TMI Blog2012 (9) TMI 1070X X X X Extracts X X X X X X X X Extracts X X X X ..... er-alia, making following additions/disallowances as under: - Software expenses Rs.1,23,114/- Disallowance on a/c of NPA Rs.45,78,232/- Disallowance on a/c of delayed Payment of P.F. Rs.2,14,127/- Expenditure relating to dividend income Rs.45,40,697/- Interest/discount on Govt. Securities Rs.83,03,169/- Depreciation on Software expenditure Considered as capital Rs.3,06,908/- 3. Being aggrieved with the order of AO, the assessee preferred appeal before ld. CIT(A) who partly allowed the assessee s appeal. 4. Being aggrieved with the order of ld. CIT(A) both assessee and department are in appeal before us. 5. First we take up the assessee s appeal vide ITA No. 3198/D/04: - First ground is general and, therefore, does not require any adjudication. 6. Second ground raised by the assessee reads as under: - 2. That on the facts and circumstances of the case and in law, the ld. CIT(A) has erred in confirming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come recognition applicable w.e.f. January 2, 1998. The assessee had also made an alternative submission that the assessee s claim was allowable as bad and doubtful debt. In this regard it was submitted that since the amount of income reversed related to non-performing assets, which were in the nature of bad and doubtful debts, therefore both the conditions, as envisaged by section 36(1)(vii), were satisfied. The assessee had relied on various case laws in support of its submission that after the amendment of section 36(1)(vii) w.e.f. April 1, 1981, if debt had been written off as irrecoverable in the accounts of the assessee for the previous year, it will suffice for claiming it as a bad debt and the assessee can never be called upon to prove that the said debt had become bad. 8.1 Ld. CIT(A) did not accept the first plea of the assessee, inter-alia, accepting the AO s contention that revision of income in respect of NPA s tantamount to following cash system of accounting. He also observed that in view of the discussion of AO on this issue and the specific provisions of sec. 43D, the assessee s claim was not acceptable. However, he accepted the alternate plea of the assessee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstrument having effect by virtue of any such law. Thus, this section takes precedence over any other law and, therefore, section 145 has to be read subject to provisions in the RBI Act. The assessee company being NBFC was bound by the provisions of RBI Act. The RBI has issued a notification, in exercise of its powers u/s 45JA, on NBFCs Prudential Norms (RBI), 1998. The revenue s contention is that on account of reversal of interest income, the assessee has in effect resorted to cash system of accounting, which is in contravention to the provisions of section 145, as assessee was following mercantile system of accounting. This plea cannot be accepted because of the specific provisions contained in the Reserve Bank of India Act which primarily administer the functioning of assessee. There is no dispute that assessee had reversed the income in respect of NPA as per the Prudential Norms . The assessee had to comply with the requirements of RBI norms and, therefore, could not account for the income in respect of assets which had become NPA. Therefore, section 145 could not be resorted to for accounting income purely on accrual basis. We find that this issue is squarely covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded. 9.4 An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of services or from the use of others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed. 9.5 When recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognized. In this scenario, we have to examine the strength in the submission of learned counsel for the Revenue that whether it can still be held that income in the form of interest though not received had still accrued to the assessee under the provisions of the Income-tax Act and was, therefore, exigible to tax. Our answer is in the negative and we give then following reasons in support: (1) First of all we would discuss the matter in the light of the provisions of the I.T. Act and to examine as to whether in the given circumstances, interest income has accrued to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when we examine the issue involved therein minutely and deeply in the context in which that had arisen and certain observations of the apex court contained in that very judgment, we find that the proposition advanced by Mr. Sabharwal may not be entirely correct. In the case before the Supreme Court, the assessee a NBFC debited ₹ 81,68,516/- as provision against NPA in the profit and loss account, which was claimed as deduction in terms of sec. 36(1)(vii) of the Act. The Assessing Officer did not allow the deduction claimed as aforesaid on the ground that the provision of NPA was not in the nature of expenditure or loss but more in the nature of a reserve, and thus not deductible u/s 36(1)(vii) of the Act. The AO, however, did not bring to tax ₹ 20,34,605 as income (being income accrued under the mercantile system of accounting). The dispute before the apex court centered around deductibility of provision for NPA. After analyzing the provisions of the RBI Act, their Lordships of the apex court observed that in so far as the permissible deductions or exclusions under the Act are concerned, the same are admissible only if such deductions/exclusions satisfy the relevant con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingly, reduced sum of ₹ 45,40,697/- from exempt income and added to the taxable income. 