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TMI Blog2012 (7) TMI 406X X X X Extracts X X X X X X X X Extracts X X X X ..... aw in upholding the disallowance in respect of software maintenance / software development expenses amounting to Rs. 12,60,475/- holding the same to be in the nature of capital expenditure. (iii) That the Ld. CIT(A) erred on facts and in law in holding that for computing book profit under section 115JB of the Act, the adjustment of the amount eligible for deduction under section 80HHC of the Act, in terms of clause (iv) of Explanation thereto, has to be calculated after reducing unabsorbed depreciation from profits of business and not the amount of deduction calculated on the profit disclosed in the profit and loss account. (iv) That the Ld. CIT(A) erred on facts and in law in upholding the charging of interest under sections 234B, 234C and section 234D of the Act. The appellant craves leave to add, alter, amend or vary from the above grounds of appeal at or before the time of hearing." 3. The ground raised in Revenue's appeal in ITA No. 2130/Del/2008 (A.Y. 2003-04) read as under:- (i) On the facts and circumstances of the case and in law, the CIT(A) has erred in directing to treat the sale tax subsidy as capital receipt instead of revenue receipt, thereby treating the same as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the object of enabling the assessee to carry on its business, although the purpose behind it was to encourage industrialization. ii) Also, it was well settled that where subsidies granted were given by the Government to assist a trader in his business, they were generally speaking, payments of a revenue nature. They were supplementary trade receipts and not capital payments, although they might be called advances or might be subject to contingency of repayment. iii) Reliance was placed on the decision in the case of Kesoram Industries & Cotton Mills Ltd. vs. CIT 191 ITR 518 of Hon'ble High Court of Calcutta. Accordingly, AO added the amount of subsidy receveid as revenue receipt. 8. Upon assessee's appeal, Ld. CIT(A) observed that the sales tax subsidy pertains to assessee's unit at Butibori. Butibori is an industrial area developed by Maharastra Industrial Development Corporation in 1994. The assessee in 1995 set up its integrated polyester complex at Butibori for production of POY and PSF. The assessee was eligible to sales tax incentive by way of exemption under the 1993 New Package Scheme of Incentives of Govt. of Maharastra. Ld. CIT(A) also noted that Tribunal in the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nciples laid down by Supreme Court in the case of Sahney Steel & Press Works Ltd. (supra) came to the conclusion that since the incentives were given for bringing about addition to necessary infrastructure in processing/developing the backward area, it would be in the nature of capital receipt not liable to tax. Ld. CIT(A) further gave a finding that the aforesaid decision of the Special Bench has been rendered on identical facts and is on all fours with the facts of the assessee's case. Ld. CIT(A) further noted that the Scheme under consideration of the Tribunal in the above case is the predecessor of the Scheme applicable to the appellant and had identical objectives. 8.3 Ld. CIT(A) further held that in the present case, the purpose of granting sales tax incentive is clearly only to provide an incentive for establishment of new industries in the underdeveloped regions or to expand its existing units of the State of Maharashta. That the intention is not to increase the viability of the eligible units but to promote development of further industry and infrastructure in the region. That in the aforesaid circumstances, the exemption availed of by the assessee's eligible units under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... problem in realizing old debts from certain debtors. Since the defaulting parties failed to make payment even after the institution of criminal proceedings against them, the assessee engaged services of "recovery agents" M/s Siddhi Vinayak Enterprises for bringing parties on settlement terms. A fixed percentage of the settlement amount agreed between the assessee and the defaulting parties pursuant to engaging such service was paid by the assessee to Siddhi Vinayak Enterprises, the details of which are as under: S.No. Party name Outstanding since Settlement amount (Rs.in lacs) Payment to recovery agent (Rs.) 1. Blue Blends Group 1994 33.00 4,63,000 2. Sacheti Synthetics Ltd. 1995 62.50 77,500 3. Siddhartha Super Spin Mills Ltd. 1995 45.00 1,04,800 Total 6,45,300 13.1 Ld. CIT(A) observed that supporting documents, namely, vouchers of payments made to Siddhi Vinayak Enterprises, copy of bills raised by Siddhi Vinayak Enterprises for rendering of services and sample copy of managerial approval given by the assessee