TMI Blog2008 (10) TMI 676X X X X Extracts X X X X X X X X Extracts X X X X ..... aking of Magardi Inc. on behalf of Toranto-Dominion Bank, the secured lenders of Magardi Inc. The company had credit balance of ₹ 30.79 crores in the share premium account as on 31st March, 2002. The company wanted to adjust the cost of intangible asset against the share premium account. The company passed a resolution in accordance with section 189 of the Companies Act. The contents of the resolution had been reproduced by the Assessing Officer at page 2 of his order. 2.3 The High Court of Karnataka vide Company Petition No. 116 of 2002 dated 28th January, 2003 has approved the resolution for writing off of the intellectual assets amounting to ₹ 15.89 crores against the share premium account. The Assessing Officer therefore inferred that the intellectual assets were not in existence during the period for the asst.year 2003-04. The assessee claimed depreciation at the rate of 25% in the computation of income on the assets, which did not exist in the balance sheet. The Assessing Officer further noticed that from the accounts for the period ending 31st March, 2002, the purchase of intellectual property rights was grouped under 'miscellaneous expenditure' and we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n filed. From the above observation, the learned AO concluded that the intention of the company was to write of and not to keep it in the accounts. This was achieved by getting the High Court order in writing off of expenditure against share premium account. In view of this, there is no reason to claim or allow depreciation on this asset. Depreciation is not allowable because the expenditure was grouped under the head 'miscellaneous expenses' in Schedule-L in the accounts for the accounting period ending on 31st March, 2002. The asset is not appearing in the balance sheet and therefore, the learned Assessing Officer disallowed the depreciation. 2.4 Before the learned CIT(A) it was contended that the assessee is entitled to depreciation irrespective of the fact that such asset was written of in the books. For this proposition the assessee relied on the decision of the Hon'ble Apex Court in the case of Kedarnath Jute Mfg. Co. Ltd. v CIT 82 ITR 363. It was pointed out that in this case it was held that the question of assessee's entitlement to a particular deduction or not will depend on the provisions of law relating thereto and not on the view which the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e share premium account and to show the balance in the share premium account in the balance sheet. The assessee has adopted the second option of disclosure. However, it should not affect the statutory right of the assessee to claim the depreciation in accordance with provisions of section 32. The learned AR submitted that Lord Russel in the case of B S Footwear. Ltd. 77 ITR 860 observed that income tax law does not march step by step in the footprints of the accountancy profession. The learned AR drew our attention to the decision of the Hon'ble Madras High Court in the case of CIT vs Fenner (India) Ltd. 292 ITR 605 in which the Hon'ble High Court held that expenditure on replacement of machinery is not to be treated as revenue or capital on the basis of the treatment given in the books of account or in the balance sheet. The claim has to be determined only by the provisions of the Act and not by the accounting practice of the assessee. The learned AR thereafter drew our attention to the scheme of computation of total income as provided in the From ITR 6. Depreciation debited to profit and loss account has to be added to the book profit and thereafter depreciation as allowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt in the case of CIT vs. Southern Roadways Ltd. 133 Taxman 350. The learned AR submitted that the Assessing Officer allowed depreciation in the first year of acquisition i.e. asst.year relevant to the previous year 2002-02. For the asst.year 2003-04, the opening WDV should be taken as the closing WDV as on 31st March, 2002 as reduced by the depreciation for the previous year 2001-02. Such opening should be increased by actual cost of IPRs acquired during the previous year 2002-03. In the case of the assessee, there has been no movements of aforesaid block during the previous year 2002-03. The Hon'ble Calcutta High Court has considered the meaning of expression demolished or destroyed for the purpose of section 41(2) of the I T Act. In the case of Karala Shipping Corporation Ltd. vs. CIT 265 ITR 13 it was held that if a ship is missing then it does not mean that the same is destroyed. It was submitted that the Hon'ble Gujarat High Court in the case of CIT vs. Ramlubhaiya R Moalhotra 119 Taxman 962 has held that depreciation can be denied only in the cases where the assets were sold, discarded, demolished or destroyed. The learned AR refereed to the decision of Chennai B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer has not held that intangible asset has not been used. The finding of the Assessing Officer is that no evidence has been filed in support of the use of the assets. The learned CIT(A), according to the learned AR, has held that the fact of the use of intangible asset is irrelevant because depreciation is not allowable, as the value of the asset has been written off. The learned AR further drew our attention to page 6 and 7, 28 and 29 and page 48 of the Annual Report for the finance year 2002-03. 