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TMI Blog2024 (2) TMI 1496X X X X Extracts X X X X X X X X Extracts X X X X ..... ization Expenses and in respect of Facility Management Charges debited to the Profit Loss Account - HELD THAT:- Assessee is engaged in the business of stock broking. The annual maintenance expenses have been incurred by the Assessee for keeping the software in line with the regulatory requirements and business requirements. Assessee has been incurring the annual maintenance charges on a recurring basis for smooth functioning of business. Vide order [ 2018 (4) TMI 931 - ITAT MUMBAI] for the Assessment Year 2011-12 the Tribunal had deleted the disallowance of Enhancement Customization Expenses and allowed deduction for identical annual maintenance expenses paid/payable to TCS as revenue expenditure. We are not persuaded to take a view, different from the aforesaid view taken by the Tribunal in appeal for the Assessment Year 2011-12. Accordingly, in view of the aforesaid, we direct the Assessing Officer to allow deduction for annual maintenance expenses paid/payable to TCS as revenue expenditure; delete the disallowance and direct the AO to reverse the depreciation @ 25% granted to the Assessee. Facility Management Charges - As perused the sample invoices and the letters dated 31/03/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gandhi, Ms. Labdhi Kothari For the Respondent/Department : Shri P.D. Chougule ORDER PER RAHUL CHAUDHARY, JUDICIAL MEMBER: 1. These cross-appeals pertaining to Assessment Year 2012-13 arising from the order, dated 30/03/2023, passed by the Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as the CIT(A) ], whereby the Ld. CIT(A) had partly allowed the appeal of the Assessee against the Assessment Order, dated 27/02/2015, passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act ). 2. The Assessee has raised following grounds of appeal in ITA No. 1886/Mum/2023: GROUND NO. I: ORDER PASSED IN VIOLATION OF THE PRINCIPLES OF NATURAL JUSTICE IS BAD-IN-LAW: 1. On the facts and circumstances of the case and in law, Hon'ble CIT(A) erred in passing the impugned order without giving a fair and reasonable opportunity of hearing to the Appellant in respect of addition made in the order and thereby violated the principles of natural justice. 2. Hon'ble CIT(A) further erred in not appreciating that non-adjudication of additional ground filed, and non-consideration of additional evidence results ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n @ 60% ought to be allowed. WITHOUT PREJUDICE TO GROUND NO, I II, GROUND NO. VI: DISALLOWANCE OF REPAIRS AND MAINTENANCE EXPENSES AMOUNTING TO RS. 5,46,479/- 1. On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in remanding the issue to the AO to verify whether the said expenses are of enduring nature or not. 2. The Appellant prays that the said expenses ought to be allowed u/s 31 of the Act. 3. Without prejudice to the prayer at 3 above, the said expense ought to be allowed u/s 37(1) of the Act. 4. Without prejudice to the prayers at 3 and 4 above, even if the said expenses are treated to be capital in nature, depreciation @ 10% ought to be allowed. GROUND NO. VII: GENERAL:- The Appellant craves leave to add, amend, alter, and/or delete any/all of the above grounds of appeal. 3. The Revenue has raised the following grounds of appeal in ITA No. 1985/Mum/2023: 1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was justified in not upholding the disallowance Rs. 1,75,16,000/- u/s. 40(a)(ia) of the Income Tax Act, 1961 on account of payment of Data/circuit Bandwidth Charges without appreciating the fact that the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3, the CIT(A) allowed partial relief to the Assessee. The CIT(A) deleted the addition/disallowances made by the Assessing Officer of INR 1,75,16,000/- under Section 40(a)(ia) of the Act and the disallowance of INR 1,67,67,179/- in respect of various expenses. As regards other additions/disallowances made by the Assessing Officer, the CIT(A) confirmed the disallowance of lease rent expenses, and the repair maintenance expenses, while in relation to net enhancement customization expenses and facility management the CIT(A) granted partial relief and issued directions to the Assessing Officer. 6. Now, both, the Assessee as well as the Revenue are in appeal before the Tribunal on the grounds reproduced in paragraph 2 to 4 above. 7. We would first take up grounds raised by the Assessee in its appeal. Appeal by Assessee : ITA No. 1886/Mum/2023 Ground No. I II 8. Ground No. 1 raised by the Assessee challenged the validity of the order impugned on the ground of violation of the principles of natural justice. By way of Ground No. II the Assessee had raised the issue of violation of the doctrine of judicial precedence. Both the aforesaid grounds, though raised as independent grounds, also sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the Lessee. During the course of hearing, the Learned Authorised Representative for the Assessee had relied upon judicial precedents dealing with the recognition of lease rental as income in the books of accounts of the Lessor in case of financial leases, whereas in the present case the issue raised pertains to recognition of lease rental pertaining to operational lease as expenses in the books of accounts of the Lessee. Therefore, in our view, the aforesaid judicial precedents are not applicable to the facts and circumstances of the present case. 16. During the course of hearing, heavy reliance was also placed on the judgment of the Hon ble Delhi High Court in the case of Commissioner of Income Tax Vs. Virtual Soft Systems Ltd.: [2012] 341 ITR 593 (Delhi)[07-02-2012] to contend that once expenses have been accounted for in the books of account as per