for settlement with defaulting debtors were produced before him. It was claimed before the Ld. CIT(A) that same set of paper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y; control over a resource; and expectation of future economic benefit flowing to the enterprises. - The Accounting Standards 26 (issued 2002) has in para 7, 9 and 10 given specific examples of computer software whether developed internally or acquired externally, as intangible assets of the company. - The Rajasthan High Court in CIT v Aravalli Construction Company, 259 ITR 30 held that expenditure on computer software is capital in nature. Same view has also been supported by ITAT Delhi Bench 'A' in the case of Maruti Udyog Ltd. V DCIT 92 TTJ (Delhi) 987." 18. Before the Ld. CIT(A), it was submitted by the assessee that the assessee has been paying Rs. 19,91,124/- per annum towards SAP end user license-fee since 1998-99 when the agreement for using SAP software was entered into. It was further submitted that with the rapid advances in computer software, the technology acquired in a particular year pales into obsolescence very fast. A continuous upgrading and constant improvement of the software is absolutely essential. It has not been the case of the assessee that it was installing a new computer and / or software for the first time. The assessee during the year had only paid y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tered into. Ld. CIT(A) has given a finding that it is neither for technology up-gradation nor a capital expenses which gives enduring benefit in subsequent years. Ld. CIT(A) held that the said expenses are revenue in nature and hence have to be allowed fully. We do not find any infirmity in the order of the Ld. CIT(A) in this regard and accordingly, we uphold the same. 21. Another issue raised in Revenue's appeal being ITA No. 2130/Del/2008 is that the Ld. CIT(A) is erred in deleting the addition of Rs. 1,85,94,706/- on account of provisions for doubtful debts and advances, Rs. 2,02,66,811/- being provisions for diminution in value of investment and Rs. 76,36,599/- being provisions for Gratuity made in the calculation of book profit u/s. 115JB of the IT Act. 22. On this issue assessee has conceded that the provision for doubtful debts and advances and provision for diminution in value of investment is not pressed in view of the retrospective amendment made in section 115JB w.e.f. 1.4.2001. 22.1 As regards the issue of provision for gratuity. AO observed that in the case of Bharat Earth Movers Ltd. vs. CIT 245 ITR 428 (SC), the Hon'ble Apex Court has held the provision for gratui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the order of the Ld. CIT(A) and hence, we uphold the same. 26. Another ground raised in assessee's appeal in ITA No. 2002/Del/2008 is that ld. CIT(A) erred in directing the AO to reduce on proportionate basis, from the written down value of the respective block of assets, the sales tax subsidy received during the relevant assessment year for the purposes of computing depreciation allowance under the IT Act, 1961. 27. In this case Ld. CIT(A) gave a finding that the subsidy amount was capital receipt. However, he further added that pursuant to introduction of Explanation (10) in section 43(1) w.e.f. 1.4.89, any subsidy intended to meet the cost of assets should go to the reduce the actual cost for the purposes of allowance of depreciation u/s. 32 of the Act. Ld. CIT(A) held that hence the amount of sales tax exemption is also to be proportionately reduced from the WDV of the respective block of asset on the basis of cost of project indicators given in the eligibility certificate issued by SICOM. Hence, ld. CIT(A) directed that the amount of sales tax incentives held as capital receipt in an earlier part of this order be considered as a reduction from the block of asset to arriv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of aforesaid Explanation. To the similar effect are the following decisions: - Inventaa Chemicals Ltd. vs. ACIT : 42 SOT 249 (Hyd) - CIT vs. Ellora Time Pvt. Ltd. Tax Appeal No. 1011 of 2010 (Guj). - Soham Electroplast Pvt. Ltde. Vs. ITO ?ITA No. 1578/PN/2008 (Pune). 