TMI Blog2016 (11) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... succeeding years even in the assessments framed u/s 143(3) of the Act and thus, the department cannot be allowed to take different view in the different assessment years qua the same assets which are nothing but specialized software or customized training softwares which are eligible for depreciation at the rate of 60% as per the Income Tax Rules and the same was correctly depreciated at the rate of 60% by the assessee. Accordingly, we set aisle the order of ld.CIT(A) and direct the AO to allow the deprecation at the rate of 60%. - Decided in favour of assessee. Disallowance at the rate of 10% being the expenditure incurred on Lucknow School Project - Held that:- We find that the assessee has incurred expenses on Lucknow school project which have been increased by 25% over the last three years. The reasons cited by the assessee for such increase was that the expenses which were as per terms as agreed in the memorandum of agreement and accordingly the assessee made payments through banking channels as agreed. We find merit in the submissions of the ld. AR that mere increase in expenditure was not sufficient ground for disallowance on estimation basis which is no basis in our opi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non deduction of tds on hire charges - Held that:- hese expenses were incurred by employees out of their tour advances while they were on tour. Looking into the facts and circumstances of the case, we find that the assessee had incurred these expenses through employees out of their travelling advances for hiring motor vehicles during the course of their employment and the expenditures incurred by them out of travelling advances. In our view, the same are not liable for deduction u/s 40(a)(ia) of the Act as it is the settled law that re-imbursement to the employees is not laible to the provisions of TDS . Accordingly, we direct AO to delete the addition. Disallowance being the provisions for rebate - Held that:- We find that the provision of rebate which is a kind of de-recognizing the revenue which was already credited in the books of accounts of the assessee as is clear from the ledger account of the Directorate of Education, New Delhi Government in the books of assessee. In our view provisions of rebate was rightly claimed by the assessee upon the same being denied by the person from whom it was receivable and also satisfies the conditions as laid down in section 36(1)(vii) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. CIT(A) has rightly deleted the addition made by the AO after considering the submissions of the assessee and by recording the findings of facts that the expenditure incurred were of revenue in nature expended for day to day running and operation of assessee’s business. We are of the opinion that the order passed by the ld.CIT(A) is correct and does not require any interference from our part and accordingly we uphold the same on this issue by dismissing the appeal of revenue. Disallowance on account of writing off advances - Held that:- The company has paid various advances for obtaining telephone and electric connections in the business premises in its franchisees as the assessee carried on the business of imparting education and training and rendering other services. These deposits were adjusted by the department concerned against the outstanding and pending bills of electricity and telephone, when the franchisees failed to make the payments and the same could not be recovered for the reasons stated above in large number of cases. We also find merit in the arguments of the ld.AR that the record of the assessee were destroyed in flood in 2005 and the deposits could not be cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- i.e ₹ 10,48,050/- made by the learned Assessing Officer of expenses incurred on account of Lucknow School project 3. On facts and in the circumstances of the case the learned CIT(A) (A) erred in law are on facts in upholding the disallowance made by the learned Assessing Officer of ESOP charges of ₹ 11,06,563/- 4. On facts and in the circumstances of the case the learned CIT(A) on facts in upholding the disallowance by the learned Assessing Officer u/s 40(a)(ia) or the Act or hire charges to the extent or ₹ 4,46,593/-. 5. On facts and in the circumstances of the case the learned CIT(A) erred in law and on facts in upholding the disallowance by the learned Assessing Officer of provision of rebate amounting to ₹ 2,50,00,000/-. 6. On facts and in the circumstances of the case the learned CIT(A) erred in law and on facts in upholding the disallowance by the learned Assessing Officer of provision for leave encashment to the extent of ₹ 19,00,418/- (Rs.40,71,369/-being disallowance made by the learned Assessing Officer and confirmed by CIT(A) less ₹ 21.70,951/70 being the leave encashment actually paid by the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified in the light of grounds deduced above. 