the accounting standard, deduction for the same would have to be allowed while computing taxable income as per the provisions of the Act. However, on closer analysis of the judgment of the Hon ble Supreme Court [reported in 404 ITR 409 (SC)], whereby the aforesaid judgment of the Hon ble Delhi High Court was affirmed, it becomes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was following the same method in earlier years. Finally, he held that the lease payment under the operating lease should be recognised as an item of the P L A/c on a straight line basis over the lease period. He deleted the addition made by the AO. 8. Before us, the DR supported the order of the AO. AR relied upon the order of the FAA and stated that the assessee followed the mandate of AS-19, that the provision was made on a scientific basis, that rent payable was allowable as per the section 30 of the Act. 9. We find that the AO had made the disallowance as he was of the opinion that it was a prepaid expense and that it could not be claimed during the year under appeal, that the assessee had claimed the expenditure as per the provisions of AS-19, that the agreement entered into by the assessee was in the nature of operating lease as defined in AS-19, as per the accounting standard in such cases the payments have to be considered as an item of P L account on a straight line basis over the lease period. The FAA had given a categorical finding of fact that the provision of Rs.1.08 crores was in respect of the liability that had accrued during the FY 2009-10. We are of the opinion th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure were capital in nature and that the Assessee was entitled to claim depreciation on the same. Thus, the Assessing Officer made aggregate disallowance of INR 1,97,53,875/-. 20. In appeal before CIT(A), it was pointed out that the Enhancement Customization Expenses paid/payable to Tata Consultancy Services Limited were different form the Facility Management Charges paid/payable to Wipro Limited. However, CIT(A) considered both the disallowance together and decided the grounds raised by the Assessee granting partial relief to the Assessee holding as under: 5.13 The learned AO disallowed sum of Rs. 1,97,53,879/- on account of enhancement and customization expenses incurred by the appellant on its software. The learned AO also disallowed sum of Rs.72,45,000/- towards facility management expenses incurred on account of maintenance of existing hardware. Also, the learned AO disallowed sum of Rs.5,46,479/- on account of maintenance expenses by treating them capital in nature. 5.14 The appellant explained that such expenses are incurred towards maintenance of existing software, therefore the same are allowable expenditure. The appellant submitted supporting invoices and copy of agreement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture and had been incurred for smooth functioning of business activities and therefore, cannot be treated as enhancement and customization charges of capital nature. In order to meet the regulatory requirements and business needs that software developed by TCS needs minor modification/customization. 27. On the other hand, the Learned Departmental Representative relied upon the order passed by the Assessing Officer and submitted that the modifications/customizations result in enduring benefit to the Assessee and therefore, Assessing Officer was correct in holding the same as capital in nature. The Assessing Officer has fairly allowed depreciation at the rate of 25% and therefore, the Assessee was not entitled to any further relief. The CIT(A) has gone a step further any directed the Assessing Officer to allow deduction for expenses not providing enduring benefit after verification and therefore, no further relief could be granted to the Assessee. 28. Having considered the rival submissions, we find merit in the submissions advanced by the Learned Authorised Representative for the Assessee. The Assessee is engaged in the business of stock broking. The annual maintenance expenses have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alf of the Assessee that the Facility Management Charges were incurred for maintaining the existing setup at all location of the Assessee in terms of hardware and linkage as well as running of the hardware. This facilities management service was provided by Wipro by way of deployment of team of computer engineers to maintain connectivity between branches and centralized server, existing computer hardware and printer installations and to prevent malfunction, work-dislodgement, zero downtime, e-mail management, keeping records of installed machines etc. The expenses of the facilities management were regularly incurred right from the inception of the Assessee in order to facilitate the business operations and were also being allowed by the Revenue. No disallowance was made in respect of identical deduction claimed for the Assessment Years 2008-09 (INR 93,65,935/-), 2009-10 (INR 1,13,18,201/-) and 2010-11 (INR 88,06,270/-). Therefore, it was contended on behalf of the Assessee that no disallowance ought to have been made on the principles of consistency when there was no change in the facts or nature of the expense. It was also contended that the aforesaid expenses did not provide any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of INR 5,46,479/-. 