2.7 On the other hand, the learned DR supported the orders of the authorities below. It was submitted by him that depreciation is allowable in case the asset is owned by the assessee. When the asset has been written off by debiting the share premium account, then such an asset is not appearing in the balance sheet; hence, there is no such asset on which depreciation is allowable. The assessee has not claimed depreciation in the asst. year 2002-03. This is not the case of the revenue that the asset is not in existence. The learned DR further submitted that in case the depreciation is to be allowed, then the assessee has acquired a software and depreciation at the rate of 60% is allowabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred in para 3 as under.- The company during May 2001 acquired an intellectual property right in software product OUTsmart which was a wireline fraud management system and Incharge which is an inter-carrier billing verification product from a company called Magardi, Inc., from PricewaterHouseCoopers, INC, who were the receivers of the property, assets and undertaking of Magardi Inc., on behalf of Toranto-Dominion Bank, the secured lenders of Magardi Inc. The total cost of acquisition of the software including the related expenses as recorded in the books of account is ₹ 15,89,56,637/-. The object of acquiring the said software is to market OUTsmart as a fraud management solution for wireline operators and Ranger. However, worldwide telecom operators have now consolidated the wireline and wireless operations and most of such operators have started offering both wireline and wireless services. Therefore, it has become essential to come in line with this global change and hence the company decided to offer an integrated product for EMS and has decided to merge OUT smart with Ranger, thus consolidating both wireline and wireless operations respectively. The company intend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be the subject matter of assignment, transmission, licensing, pledge, mortgage or any such other agreement. From the details filed before lower authorities and before us, it is not clear as to what intellectual property right has been purchased for which a consideration of 891031.92 Canadian dollars has been paid. Without ascertaining the nature, it is not possible to give a finding that such IPR is an intangible asset as mentioned in section 32 of the IT Act for the purpose of allowing depreciation. Hence, on this issue, the matter is restored back on the file of the Assessing Officer. The Assessing Officer will ascertain the nature of IPR and if it is covered in the definition of intangible assets as contained in section 32, then the Assessing Officer will allow depreciation provided such right has been used for the purpose of business during the relevant asst. year. For coming to the conclusion, the Assessing Officer will consider our observations as given in next para. 2.12 It is true that the Assessing Officer has not recorded his finding after ascertaining the factual details from the assessee that intangible assets have not been used. The finding of the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ification system from Pricewaterhouse Coopers, Inc. (being the receivers of the property, assets and undertaking of Magardi, Inc. on behalf of Toranto Dominion Bank, who are the secured lenders of Magardi Inc.). The total cost of acquisition amounting to ₹ 158,956,637 includes the purchase consideration, advisory, syndication fees and other costs. INcharge was only at a conceptual stage during the acquisition and hence it is not possible to attribute any part of the cost of acquisition to this product. The amount of ₹ 29,258,668 outstanding at March 31, 2003 towards consideration payable over the next one year has been accounted as Deferred Consideration. Consequent to the approval of the shareholders of the Company for write off of the above cost of acquisition of the intangible asset against the balance in the Share Premium account, an application for confirming the write off was preferred to the Honourable High Court of Karnataka under the provisions of section 78 and 100 of the Companies Act, 1856. The Honourable High Court of Karnataka approved the said