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TMI Blog2006 (3) TMI 196X X X X Extracts X X X X X X X X Extracts X X X X ..... of past experience and certain fair and best estimate basis provided for such warranty liability in respect of sales made during the year. It is the contention of assessee that since the assessee is following mercantile system of accounting; the assessee is required to provide for all known liabilities even though the amount cannot be determined precisely or with certainty. This is in tune with accounting standards notified by the CBDT, where it is mentioned that the provision is to be made for all known liabilities and losses even though the amount cannot be determined with certainty. The assessee, on the basis of its past experience, made provision in respect of goods sold during the year as percentage of sales. For providing such warranty claims, the assessee has entered into back to back arrangement with IBM Global Services India Pvt. Ltd. (IGSI). Pursuant to which the appellant's application in the warranty period are to be discharged by, the said company. In consideration thereof, the appellant has to pay over the fixed percentage of sales price to IGSI. The assessee claimed the liability as accrued liability whereas the Assessing Officer held that the same is merely a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treatment of purchase of software amounting to Rs. 33,14,298 as capital expenditure as against claim of assessee as revenue expenditure. 3.1 The assessee acquired certain application software for a sum of Rs. 33,14,298 and claimed the same as revenue expenditure. The Assessing Officer held that since these results in enduring benefit to the assessee, it is a capital expenditure and not revenue expenditure but depreciation on the same is to be allowed. Learned CIT(A) held that in absence of any material to decide the lifespan of said software, the decision relied by the counsel for assessee cannot be examined. He also held that the depreciation on non-tangible asset is allowable under section 32(1)(ii). This implies that software which is an intangible asset can also be a capital asset and hence when the assessee acquires the same, it amounts to capital expenditure and not revenue expenditure. He also relied upon the decision of Hon'ble Rajasthan High Court in the case of CIT v. Arawali Constructions Co. (P.) Ltd [2003] 259 ITR 301. 3.2 Learned counsel for assessee Shri Pardiwala submitted that what the assessee acquired is application software and not system software. The app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions cited. For determining the nature as to whether the expenses are capital or revenue, the same can be with regard to facts of each case, as no one test or principle or criteria is paramount or conclusive or of universal application. When expenditure is made not only once and for all but also with a view to bringing into existence an asset or an advantage for the enduring benefit, the same can be properly classified as capital expenditure. At the same time, even though the expenses are once and for all and may give an advantage for enduring benefit but is not with a view to bringing into existence any asset, the same cannot be always classified as capital expenditure. The test to be applied is, is it a part of company's working expenses or is it expenditure laid out as a part of process of profit earning. Is it on the capital layout or is it an expenditure necessary for acquisition of property or of rights of a permanent character, possession of which is condition on carrying on a trade at all. Hon'ble Supreme Court in the case of Alembic Chemical Co. held that the concept of payment made 'once and for all' and of 'enduring benefit' must respond to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid sum is not chargeable to tax but is capital receipt. The Assessing Officer held that the amount received is not capital receipt as there is no corresponding asset represented in balance sheet. These were created over the years through the expenditure debited to revenue account. The amount received is therefore to be treated as revenue receipt. Learned CIT(A), after considering the terms of agreement as also the sample copies of appointment letters issued by appellant to its employees, held that the appellant has no power to transfer its employees. The power is only to terminate the services but not to direct the employees to join the particular concern. Hence the amount cannot be considered to have been received for transfer of capital asset. He also held that the amount received on transfer of skilled personnel is not for the loss of source of income or income earning apparatus, but is compensation towards loss of business due to loss of skilled personnel. While so holding he relied upon the decision of Hon'ble, Bombay High Court in the case of H.H Maharani Shri Vijay Kuverba Saheeb of Morvi v. CIT [1963] 49 ITR 594. He concluded that the amount of Rs.18.4 crores received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ried out by the assessee or its business activities, but are capital receipts. The amount received can neither be considered as fees for technical services within the meaning of section 9(1)(vii) nor royalty within the meaning of section 9(1)(vi). The appellant has not rendered any technical services to IGSI. The assessee is not in business of transferring these personnel after training them. The database accumulated by appellant over the years is an asset though an intangible one. It is one of the recognized accounting principle that intangible asset will not appear in the balance sheet unless paid for. The Assessing Officer was therefore not correct to state that the amount is not for any asset since it is not appearing in the balance sheet. Similarly the amount received is not royalty. He strongly relied upon the decision of Hon'ble Bombay High Court in the case of Mehboob Productions (P.) Ltd v. CIT [1977] 106 ITR 758, the relevant portion of which is extracted hereunder:- "As regards the amount of Rs. 10 lakhs odd, the first aspect for consideration is whether the various amounts received by the assessee and aggregating to Rs. 10 lakhs odd should be held to be income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur of the assessee." On the basis of above, he submitted that the disputed sum be treated as capital receipt not chargeable to tax or alternatively as capital gain on transfer of certain assets, the cost of which is not ascertainable and hence not chargeable to tax. For the alternate proposition, he relied upon the decision of Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 and the decision of the Tribunal in the case of Voltas Ltd and in the case of Coromandel Fertilizers Ltd v. Dy. CIT [2004] 90 ITD 344 (Hyd.). 