29.1 We have considered the submissions. We find that Explanation 10 to Section 43(1) read as under:- "Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee." 29.2 In this regard, ld. Counsel of the assessee has submitted that in assessee's own case there is no linking of the subsidy received to the acquisition of asset. The subsidy in this case has been received for encouraging investment in backward area, even if computed with reference to cost of investment in fixed assets, will not be reduced from the cost of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded on the computers and for purchasing certain other application software required for facilitation of more efficient and profitable day to day management and trading operations. The Special bench of the Tribunal in the case of Amway India Enterprises vs. DCIT: 111 ITD 112, wherein the Special Bench held that the question of allowability of software expense had to be decided by applying the functional test. Attention is further invited to the following recent decisions wherein, after considering the decision of the Special Bench in Amway Enterprises (Supra), the expenditure incurred on software has been has a revenue expenditure : - CIT vs. M/s Raychem RPG Ltd. : 245 CTR 515 (Bom). - M/s ST Microelectronics Private Limited. Recently, the Delhi High Court in the case of CIT vs. Asahi India Safety Glass Ltd. 245 CTR 529 held that expenditure incurred on application software is allowable revenue deduction. The same was followed by the Delhi High court in the case of CIT vs. Amway India Enteprises : 1344/2009. It is submitted that the Punjab and Haryana High court in the recent case of CIT vs. Varinder Agro Chemicals Ltd., : 309 ITR 272 held that software expense are allowable rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rips Ltd., Thirumalai Chemicals Ltd. : 292 ITR 144 (Mum) (SB). - ITO vs. Amalgamated Bean Coffee Trading Co. P Ltd (2007) 19 SOT 1 (Bang.). - ITO vs. Godrej Soaps Ltd. : 114 TTJ 950- (Mum) - CIT vs. GTN Textiles : 248 ITR 372 (Ker.). - DCIT vs. Govind Rubber (P) Ltd. 89 ITD 457 (Mum). - DCIT vs. JK Industries Ltd. ITA BO 1301/Kol/05 - Smruthi Organics Ltd. vs. DCIT 290 ITR 172 (Pune)(AT). - M/.s Banswara Syntex Ltd. vs. ACIT 2007 TIOL 229 (Jodh.). - Circular NO. 680 dated 21.2.1994. - CIT vs. Bharti Information and Technology Services Ltd. 340 ITR 593. 39. Ld. Departmental Representative on the other hand relied upon the orders of the authorities below. 40. We have heard the rival contentions in light of the material produced and precedents relied upon. We find that the ld. Counsel of the assessee has claimed that this issue is covered in favour of the assessee by the Delhi Tribunal in assessee's own case for A.Y. 2002- 03. Further, we note that Hon'ble Apex Court in the case of Ajanta Pharma Ltd. CIT 327 ITR 305 (SC) has held that for computing book profit in terms of section 115JB, net profit as shown in the P&L account have to be reduced by the amount of profits eligib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the legal position discussed hereunder: Submissions It is respectfully submitted that the assessee cannot be held to be in default in payment of advance tax under sections 208 to 210 of the Act, as the advance tax liability with respect to legal position prevailing at the relevant time i.e. during relevant financial year was duly deposited with government treasury by the assessee. Accordingly, interest under section 234B of the Act is not chargeable in the present case. The provisions of sub-section (1) of section 234B read as under: "234B. Interest for defaults in payment of advance tax. (1) Subject to the other provisions of this section, where, in any financial year, an assessee who is liable to pay advance tax under section 208 has failed to pay such tax or, where the advance tax paid by such assessee under the provisions of section 210 is less than ninety per cent. of the assessed tax, the assessee shall be liable to pay simple interest at the rate of one per cent for every month or part of a month comprised in the period from the 1st day of April next following such financial year to the date of determination of total income under sub-section (1) of section 143 and where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l produced and precedents relied upon. We find that the assessee in this case became liable for advance tax due to the retrospective amendment made by the Finance Act, 2008. In this regard assessee's submission is that additions to 'book profits' of assessee on account of retrospective amendment in law, should not result in levy of interestunder section 234B of the Act. It has been claimed that it is only on account of subsequent retrospective amendment in law that the advance tax paid by the assessee would fall short of the tax payable on the income as per the amended law. It was not possible for the assessee, at that time, to foresee the retrospective amendment, which was yet to be introduced in future, and accordingly adjust his advance tax liability. Therefore, by no stretch of imagination can it be held that, during the relevant previous year, there was any default on the part of the assessee in payment of advance tax in accordance with the provisions of sections 208 to 210 of the Act. 46. We further note that ITAT, Delhi in the case of DCIT vs. Uttam Sugar Mills Ltd. in ITA No. 3223/Del/2010 vide order dated 16.12.2010 reported in 137 TTJ 157 has held as under:- "The questi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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