write off vide their confirmation order dated January 28, 2003 and the order, which was received by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired during the previous year; 2. By the reduction of the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year together with the amount of the scrap value, if any, so, however, that the amount of such reduction does not exceed the written down value as so increased. Actual cost has been defined in section 43(1) of the IT Act. Actual cost means, the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. In the instant case, it is not disputed that intangible assets were purchased. The purchase price along with any incidental expenses necessary for making that asset to be used is a cost to the assessee. It is to be reduced by that portion of the cost, which' has been met directly or indirectly by any other person or authority. Share premium account belongs to the assessee. It is part of the reserve of the assessee company. Hence, if the part of the cost has been written of by share premium account, then it cannot be said that cost to that extent has been met directly or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on should be allowed after considering the depreciation allowable for the asst. year 2002-03 and the balance should be taken as the WDV for computing depreciation for the asst. year 2003-04. The learned AR has argued that in case the depreciation is to be allowed after considering the depreciation allowable for the asst. year 2002-03, then a direction should be given for allowing depreciation for the asst. year 2003-04. 3.2 Written down value in case of an asset as defined in section 43(6) of the Act in respect of an asset acquired before the previous year is the actual cost to the assessee less depreciation actually allowed. The word 'actually allowed' has been considered by the Hon'ble Apex Court in the case of CIT v Mahendra Mills 243 ITR 56. The Hon'ble Apex Court observed that 'actually allowed' does not mean 'notionally allowed'. If the assessee has not claimed deduction of depreciation in any past year, it cannot be said that it was notionally allowed to him. Hence, if the depreciation has not been allowed for the asst. year 2002-03, then it cannot be considered as notionally allowed and cannot be reduced from the actual cost. However, Expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment of the Court in the case of Mahindra Mills (supra) would apply to the assessment years under consideration. In this connection, the High Court is also requested to take into account the scope of Expln. 5 to s. 32(1) of the 1961 Act, made by the Finance Act, 2001 . 3.3 Hence, the Assessing Officer will have to apply his mind in respect of WDV on which the depreciation is to be allowed. Since this issue has not been considered either by the AO or by the learned CIT(A), therefore, we think it proper to restore this issue on the file of the Assessing Officer to give a finding in respect of WDV of intangible asset on which the assessee will be entitled to depreciation. 4. The second grievance of the assessee is that the learned CIT(A) has erred in excluding the telecommunication expenses attributable to the delivery of article or goods or computer software from the export turnover. Alternatively, it was argued that if the same is to be reduced from the export turnover, then the same should be reduced from the total turnover. 4.1 On the above referred issue we have heard both the parties. Export turnover has been defined in Explanation 2(iv) of section 10A. The thrust of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the learned CIT(A) it was pointed out that the AO had first adjusted the loss of ₹ 11,89,634/- arising from the domestic unit against profits of the eligible unit and the deduction was granted on the balance profits. It was contended that the deduction is to be given before set off of loss of domestic unit against profits of eligible unit in accordance with section 70 of the Act. The learned CIT(A) was of the opinion that the decision of the jurisdictional High Court in the case of Himatshingike Seide Ltd. 286 ITR 255 is applicable and therefore, the contention of the learned AR was rejected. 