TMI Blog2012 (10) TMI 175X X X X Extracts X X X X X X X X Extracts X X X X ..... e this issue is restored back to the files of the AO. Treatment of software license - as intangible assets OR an integral part of computer - Held that:- the AO has not gone into details of the software purchased by the assessee. The assessee has exhibited the copy of invoice for the purchase of software with each and every item mentioned in the invoice vis-a-vis the business of the assessee which was ignored by AO - this issue is restored back to the files of the AO - in favour of assessee for statistical purposes. Treatment of creditors outstanding more than 3 years as income - Held that:- as the assessee has taken the benefit of claiming these expenses in F.Y. 1999-2000 and now that the liability has been found not to be discharged. No reason to interfere with the findings of the CIT(A) and addition of Rs. 3,47,081/- is confirmed - against assessee. Disallowance of bad debts written off - Held that:- Sec. 36(1)(vii) has to be r.w.s 36(2). Section 36(2)(i) provides that “ no such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier prev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso to be restored back to the file of AO - in favour of assessee for statistical purposes. - ITA No. 2846/Mum/2007, ITA No. 405/Mum/2008 & ITA No. 2969/Mum/2009 - - - Dated:- 31-7-2012 - SHRI D.MANMOHAN AND SHRI N.K. BILLAIYA, JJ. Appellant by: Shri S.R. Bhandari Respondent by: Mrs. Sasmita Misra ORDER PER N.K. BILLAIYA (AM): These three appeals are filed by the assessee against the separate orders of Ld. CIT(A) for assessment years 2003-04 2004-05. As these appeals involve almost connected issues, all these appeals are being disposed off through this consolidated order. Firstly we will take ITA No. 2846/Mum/2007 A.Y. 2003-04 2. The assessee has challenged the decision of the Ld. CIT(A) by raising following grounds of appeal: Being aggrieved by the order passed by the Commissioner of Income-tax (Appeals) - XXVI, Mumbai, [CIT(A) for short] your appellant submits the following grounds of appeal for Your Honours sympathetic consideration: 1. The learned CIT(A) erred in upholding the action of Assessing Officer of disallowing depreciation on leased assets to the tune of Rs.10,41,63,512/-. The learned CIT(A) ought to have allowed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence was entirely allowable. 5. The learned CIT(A) has erred in enhancing the income by disallowing the expenses incurred on commission and brokerage amounting to Rs.5,46,37,628, alleging that the said expenditure is not incurred wholly and exclusively for the purpose of business. On the basis of the facts and circumstances of the case, such enhancement of income is entirely unwarranted and hence needs to be quashed. 7. The learned CIT(A) further erred in initiating the penalty proceedings under Sec.271(l)(c) with respect the enhancement of income as referred in Ground No.7. He ought to have appreciated the facts that the assessee had neither concealed any income nor had it furnished any inaccurate particulars of income and hence there was no cause to initiate any penal proceedings. 3. Ground No. 1 relates to the decision of Ld. CIT(A) to confirm the findings of AO for disallowing depreciation on leased assets to the tune of Rs. 10,41,63,512/-. 4. The main contention raised by the assessee is entirely based on the orders passed by ITAT, Mumbai for assessment year 1999-2000 and 2000-01 in assessee s own case. During the course of assessment proceedings, while going through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is merely financing without taking into account the owner in law is the only person who is eligible to get depreciation under the provisions of the Income Tax Act. 6. After considering the submissions of the assessee, the AO relying upon various judgements exhibited in assessment order treated the lease transaction as finance transaction and disallowed the depreciation of Rs. 10,41,63,512/-. 7. Before the Ld. CIT(A) the assessee reiterated its submission as made before the AO. After considering the submissions of the assessee, the Ld. CIT(A) observed that the vehicles stands registered in the name of the lessee and not in the name of lessor. It is the lessee who on its own cost insures the assets against all risks. In view of the above finding, the Ld. CIT(A) upheld the disallowance of depreciation. The Ld. CIT(A) further observed that the assessee has stated that the Tribunal has for the assessment year 1999-2000 has allowed the depreciation on leased assets to the assessee. Ld. CIT(A) pointed out that the ITAT has allowed depreciation on the ground that in A.Y. 1996-97 and 1997-98, the department has accepted the orders of Ld. CIT(A) wherein it was held that assessee is en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in the name of the lessor and shall keep such insurance in full force and effect during the term of this Lease Agreement. In Clause-8 it is mentioned that the lessee shall at its own cost and expense at all times dutifully and faithfully follow the equipment manufacturer s recommendations as to use service and maintenance thereof. Clause 12 relates to inspection and it is mentioned that the lessor and the banks/financial institutions to whom the assets covered by this agreement are hypothecated by the lessor shall have the rights at all reasonable times to enter upon any premises where the equipment covered under each schedule is believed to be and inspect and/or test the equipment and/or observe its use. Most importantly clause -15 relates to Warrantees Exclusions. At clause (b), the lessee acknowledges and agrees with the lessor (i) That the equipment is of a size, design, capacity and manufacture selected by the lessee. (ii) That the lessee is satisfied that the goods are suitable for its purposes. (iii) That the lessor is not the manufacturer/dealer of the equipment (iv) That having selected the equipment, the lessee has signed this agreement relying enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) are satisfied in a lease agreement, it will be a case of finance lease and not operating lease. (it) Only the lessee can be treated as owner of the asset in case of a finance lease. It is he who is entitled to claim depreciation as per law. No depreciation can be allowed to the lessor in such a case of a genuine finance lease. (Hi) The facts and circumstances of the present case show that it was a case of mere advancing of loan by the assessee to Indo Gulf Fertilizers. There was, in fact, no genuine leasing of boiler, neither operating nor finance. In that view of the matter also no depreciation is admissible to the assessee-lessor Respectfully following the decision of the Special Bench (supra), we do not find any reason to interfere with the findings of the Ld. CIT(A), the claim of the depreciation is accordingly rejected. Ground No. 1 with all its variants is accordingly dismissed. 