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TMI ID= 327119
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  • Cases Cited

2016 (5) TMI 100 - ITAT DELHI

Deputy Commissioner of Income-Tax Versus E-Enable Technologies P. Ltd.

Addition on account of software purchase - CIT(A) deleted the addition - Held that:- As find from the findings of the learned Commissioner of Income-tax (Appeals) that from the details and copies of purchase invoices and sales of software invoices it was evident that software was purchased and subsequently sold to customer and was not used by the assessee, have not been controverted by the Department. We, accordingly, confirm the order of the Commissioner of Income-tax (Appeals) on this issue. - Decided against revenue

Addition on account of sales and maintenance of software - CIT(A) deleted the addition - Held that:- The assessee is following the mercantile system of accounting and as per the accounting standard 9, the net effect of the accounting treatment was for only that part of the annual maintenance contract receipt was taken into consideration which pertained to the year under consideration. This method has consistently been followed by the assessee. We, therefore, do not find any reason to interfere with the order of the learned Commissioner of Income-tax (Appeals). Ground fails against revenue

No.- I. T. A. No. 2359/Del/2011

Dated.- January 18, 2016

Citations:

  1. Commissioner Of Income-Tax Versus Hindustan Computers Limited - 1997 (1) TMI 26 - ALLAHABAD High Court

S. V. Mehrotra (Accountant Member) And Suchitra Kamble (Judicial Member)

For the Petitioner : Amrit Lal

For the Respondent : Himanshu Sinha, Satyam Rastogi

ORDER

S. V. Mehrotra (Accountant Member)

1. This appeal, by the Revenue, is directed against the Commissioner of Income-tax (Appeals)'s order dated February 15, 2011, relating to the assessment year 2006-07.

2. The brief facts of the case are that the assessee-company, in the relevant assessment year, was engaged in the business of computer education/ training centre, software development, support and maintenance. It had filed its return of income declaring a total income at ₹ 69,96,748. The assessment was completed at a total income of ₹ 1,11,51,637, inter alia, making following disallowances :

 

 

(Rs.)

(i)

Capital expenses

3,30,195

(ii)

Provision for sale and maintenance of software

33,61,059

3. The learned Commissioner of Income-tax (Appeals) allowed the assessee's appeal and deleted both these additions. Being aggrieved, the Department is in appeal before us and has taken the following two grounds of appeal :

"1. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) has erred in deleting the addition of ₹ 3,30,195 on account of software purchase.

2. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) has erred in deleting the addition of ₹ 33,61,059 on account of sales and maintenance of software."

4. The brief facts, apropos ground No. 1 are that the assessee had debited software/annual maintenance contract to the extent of ₹ 50,80,754. The Assessing Officer required the assessee to explain why the said sum should not be treated as capital expenses. The assessee pointed out that this sum represented the amount of software purchases, annual maintenance contract (AMC) for hardware and software and the expenses towards consultancy. As regards the software purchases, the assessee submitted that they were to the extent of ₹ 8,25,488. The assessee further submitted that the software so purchased had been sold out and it was only the trading activity of the assessee. The assessee also submitted that the software purchases to the extent of ₹ 5,19,011 had been sold for ₹ 9,59,924. The assessee filed the bills of purchases as well as the sale vouchers. From these documents the Assessing Officer concluded that there was no co-relation between the purchase and sale of software because the software purchased did not tally with the software sold out. He, therefore, did not accept the assessee's contention that it was only a trading transaction. He treated the sum of ₹ 8,25,488 in capital field and allowed depreciation at 60 per cent. Thus, made a disallowance of ₹ 3,30,195.

5. Before the learned Commissioner of Income-tax (Appeals) it was submitted that the assessee was the implementation partner of "hyperion software", which was installed to evaluate performance of the employees. It was submitted that the assessee undertook to devise systems for performance evaluation in organisations. In the performance of these services, "hyperion software", which it purchased from time to time after customisation depending upon the needs of the customers, the software was installed on the customer's system and, thereafter, it was used by the customer. Once installed on the customer's system, it was no longer available for use by the assessee. He, accordingly, deleted the disallowance.

6. We have considered the submissions of both the parties and find that the findings of the learned Commissioner of Income-tax (Appeals) that from the details and copies of purchase invoices and sales of software invoices it was evident that software was purchased and subsequently sold to customer and was not used by the assessee, have not been controverted by the Department. We, accordingly, confirm the order of the Commissioner of Income-tax (Appeals) on this issue.

7. The brief facts apropos ground No. 2 are that the assessee had debited a sum of ₹ 33,61,059 as provision for sale and maintenance of software. The Assessing Officer required the assessee to explain as to how it was an ascertained liability. The assessee submitted that it enters into annual maintenance contract with customers while selling the software for a period of one year. Annual maintenance contract is received and credited to the profit and loss account. The provisions for sale and maintenance represented the annual maintenance contract received for the period beyond the financial year. The Assessing Officer did not accept the assessee's claim, inter alia, observing that it was not to be paid back or accrued to the assessee from day-to-day. He, therefore, denied the claim of ₹ 33,61,059.

8. Before the learned Commissioner of Income-tax (Appeals), the assessee reiterated his submissions and pointed out that the total annual maintenance contract in the year was bifurcated into amount for the year and the amount received for services to be provided in the next year. This bifurcation was made on time basis and, accordingly, the provision for sale and maintenance of software of ₹ 33,61,059 represented the unexecuted portion of the AMC income, which was received in advance. It was further clarified that the assessee was following the mercantile system of accounting and, therefore, the revenue recognisable for the year under consideration from annual maintenance contract sale was that which pertained to the period falling in the financial year 2005-06 and which was covered by the annual maintenance contract period. This accounting treatment was as per the accounting standard "AS-9" on revenue recognition as prescribed by the Institute of Chartered Accountants of India. The assessee further pointed out that it was consistently following this accounting policy. The assessee relied on the decision of the hon'ble Allahabad High Court in the case of CIT v. Hindustan Computers Ltd. [1998] 233 ITR 366 (All), wherein under similar facts the assessee's claim was upheld.

9. The learned Commissioner of Income-tax (Appeals) allowed the assessee's claim by observing as under :

"6.5. I have considered the assessment order as well as the written submission of the appellant. The reason the Assessing Officer did not accept the contention of the appellant was because the annual maintenance contract has been received by the assessee at once and it is not to be paid back. It appears that the Assessing Officer has not understood the accounting treatment being given to receipt of the annual maintenance contract consistently by the appellant. It is seen that the provision for sale and maintenance of software is the reversal of income to the extent of unexecuted portion of contractual liability and unexecuted portion of annual maintenance contract is charged as income in the next financial year. This method of accounting has been consistently followed by the appellant in earlier years as well as subsequent years and accepted by the Department. If a departure is made from this method this amount will be taxed twice. I find that there is no reason why the Assessing Officer should take a different view when there is no change in the facts of the case. I also find that the case law relied on by the appellant is squarely applicable to the facts of the appellant's case. In view of the reasons above, the addition is directed to be deleted."

10. We have considered the rival submissions and have perused the record of the case. The facts are not disputed. The assessee is following the mercantile system of accounting and as per the accounting standard 9, the net effect of the accounting treatment was for only that part of the annual maintenance contract receipt was taken into consideration which pertained to the year under consideration. This method has consistently been followed by the assessee. We, therefore, do not find any reason to interfere with the order of the learned Commissioner of Income-tax (Appeals). Ground fails.

11. In the result, the Departmental appeal is dismissed.

12. The order pronouncement in open court on January 18, 2016.

 
 
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