4.4 Learned CIT Shri D.K. Gupta strongly relied upon the appellate order. He submitted that the assessee himself treated the amount received as income in its books of account. The same was also offered as income initially but claimed as exempt later on. Though the entry in books of account or nomenclature given thereto is not material, the same is relevant for considering the nature thereof. For this proposition he relied upon the decision of Hon'ble Supreme Court in the case of Siddheshwar Sahakari Sakhar Karkhana Ltd v. CIT [2004] 270 ITR 1. When the assessee recites in the agreement that the consideration is by reason of tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e database, the amount is received and the same is not in respect of expenses incurred earlier. Section 28(iv) will not apply, as it is not the value of any benefit or perquisite. Section 28(iv) will apply to no cash transaction in the nature of benefit or perquisite but not to the monetary transaction itself. For this proposition he relied upon the decision of Hon'ble Gujarat High Court in the case of CIT v. Alchemic (P.) Ltd [1981] 130 ITR 168 and in the case of CIT v. Mafatlal Gangabhai & Co. (P.) Ltd [1996] 219 ITR 644 (SC). The amount received is not in the course of carrying on any business and hence under section 28, the same cannot be brought to tax. 4.6 We have carefully considered the relevant facts, arguments advanced and the decisions cited. To understand the controversy, it is necessary to consider the terms of agreement, extracted hereunder:- "This agreement is made and entered into as of this twentyfifth day of August, 1997, by and between: (A) Tata IBM Limited (Tata IBM), a company duly established under the laws of the republic of India, having its registered office at Golden Enclave, Airport Road, Bangalore-560 017 (which expression shall unless it be rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kiosk Services, and it is the understanding of IBM, Tata and TATA IBM that such services include but is not limited to (l) software design, (m) hardware design, (n) professional services, (0) information technology consulting (p) international procurement operations, (r) value added network, (s) fee based education, (t) systems integration, (u) availability services, and (v) hardware maintenance and software support: (C) Therefore, for and in consideration of the premises and the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: (1) Tata IBM agrees to do the following: (a) Sell all maintenance spares and accessories comparing inventory of TATA IBM relating to IBM computers; (b) Facilitate transfer of its personnel of TATA IBM set out in Annexure I; and (c) Share the database relating to TATA IBM's clients and customers, list whereof is set out in Annexure III hereto. (2) The transfer aforesaid shall be effective from the twenty-fifth day of August, 1997. (3) In consideration of the transfer aforesaid IBM Global shall pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eaning but to widen its net. The word 'income' is of widest amplitude, and it must be given its natural and grammatical meaning. The scheme of section 2(24) read with sections 4 and 10, seems to be that given its ordinary natural meaning the word 'income' will take in any monetary return 'coming in'. It will take in voluntary and gratuitous payments, which are connected or linked with the office, vocation or occupation. 4.8 Income under the Act connotes a periodical monetary return coming in with some sort of regularity or definite source. The source is not necessarily one, which is accepted to be continuously productive but it must be one whose object is the production of a definite return. At the same time, it cannot be said that the receipt, which is not periodical or which is not regulated but of one time receipt, cannot be considered as income. The source need not be continuously productive and it is sufficient if the income is flowing from some exercise or operation by the appellant and in ordinary parlance, which can be considered as income. To constitute income, the receipt need not necessarily have their origin in business activity or investment or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of his income, but depends entirely on the whim of the donor, cannot fall in the category of "income"." In the case before Hon'ble Punjab and Haryana High Court in Atlas Cycle Industries Ltd.'s case, three employees entered into an agreement with the assessee for serving it for an agreed period and deposited a sum by way of security deposit. As these employees left the service before the stipulated period, the assessee-company forfeited the Security deposit. On the question whether such sum is revenue receipt or capital receipt, Hon'ble High Court held thus:- "That the assessee had incurred the expenditure on the training of the three employees which had been allowed as business expense. When part of the expense had been realized by the assessee by way of forfeiture of the security deposits, in essence the amounts of the security deposits resulted in the reduction of the expenditure of the company on the training of its personnel and was to be included in the total income of the assessee." Hon'ble Bombay High Court in the case of Ralliwolf Ltd. held thus:- "That the Tribunal had recorded a finding that the effect of the transaction was that the assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r a further period of one year and accordingly the said agreement stood renewed up to 10-6-1977. But, in the meanwhile, the Government of India sponsored a company C and on 6-10-1976, BME wrote a letter to the assessee stating that since a lot of technical know-how and organization potentialities were needed to handle the date process plan made by BME, the assessee might assign its rights under the said agreement to C which was specializing in the particular line. BME agreed to pay to the assessee a lump sum as consideration for the assessee assigning its rights in favour of C. The agreement between the assessee and BME stood terminated on a payment of Rs. 5 lakhs. The Income-tax Officer held that the amount was assessable and this was upheld by the Tribunal. On a reference: Held, that the agency agreement was entered into by the assessee in the normal course within the framework of the normal business of the assessee and the termination thereof could be treated as a normal incident of the business. Even with the termination of the agreement, the assessee was left free to carryon its normal trading activities. By cancellation of the agency, the trading structure of the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 25 lakhs received by the assessee during the year 1988-89 and again Rs. 15 lakhs during the year 1989-90 only a sum of Rs. 5 lakhs was a capital receipt and not liable to tax as income under section 28(ii)(c) of the Income-tax Act, 1961." 