further, it is brought to our notice that the Hon'ble Bombay High Court in the case of Pr.CIT v. TATA AIG General Insurance Co. Ltd., (supra) has allowed the claim of EPD expenditure as revenue expenditure, and observed as under: - 2. The appeal is admitted for consideration of following substantial questions of law: (i) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the amortized amount of the premium on investments amounting to Rs. 1,18,23,413/- cannot added back to the balance of the profits as there is no specific prohibition against the allowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid by assessee? (d) Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in confirming that the coinsurance commission of Rs. 49,61,295/- is allowable under the provisions of Sec. 40(a)(ia) and does not require to deduct TDS on such payments? Questions Nos. (a) and (b) refer to the expenditure incurred by the assessee in purchase of hard discs and other peripherals and for acquiring computer software. Revenue argued that the same was in the nature of capital expenditure. CIT(A) and the Tribunal, however, examined the nature of expenditure and held that the same was revenue expenditure. We do not find any error. Similar issue was examined by this Court in order dated 4.12.2018 passed in Income Tax Appeal No. 778 of 2016 and connected appeal. These questions are, therefore, not considered. As far as Question Nos. (c) and (d) are concerned, we have examined these questions in Income Tax Appeal No. 541 of 2017 and not entertained them. Without recording separate reasons, these questions are not entertained. 20. Considering the above decision and also various verifications made by the Assessing Officer on royalty clear ..... X X X X Extracts X X X X X X X X Extracts X X X X
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