10. Each ground of appeal hereinabove is independent and without prejudice to each other. 3. Facts of the case are that the assessee-firm filed its return of income for the assessment year 2007-08 on 30.11.2007 declaring total income at Rs.NIL after setting off of earlier years brought forward business losses and unabsorbed depreciation. The said return was revised on 26.9.2008 declaring a loss of ₹ 3,14,06,293/- which was processed u/s 143(1) of the Act. Thereafter, scrutiny proceedings were initiated against the assessee and statutory notices under section 143(2) and 142(1) were issued and served upon the assessee. 4. The issue raised in ground no.1 is against the confirmation of deletion of ₹ 1,67,76,003/- by the ld.CIT(A) upholding the order of the AO that the assessee was not entitled to depreciation at the rate of 60% on the courseware of ₹ 5,02,29,679/- and actually allowing the depreciation at the rate of 15%. Thus, the disallowance has arisen because of reduction in the rate of depreciation from 60% to 15% on cost of courseware. 5. During the course of assessment proceedings, the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g system, Program software performs the function of the program it implements, either by directly providing instructions to the digital electronics or by serving as input to another piece of software. Other explanations state that Software is a generic term for organized collections of computer data and instructions, often broken into two major categories: system software that provides the basic non-task-specific functions of the computer, and application software which is used by users to accomplish specific tasks, System software is responsible for controlling, integrating, and managing the individual hardware components of a computer system so that other software and the users of the system see it as a functional unit without having to be concerned with the low-level details such as transferring data from memory to disk, or rendering text onto a display. Generally, system software consists of an operating system and some fundamental utilities such as disk formatters, file managers, display managers, text editors, user authentication (login) and management tools, and networking and device control software, Application software, on the other hand, is used to accomplish sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts. The ld. AR submitted that in I T Rules, 1962, the computer software was treated as definite asset under the head plant and machinery and software was eligible for depreciation at the rate of 60%. The ld. AR also distinguished the difference between the hardware and software. Anything that can be stored electronically is computer software and machines used to run the software is called hardware. Thus, following the same analogy of electronically storage of data as software , the coursewares (softwares) which were used for training and education by the assessee for its customers were nothing but computer softwares. These education softwares were a kind of computer software the primary purpose of which was teaching and self learning. Therefore, the ld. AR submitted that the coursewares were eligible for depreciation at the rate of 60%. The ld. AR also submitted that the depreciation has been allowed at the rate of 60% for the assessment years 2004-05 to 2013-14 which were scrutinized and assessments were framed u/s 143(3) of the Act. 7. On the other hand, the ld. DR relied on the orders of authorities below and submitted that coursewares in no way consisted of the software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to revenue is increased substantially and disproportionately from financial year 2003-04 and therefore the assessee was asked to produce vouchers etc in order to justify such steep hike in the expenses which were 55% in the financial year 2003-04 and 75% in the financial year 2006-07. The AO disallowed 10% of the expenditures claimed for the reasons that the assessee failed to produce any bills and vouchers or failed to give any justification for the said steep rise in the expenses and thus worked out disallowance at ₹ 23,34,728/- being 10% of ₹ 2,33,47,380/-. The ld. CIT(A) confirmed the disallowance to the extent of ₹ 10,48,050/- by holding that the AO had wrongly taken the figure of ₹ 2,33,48,380/- which were the total of expenses from the financial years 2004-05 to 2006-07 and thus sustained the disallowance at the rate of 10% of the total expenses incurred in respect of Lucknow School project after calling remand report from the AO who admitted in the remand report dated 20.11.2011 that the disallowance was wrongly calculated by taking wrong figure of expenses. The ld. CIT(A) rejected the submissions and pleas of the assessee that these expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts and the manner in which adhoc disallowance was made, we are inclined to set aside the order of the ld. CIT(A) and direct the AO to delete the addition. 