11. Before parting, we have also gone through the decision of the Tribunal in assessee s own case for A.Yrs 1999-2000, 2000-01 and 2002-03. We find that in all these three appeals, the Tribunal has allowed the depreciation only on the ground that the Ld. CIT(A) has allowed depreciation in ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an with the computer. However it is for the assessee to establish that the UPS have been purchased as part of the computer systems . Therefore , in the interest of justice and fair play we restore this issue back to the files of the AO .The AO is directed to verify that the UPS have been purchased only for the purposes of the computer systems and the assessee is directed to bring cogent material evidence on records to substantiate its claim that the UPS have been purchased only for the computer systems . The AO is directed to allow a reasonable opportunity of being heard to the assessee . Accordingly ground No. 2 is allowed for statistical purposes. 18. Ground No. 3 relates to treatment of software license as intangible assets and not as an integral part of computer. Thereby allowing depreciation at the rate of 25% instead of the claim of 60%. 19. While scrutinizing the details filed by the assessee, the AO found that the software licence is in the nature of right to use licence and hence form part of intangible assets qualifying for the depreciation at the rate of 25%. 20. Before the Ld. CIT(A) the assessee submitted that with effect from assessment year 2003-04 in Appendix ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make the expenditure capital. The presence of an element of upgrading, therefore, will not necessarily cause the expenditure in question to be capital. This ground is allowed for statistical purposes. 24. Ground No. 4 relates to treatment of creditors outstanding more than 3 years as income to the tune of Rs. 3,47,081/-. 25. The facts at the time of the assessment proceedings show that there were certain creditors which were outstanding more than 3 years. The AO sought explanation from the assessee in respect of outstanding creditors and why they should not be taxed u/s. 41(1) of the Act, considering the same as cessation of liability. The assessee s submission was that the outstanding creditors more than three years were relatable to the customers who were paid the respective amounts by cheques. However, as the cheques were not presented to the bank within the time limit, cheques became stale and invalid. The assessee further submitted that as and when the customers will come for revalidation of cheque, the same would be done and therefore the liability still exists and therefore no addition can be made u/s. 41(1) of the Act. The assessee further elaborated his submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd other expenses. On perusal of this chart shows that the assessee has claimed these expenses and charged to its profits and loss account in F.Y. 1999-2000, The contention of the assessee was that as and when these customers come for revalidation of cheques, it will be done in the due course of time. We do not find any force in the statement because , since the order of the Ld. CIT(A) dt. 9.2.2007 more than 5 years has been elapsed , and even today , before us the Ld. Counsel has not brought a single material evidence to show that the cheques have been revalidated subsequently and the liability has been discharged , as the assessee has taken the benefit of claiming these expenses in F.Y. 1999-2000 and now that the liability has been found not to be discharged. We do not find any reason to interfere with the findings of the Ld. CIT(A) accordingly ground No. 4 is dismissed and addition of Rs. 3,47,081/- is confirmed. 30. Ground No. 5 relates to the disallowance of bad debts written off to the tune of Rs. 1,29,86,013/-. 31. During the course of assessment proceedings, the AO found that the assessee has debited bad debts to the tune of Rs. 8,45,61,276.69. The assessee was asked to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1998) 232 ITR 324 disallowed the debts written off all these three parties amounting to Rs. 1,29,86,013/-. 33. Before the Ld. CIT(A), the assessee relied upon the decision in the case of DCIT Vs Oman International Bank SAOG 100 ITD 285 (Bom)(SB) in which it is held that after the amendment w.e.f. 1.4.1989 to Sec. 36(1)(vii), it is not obligatory on the part of the assessee to prove that debt written off by him is indeed a bad debt for the purpose of allowance u/s. 36(1)(vii). The Tribunal held that the AO has to allow the claim in the year in which it has been claimed on the basis of the writing off the debt in the books of account. The Ld. CIT(A) after considering the facts and submissions observed that since the assessee has claimed the above bad debts, the onus is on the assessee to prove with evidence that the above bad debts have been claimed in accordance with the provisions of Sec. 36(1)(vii) r.w.s. 36(2) of the Act and as the assessee has not produced any such details, the Ld. CIT(A) confirmed the additions made by AO. 34. Before us, the Ld. Counsel for the assessee reiterated that after the amendment w.e.f. 1.4.1989, the only obligation upon the assessee is to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s