5.3 Before us, the learned AR drew our attention to CBDT Circular No. 14 (252 ITR (St.) 65) in which it has been mentioned that relief u/s 10A should be given undertaking-wise. In the case of Himatshingike Seide Ltd. 286 ITR 255 (Kar.), the loss was from the eligible unit and therefore, it was set off. If the loss is from a non-eligible unit, then it cannot be set off. The Bangalore Tribunal in the case of Webspectrum Software P. Ltd. has held that loss of a unit not availing relief u/s 10A of the Act cannot be set off against income of a unit eligible for relief u/s 10A. The learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 11,48,73,662/- while the profit adjustment of carry forward loss is ₹ 10,44,12,508/-. If the carry forward loss cannot be set off of non-STP unit, then naturally the loss for the year under assessment also cannot be set off. Hence, the AO is directed not to set off the loss of non-STP unit from the income of STP unit for the purpose of computing deduction u/s 10A. 6. The 4th grievance of the assessee is that the learned CIT(A) has erred in law upholding the adjustment made by the Assessing Officer wherein the gross receipts from sub-letting of property has not been treated as income pertaining to the business of the assessee and excluding the same from profits for the purpose of computing relief u/s 10A of the IT Act. Alternatively, it was argued that the amount that needs to be reduced from profits for computing relief u/s 10A is the net amount and not the gross amount. 6.1 The Assessing Officer noticed from the Schedule-M to the financial account that a sum of ₹ 17,27,385/- was shown as rent receipt. The assessee was required to clarify the receipt of rent. It was submitted that the assessee was having a branch office at Canada for development of software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roducin P. Ltd 290 ITR 598 (Kar.) CIT v Chinna Nachimuthu Constructions 297 ITR 70 (Kar.) Wipro Information Technology Ltd. v DCIT 88TTJ 778 (Bang.) ITC Hotels v DCIT 107 TTJ 955 (Bang.) ACIT v Motorola India Electronics (P) Ltd. 112 TTJ 562 (Bang.) Inter Classic Jewellery (I) (P) Ltd. v ITO 114 TTJ 402 (Mum.) CITv Eltek 565 (P) L td 300 ITR 6 (Del.) Mercator Lines Ltd. v DCIT 17 SOT 54 Cybertech Systems and Software Ltd. v ACIT 7 SOT 230 (Mum.) Shiva Shankar Granites P. Ltd. v ITO 81 ITD 106 Nirma Industries Limited v DCIT 155 CTR 330 CIT v Alfa Laval (India) L td. 295 ITR 451 (SC) ACIT v Woodword Governors India (P) Ltd. 15 SOT 362 Jagdishprasad M Joshi v DCIT 154 Taxman 110 (Mg.) 6.4 On the other hand, the learned DR stated that there should be direct nexus between the income and the industrial undertaking. If there is an incidental connection then deduction u/s 10A cannot be allowed. For this proposition, learned DR relied on the decision of the Delhi Bench in the case of Perot Systems TSI (India) Ltd. v ACIT 16 SOT 350 and CIT v Menon Impex (P) Ltd. 259 ITR 403 (Madras). 6.5 We have heard both the parties. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee is carrying on the business of software development and the rental received is not from the business carried on by the assessee. 28(iv) refers to the value of any benefit or perquisite whether convertible into money or not arising from business or the exercise of a profession is also to be considered under the head 'profit and gains of business'. It is true that the building was taken on lease for the purpose of business and the expenditure so incurred is covered u/s 37 of the IT Act as the expenditure has been laid for the purpose of the business. However, the receipt is not arising from the business carried on by the assessee. Such benefit is also not arising from the business of the assessee. 6.8 The Hon'ble Apex Court in the case of CIT v Dr. V P Gopinathan 248 ITR 449 had an occasion to consider the allowability of interest on loan taken from the bank against the interest received on Fixed Deposits. The loans were taken on the security of the amount so deposited. The Hon'ble Apex Court held that there is no provision of law which allows that the interest on loan taken from the bank will reduce its income by way of interest from Fixed Deposits. The con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue. The first grievance of the revenue is that the learned CIT(A) has erred in deleting the addition on account of provision of warranty at ₹ 7,95,731/-. 8.1 The learned CIT(A) has allowed the provision for warranty as an ascertained liability for the purpose of computing income as per his finding as under:- 4.3 The ARs were heard. The written submissions were duly considered. The decisions relied on by the AO and the appellant were carefully perused. The issue of allowing the expenses provided for warranty as business expenses has been decided by the Tribunal in the cases of IBM India and Wipro GE (supra). The Tribunal, in the case of Wipro GE (Supra), on a similar issue, after considering the facts and the circumstances thereof in detail, had held thus: Such estimated liabilities are to be treated as trading expenses and must be allowed . I find the facts and circumstances, concerning the issue on hand, are similar to that of Wipro GE (supra). Therefore, respectfully applying the ratio of decision of the Tribunal, in the order under ITA Nos.322 to 328/B.2001 - AY 91-92 to 97-98 (81 TTJ 455) I direct the AO to allow the provision for warranty of ₹ 795731 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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