4.9 Applying the principles laid down above by us as well as by the various courts extracted herein above, we examine the facts of present case before us. The appellant received a sum of Rs. 18.4 crores being consideration for the value which inheres in the human resources by reason of training, skill, practical experience and work culture for transfer of the personnel. To facilitate such transfer, the amount was paid. Undisputedly, the training, skills and experience as well as work culture was imparted by the assessee. Because of the employment of such personnel with the appellant company, the personnel acquire such skills, experience and work culture. Acquisition of such training, skill, experience and work culture was at the cost of appellant company. Thus, the same can be connected with the office or occupation, which the assessee carries on. The sum is referable to the source, which is office or occupation of the appellant. The amount is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment proceedings. 5.3 We are in agreement with the submission by Shri Pardiwala. The Assessing Officer may allow the credit for the taxes paid in USA as per the provision of section 90 of the Act read with article 25(2)(a) of the DTAA between India and USA, whether or not such claim is made in the return or during the assessment proceedings. There cannot be any embargo on entertaining the claim even if such claim is not made in the return or during assessment proceedings. 6. The next ground of appeal relates to computation of income under the provision of section 115JA of the Act. It is the contention of assessee that while computing "book profits" within the meaning of section 115JA, provision made for doubtful debts should not be added as it do not amount to "Provision made for meeting liabilities other than ascertained liabilities" within the meaning of Explanation in section 115JA(2). 6.1 The assessee in his profit and loss account debited a sum of Rs. 30,45,96,133 as provision for bad and doubtful debts. The Assessing Officer held that the provision is for unascertained liability. The Assessing Officer held that by writing off a debt, the company in fact meets the liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T, Pune in the case of J.G. Vacuum Flasks (p.) Ltd. 6.5 We have carefully considered the relevant facts, arguments advanced and the decisions cited. Hon'ble Supreme Court in the case of Surana Steels (P) Ltd. v. Dy. CIT [1999] 237 ITR 777 held that while computing book profit, one has to refer the provision of Companies Act, 1956. As per Part III of Schedule VI of Companies Act, 1956, the expression 'provision' shall mean "any amount written off or retained by way of providing for depreciation renewals or diminution in value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy". Thus, as per the aforesaid definition, the provision can be for diminution in value of asset or for meeting any liability. Under clause (c) of Explanation to section 115JA, the amount to be increased is "the amount set aside to provision made for meeting liabilities other than ascertained liabilities". Clause (c) of the said Explanation do not require to increase the book profit by all sorts of provision but only in respect of provision for meeting unascertained liabilities. The debts due to assessee are appearing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the financial year. Thus, the assessee is not required to pay any advance tax as per provision of section 208. In absence of any liability to pay advance tax, interest under section 234B is not chargeable. He also submitted that though the decision by Hon'ble Karnataka High Court is rendered with reference to section 115J, the ratio laid down therein will apply even when income is computed under the amended provision of section 115JA. 7.3 Learned DR strongly relied upon the appellate order. He submitted that interest under section 234B is mandatory in nature in view of the decision of Hon'ble Supreme Court in the case of CIT v. Anjum M.H Ghaswala [2001] 252 ITR 1, CIT v. Hindustan Bulk Carriers [2003] 259 ITR 449 (SC) and by Patna High Court in the case of Mrs. Prabha Lal v. CIT [2004] 269 ITR 212.The interest is compensatory in nature. In the case of CIT v. Kotak Mahindra Finance Ltd [2004] 265 ITR 119 (Bom.), it is held that even when income is computed under section 115J, interest can be levied under section 234B. Similar view has been taken by Hon'ble Punjab and Haryana High Court in the case of CIT v. Upper India Steel Mfg. & Engg. Co. Ltd. [2005] 279 ITR 123. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to 30 per cent of such book profit. It is thus, by way of deeming fiction that this income has been considered to be the deemed income. The profit and loss account has to be prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. In the Explanation under section 115J(1A) it is provided that for the purposes of this section "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (1A) as increased by various amounts given in the section. Thus, for the purpose of assessing tax under section 115J, firstly, the profit as computed under the Income-tax Act has to be prepared and thereafter the book profit as contemplated by the provisions of section 115J are to be determined and then the tax is to be levied. The liability of the assessee for payment of tax under section 115J arises if the total income as computed under the provisions of the Act is less than 30 per cent of its book profits. This exercise for determining the total income in accordance with the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X
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