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TMI Blog2009 (5) TMI 601X X X X Extracts X X X X X X X X Extracts X X X X ..... the teamed CIT(A) has erred in partially confirming the disallowance on account of expenditure on computer software to the extent of Rs. 71,47,404. It is prayed that the learned AO be directed to grant deduction of the said expenditure on computer software." Grounds Assessee's Appeal A.Y. 2003-04. "1. On the facts and circumstances of the case, the learned CIT(A) has learned in partially confirming the disallowance on account of expenditure on computer software to the extent of Rs. 31,16,486. It is prayed that the learned AO be directed to grant deduction of the said expenditure on computer software." "2.1. On the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) [CIT(A)] has legally erred in confirming the disallowance of the foreseeable losses of Rs. 5,83,038. It is prayed that the learned Assessing Officer (A.O) be directed to allow foreseeable losses." 3. On the facts and circumstances of the case, the learned CIT(A) has erred in confirming the action of A.O. in reducing unabsorbed depreciation of earlier bears while computing 'profits from the business' when granting deduction under section 80HHE of the Income-tax Act. (the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icable and that the method of accounting followed by the appellant was as per law. For easy reference the extract of the order of the CIT(A) and that of the Hon'ble ITAT is given as under:- "I have carefully considered the submissions of the appellant. I find that the assessee has been consistently following the method of accounting which has the due approval of the accounting policy laid down by the institute of the CAs. This methodology has also been approved by the CBDT. It is also to be taken into account that more than 90% of the contract was complete during the year, and therefore, as per the accounting policy there was nothing wrong in considering the anticipated losses. Considering the facts and circumstances, and taking into account that the appellant had consistently followed this method of accounting, the addition of Rs. 75,218/- is deleted." "After considering the submissions, the CIT(A) came to the following conclusions. (1) The varying rates of profits earned by the assessee is due to the varying nature of the contracts. (2) The profit in a fixed price contract differs from the profits in a fixed rate contract. (3) The contracts have yielded higher profits at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... percentage of the work remains incomplete, the appellant can justifiably argue that certain events are so proximate and so determinable that the loss or gains can be easily accounted for and provided, it is on these circumstances that my predecessor in office had concluded that the anticipated loss could be allowed. Before, him the contract was complete to the extent of 92%. Further, the extract of the case before the Hon'ble Tribunal itself shows that this specific issue had not been taken into account by the Hon'ble Tribunal and therefore, reliance placed by the learned counsel on this decision cannot come to its aid. To conclude, therefore, I agree with the view of the AO that such anticipated loss cannot be allowed inasmuch as a several parameters are accounted for only on estimate and therefore, it was not plausible to anticipate result. In view of the above, disallowance of loss made by the A.O. is upheld." 4. The ld. CIT(A) confirmed the finding of the A.O. that anticipated loss cannot be allowed inasmuch as several parameters are accounted for only on estimate, and, therefore, it was not plausible to anticipate results. 5. The ld. 'A.R.' placed reliance on para 13.1 of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otified. The ld. 'D.R.' discussed at length the said notified accounting standards, including the considerations governing the selection and application of accounting policies, such prudence, substance over form and materiality. The ld. 'D.R.' also stressed the concept of matching principle essential for income and expenditure. The ld. 'D.R.' also quoted certain case laws on such matching principle CIT v. India Discount Co. Ltd. [1970] 75 ITR 191 (SC), Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC) and Sinclair Muray & Co. (P.) Ltd. v. CIT [1974] 97 ITR 615 (SC) 116 ITR (sic). 8. The ld. 'A.R.' as a rejoinder, cited decisions on the issue of Accounting Standard -7, in the case of Metal Box Co. of India Ltd. (supra) and the decision in the case of Mazagon Dock Ltd. v. Jt. CIT [2009] 29 SOT 356 (Mum). 9. We have carefully perused and considered the rival submissions, facts of the case, relevant record and the case laws relied upon by both the parties. The contention of the ld. 'A.R' on the issue of allowability of foreseeable losses the ld. 'A.R.' placed reliance on the decision in the case of Metal Box Co. India Ltd. (supra), wherein the Hon'ble Court held as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aspect is very evident from the first proviso to section 145 as it stood prior to the amendment by the Finance Act, 1995 with effect from 1/4/1997. It could not be disputed that from the method adopted by the assessee, the assessee's income could not be deduced properly in the year in which the loss had been anticipated. As a matter of fact this aspect was not disputed by the Assessing Officer also. He had swayed more by the revenue loss than by the correct principle to be applied. The matching principle of accounting was not of much significance in the present context because if the loss had been properly estimated in the year in which the contract had been entered into, then it had to be allowed in that very year and could not be spread over the period of contract. The matching principle is of relevance where income and expenditure, both are to be considered together. However, in the instant case the effect of valuation of WIP would automatically affect the profit of subsequent years accordingly. Therefore, there was no reason for not accepting in principle the assessee's claim as being allowable. However, in view of discrepancies pointed out by the Commissioner (Appeals) for cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3-04, the assessee contended that the ld. CIT(A) has erred in partially confirming the disallowance on account of expenditure on computer software to the extent of Rs. 71,47,404/-, for A.Y. 2002-03 and Rs. 31,16,486/-, for A.Y. 2003-04. 13. For the assessment year 2002-03, the A.O. disallowed the claim of the assessee for purchase of computer software and maintenance of computers. The assessee has expended Rs. 1,40,44,387/-, on purchase of computer software and maintenance of computers. This amount is inclusive of Rs. 93,20,213/- expended on purchase of computer software. This claim of the assessee cannot be entertained as the payment is made for outright purchase of computer software. As the acquisition of software and its repeated usage in the business of the assessee involves the creation of an asset of an endurable nature, the expenditure on the acquisition of the software is to be treated as capital expenditure as held in the case of CIT v. Arawali Construction Co. (P.) Ltd. [2002] 124 Taxman 146 (Raj.). Reliance is also placed on the decision in the case of CIT v. Elecon Engineering Co. Ltd. [1987] 167 ITR 639/33 Taxman 386A (SC) wherein it was held that acquisition of drawi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound of appeal seriously. The ld. D.R. on the other vehemently defended the order of the AO and the first appellate authority. The ld. CIT(A), confirmed the finding of the AO, on the issue that the brought forward unabsorbed depreciation is to be treated as the current depreciation u/s 32(2) of the Act, and has to be set off against business income for allowing deduction u/s 80 HHE of the Act. The ld. CIT(A), placed reliance on the decision of the Mumbai Tribunal in the case of Vithal Health Care (P.) Ltd. v. ITO in IT Appeal No.1754 (Mum.) of for A.Y. 2001-02 wherein the decision of the Jurisdictional High Court in the case of CIT v. Shirke Construction Equipments Ltd. [2000] 246 ITR 429/112 Taxman 311 (Bom.) has been discussed. Cambay Electric Supply & Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 (SC). The findings of the ld. CIT(A) on the issue in question are contained from pages 5 to 8 of the impugned appellate order. 19. It is now well-settled that deduction under Chapter VIA are to be allowed only on net income and not on gross income. The net income is to be computed after giving full effect to the provisions of sections 80AB, 32, 70, 71 & 72 of the Act. Therefore, the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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