22. Ld. CIT(A) upheld the AO s action following the decision for A.Y. 1996-97. 23. Ld. Counsel submitted that 98% of the dividend income was earned from investments in group companies which were made long back. In this regard he referred to page 7 of ld. CIT(A) s order, wherein the details of investments are contained which are as under: - Dividend received from Amount (Rs.) GE Countrywide Consumer financial Services 1,28,33,336 Maruti Countrywide 44,40,000 IGE 6,00,000 Mahindra Sona 2,89,450 Total 1,81,62,786 24. Ld. Counsel submitted that ld. CIT(A) has followed the order for AY 1996-97 which is contained at page 15 to 34 of paper book and referred to page 18 of the said order. He pointed out that the issue related to the deduction claimed by the assessee u/s 80M of the Act on gross basis. In that context the AO had observed that the investme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are that AO noticed that in computation of income, the assessee excluded from its income an amount of ₹ 81,99,745/- representing interest on Government Securities being interest accrued but not due. The assessee s claim was that the amount was to be offered to tax only at the time it became due. The AO observed that since assessee was following mercantile system of accounting and the company itself was taking this interest in its audited profit and loss account as its income, this interest income had accrued to the assessee and hence it was not to be excluded from income of the assessee. The AO rejected the assessee s claim of accounting for interest on Government Securities on cash basis. The AO distinguished the decision in the case of Dalmia Dadri Cement vs. CIT, 126 ITR 851 on the ground that in the said decision issue involved was debenture redemption and whether debenture redeemed by paying lump sum excess paid over face value was to be allowed as business outgoing. He pointed out that in the present case Government Securities are in the books of the assessee as investments as on 31/03/1999. There was no trading or redemption which was involved. He, therefore, made an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. AO made additions accordingly. On assessee s appeal the ld. CIT(A) held that the assessee had himself offered the sum of ₹ 92,31,360 for AY 1997-98. The claim of the assessee was covered by the decision of the Tribunal in the case of State Bank of Bikaner Jaipur vs. DCIT [1999] 65 TTJ (Jp) 480 : [2000]74 ITD 203 (Jp). Relying upon that decision, the ld. CIT(A) deleted the disallowance of ₹ 92,31,360 for AY 1996-97. For AY 1997-98 the ld. AO made an addition of ₹ 19,81,271 on the same basis. The ld. CIT(A) deleted the addition following order for AY 1996-97. 25. During the course of hearing before us the ld. Departmental Representative argued that the decision of the Tribunal reported in [1999] 65 TTJ (Jp) 480 : [2000] 74 ITD 203 (Jp) (supra) had been given in relation to a bank whereas the assessee before us was not a bank. The ld. Counsel for the assessee argued that the case of the assessee was not properly distinguished. The assessee was controlled by RBI guidelines applicable to nonbanking financial corporations. The assessee submitted that the securities in question had been acquired in view of the said RBI guidelines only. The same did not con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehalf. Accordingly this ground of appeal is rejected. 38. Ld. Counsel further pointed out that the order of the Tribunal has been upheld by Hon ble Delhi High Court, wherein Hon ble Delhi High Court has observed as under: - The only question that has arisen in this case pertaining to the AY 1997-98 is that expenditure incurred by the Assessee on software was treated by the AO as capital expenditure. The Tribunal was of the view that due to technological changes and the need to upgrade the software on a regular basis it cannot be said that the software was of an enduring nature. We are informed that the software for which the expenditure was incurred was MS Office, which is not a custom built software for the assessee and it is common knowledge that this software requires regular upgradation. We can understand that where customized software is prepared, then it could be of an enduring nature, but in this case MS Office is not customized software and it cannot be said that the software does not require frequent upgradation. We are of the view that there is no error committed by the Tribunal in taking the view that it did. 39. Respectfully following ..... X X X X Extracts X X X X X X X X Extracts X X X X
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