39. Being aggrieved, the Assessee is now in appeal before us. 40. We have heard the rival submissions and perused the material on record. On perusal of the details of expenses furnished by the Assessee and corresponding invoices, it emerges that expenses were incurred for routine repair and maintenance activity for keeping the assets in working condition. (a) Amount aggregating to INR 2,92,585/- paid to Siddhi Office Solution, a multi-tasking labour contractor, to carry out all types of repairs of furniture, electrical and telephone data lines and instruments, across all branch. The Assessee has placed on record the ledger account along with the relevant invoices. Majority of the expenses incurred pertain to supply in installation of networking products such as crone modules, voice cabling for work stations, supply and installation of key board trays connectors, data/voice/electrical cabling and electrical work incurred for keeping the working station in operating conditions. (b) Amount aggregating to INR 61,700/- was paid to Mahal Decorator, a carpenter carrying out petty repairs for the Assessee. The Assessee has provided following details during the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view that expenses of INR 5,46,479/- are to be allowed as revenue expenditure. The aforesaid view, also draws strength from the decision of the Tribunal in the case of the Assessee for the Assessment Year Assessment Year 2011-12 [ITA No. 738 716/Mum/2016, order dated 16/04/2018], whereby the Tribunal had deleted similar disallowance of net repair and maintenance expenses. Accordingly, we overturn the decision of the Assessing Officer and direct the Assessing Officer to allow deduction for INR 5,46,479/- as revenue expenditure; delete the disallowance of INR 5,46,479/- and reverse the depreciation granted to the Assessee in relation to the same. In terms of the aforesaid, Ground No. VI raised by the Assessee is allowed. Appeal by Revenue: : ITA No. 1985/MUM/2023 43. We would now take up grounds raised by the Revenue in the cross-appeal. Ground No. 1 44. Ground No. 1 pertains to deletion of disallowance of Data Circuit/Broadband/Multi-Protocol Label Bandwidth Charges under Section 40(a)(ia) of the Act. 45. During the assessment proceedings, the Assessing Officer noted that the Assessee had debited INR 175.16 Lakhs as Data Circuit/Broadband Charges to various parties consisting of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Revenue was that the CIT(A) had deleted the addition without even carrying out basic verification. The agreement in terms of which payments were made by the Assessee was not examined by the CIT(A) despite specific finding by the Assessing Officer that the aforesaid agreements were not filed during the assessment proceedings. Per contra, the Learned Authorized Representative for the Assessee submitted that identical disallowances was deleted by the Mumbai Bench of the Tribunal in appeal for the Assessment Year 2010-11 [ITA No. 3137/Mum/2014] following the decision of the Pune Bench of the Tribunal in the case of iGate Computer System Limited (67 SOT 296). Following the aforesaid decision for Assessment Year 2010-11, the Mumbai Bench of the Tribunal has also decided similar issue in the favour of the Assessee in appeal for Assessment Year 2011-12 [ITA No. 716/Mum/2016]. The Learned Authorised Representative for Assessee submitted that the agreements in terms of which payments have been made continue to be the same and therefore, there is no change in the facts and circumstances of the case. 49. We have heard the rival submissions and perused the material on record. On perusa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said expenses are revenue in nature. Relevant extract of the same is reproduced as under: Considering the principle of commercial trading, when the question is to be addressed, both the CIT [A] as well as the Tribunal rightly held it to be revenue in nature and the same cannot be said to be capital. It is quite apparent that the fees paid for support for LAN work, providing and upgradation of Internet Bandwidth, or for coordination with BSNL for internet connectivity, etc. are not having any enduring benefit. If any consultancy is required for the said purpose, the amount clearly would come under the head of Consultancy and that surely could not be considered as capital in nature. In the present form, the expenditure made was at the best for continuing the benefit for one year, Resultantly, such payment cannot be categorized as capital in nature as no asset is brought into existence on account of such payment, 5.3.6. In view of the foregoing submissions, the Appellant prays that the AO be directed to allow the entire amount of Rs. 96,60,000/- incurred on account of facilities management under section 37(1) of the Act. 5.3.7. Lastly, facilities management expenses are regularly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he aforesaid, we find that the Assessing Officer had made adhoc disallowances @ 25% of expenses aggregating to INR 6,70,68,742/- of the following : S. No. Particulars Amount (INR) 1 Conveyance 2,01,91,456 2 Travel Expenses Hotel Inland 2,327,388 3 Travel Expenses-Other 5,611,870 4 Staff Training and Welfare 3,89,38,000 Total 6,70,68,714 53. In the assessment order the Assessing Officer has, on verification of details furnished by the Assessee, recorded that the above said expenses were not fully supported by proper bills/vouchers and were supported by self made voucher (in cash). Further, the Assessing Officer was of the view that an element of personal expenditure could not be ruled out. 54. In appeal before CIT(A), the Assessee filed sample bills and vouchers pertaining to various expenses. We note that CIT(A) deleted the disallowances made by the Assessing Officer observing that the Assessing Officer has failed to specify expenses which are to be disallowed and has made the disallowances on ad-hoc basis. The observation of the Assessing Officer that expenses incurred may involve personal element was without any basis. Further, the Assessing Officer has also not quantified the el ..... X X X X Extracts X X X X X X X X Extracts X X X X
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