with PAN. The Ld. CIT(A) further sought explanation from the assessee asking why commission and brokerage should not be disallowed in excess of which has been claimed last year in the ratio of sales which will result to enhancement of income. The assessee submitted a detailed reply explaining the nature of business. The main contention of the assessee was that during the year under consideration, the percentage of brokerage and commission to the total disbursement of business of during the year is at 0.64% as against 0.24% in the immediately preceding year. The assessee further submitted that number of contracts have increased from 11327 to 161079 and the loan business disbursement increased from 116675 lakhs to 160985. The assessee further contended that all these details have been considered by the AO while completing the assessment for the year under consideration. The assessee claimed that all the payments have been made through cheques and are genuine expenditure incurred for the purpose of business and hence allowable u/s. 36 of the Act. 38. After considering the submissions of the assessee, the Ld. CIT(A) observed that the commission and brokerage during the year has i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even given an opportunity to reconcile the difference in the amount of confirmation received from the parties which has resulted into an addition of Rs. 38,88,596/-. Further we find that the Ld. CIT(A) has simply disallowed Rs. 4,41,56,021/- in respect of parties from whom confirmations have not been received and Rs. 65,93,011/- in respect of parties whose PA Nos were not available. Considering the facts and the circumstances in totality and also the year-wise chart filed by the assessee, in our humble opinion, this issue needs further verification . Therefore, in the interest of justice and fair play, we restore this issue back to the files of AO . Considering the nature of business and the volume of transaction and the total number of contracts entered during the year under consideration , it is suggested that the AO may restrict its verificaiton to the payment of brokerage and commission only of those parties where payment is made for more than one lakh , after giving a reasonable opportunity of being heard to the assessee . The assessee is directed to establish the identity of the payees with necessary details/evidences. The AO is further directed to verify the TDS details whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the investments are made in earlier years. The assessee has also not claimed any income exempt from tax as the investments pertains to earlier year. We do not find any reason for making any disallowance during the year under consideration. We accordingly reverse the finding of the lower authorities and direct the AO to delete the addition of Rs. 2,192/-. Ground No. 2 is accordingly allowed. 50. Ground No. 3 relates to treatment of renovation expenditure at the corporate office to the tune of Rs. 92,12,679.- and disallowing the same as capital expenditure. 51. Ground No. 4 relates to treatment of Architect fees of Rs. 5,50,000/- which is related to renovation at the corporate office which is disallowed as capital expenditure. 52. As issues involved in both these grounds are same, therefore we take both these grounds together. While going through the balance sheet of the assessee for the year under consideration, the AO noticed that in the notes to accounts, it is mentioned that repairs and maintenance includes amount of Rs.92.12 lakhs incurred towards furnishing of new corporate office premises taken on lease. The AO sought explanation from the assessee asking it why ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22.00 2. Civil work B 1,880,059.00 3. Gypsum Ceiling C 643,717.00 4. Painting D 586,013.73 5. Carpentry E 3,864,592.00 7,739,503.73 6. Electrical Fittings F 1,473,174.93 Total 9,212,678.66 56. The assessee has also filed item-wise detail under each of the aforementioned heads. After carefully considering the items on which expenses have been incurred, we have no hesitation to hold that all the items of expenses give a benefits which are of enduring in nature to the assessee more so when the assessee himself states that the leased premises were occupied from 1.1.2004 and all the renovation expenses claimed by the assessee were incurred upto December, 2003. This itself shows that the Mahindra Mahindra Financial 23 Services Ltd. expenses cannot be termed as current repairs . Considering the nature of expenses and the items on which they have been incurred, we do not find any reason to interfere with the findings of lower authorities. The expenses are in the nature of capital and as the AO has already allowed deprecation, no further interference is called fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etter of DIT (Exem.). We find force in the submission of the Ld. Counsel. However, it appears that the AO has not considered the certificate issued by DIT (Exem) Mumbai. We therefore restore this issue back to the file of AO. The AO is directed to consider the certificates issued by DIT (Exem) u/s. 80G of the Act and if satisfied, allow the claim of the assessee as per law after giving a reasonable opportunity of being heard to the assessee. This ground of the assessee is allowed for statistical purposes. 62. Ground No. 9 relates to enhancement done by the Ld. CIT(A) by disallowing the expenses incurred on commission and brokerage amounting to Rs. 4,93,56,527/- alleging that the said expenditure is not incurred wholly and exclusively for the purpose of business. This ground is identical with the issue raised in ground No. 6 in ITA No. 2846/M/07 for A.Y. 2003-04 at paras 36 to 41. While deciding this issue in ITA No. 2846/M/07, we restore this issue back to the file of AO and AO may restrict its verificaiton to the payment of brokerage and commission only of those parties where payment is made for more than one lakh , after giving a reasonable opportunity of being heard to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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