13. The issue raised in the third ground of appeal is with regard to the confirmation of disallowance of ₹ 11,06,563/- by the ld. CIT(A) which was made by the AO in respect of ESOP charges. During the course of assessment proceedings, the AO found that the assessee has claimed ESOP charges to the tune of ₹ 11,06,563/- which the AO found to be of capital nature and accordingly issued show cause notice dated 14.9.2009. As per the AO, the assessee did not reply to the show cause notice and as a result of which he treated the said expenditure as capital in nature as being incurred for issue of equity shares which were issued to the eligible employees. Aggrieved by the order of the AO, the assessee preferred an appeal before the ld. CIT(A). 14. The ld CIT(A) also dismissed the appeal of the assessee on this issue by upholding the order of AO by rejecting the various submissions and arguments of the assessee which have been incorporated 7.2 of the appeal order. The assessee submitted before the CIT(A) that ESOP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred on capital account or were not of contingent nature. The ld. AR submitted that the assessee has followed the procedure as they drawn from SEBI with regard to the employee s stock option scheme. The ld AR further submitted that the deduction of the said expenses by amortising and writing off over the vesting period were allowable as revenue expenditure as held by the Hon ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT (1997) 225 ITR 802 (SC). These expenditures were incurred for the benefit of the employees and these options were not transferable. It was also argued that the guidelines issued by the SEBI and ICAI have been followed in giving accounting treatment to these expenses. The ld. Counsel submitted that Special Bench of the Bangalore Tribunal in the case of Biocon Ltd. Vs Deputy Commissioner of Income-tax (LTU), Bangalore [2013] 25 ITR(T) 602 (Bangalore - Trib.) have set at rest all the doubts with regard to the treatment of ESOP charges. The Special Bench held that the objective of stock employees option was not to raise share capital but simply the mode of compensating the employees. The Special Bench of the Tribunal further held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said expenditure was incurred by the company to increase share capital of the company and thus, constituted the capital expenditure nor with opinion and conclusion drawn by the ld.CIT(A) that the liability is contingent in nature, whereas the arguments advanced by the ld.AR are quite convincing that the scheme was floated to reward the employees of the company and the difference between the discounted price and prevailing market price was amortised over the vesting period. The case of the assessee finds strong support from the number of the decisions referred and relied upon by the ld.AR. In the case of Biocon Ltd (supra), the Special Bench of the Bangalore Tribunal has held that discount on issue of shares to the employee stock option is allowable deduction in computing the income in the profit and loss account of business or profession and the same was on account of ascertained liability and not contingent liability. It was also held that by issuing shares at discounted price under the scheme ESOP is simply one of the motive to compensate the employees for their services and is part of the remuneration . In the case of PVP Ventures Limited (supra), the Hon ble Madras High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditures incurred by them out of travelling advances. In our view, the same are not liable for deduction u/s 40(a)(ia) of the Act as it is the settled law that re-imbursement to the employees is not laible to the provisions of TDS . Accordingly, we direct AO to delete the addition. 20. The issue raised in the fifth ground of appeal is against the upholding the disallowance of ₹ 2,50,00,000/- by the ld. CIT(A) being the provisions for rebate. 21. The brief facts of the case are that the assessee entered into a contract with Directorate of Education, Delhi for imparting computer education and also supplying the related accessories in the government and government aided schools in the National Capital region of Delhi. The assessee raised the bills to the Directorate of Education and Directorate of Education withheld certain payments on the ground of delayed installation of infrastructure, non performance of infrastructure and faculty absenteeism etc. The assessee reduced the amount billed and raised to Delhi Government by way of a provisions of rebate to the extent the amount withheld for deficiency in the services by the assessee. The AO disallowed the amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age 621 to 628 of the paper book. The similar provisions for rebate were made in earlier years qua the amount billed but not acknowledged by the Directorate of Education Delhi. The provisions for rebate of ₹ 3,00,00,000/- for the assessment year 2006-07 and ₹ 10,80,00,000/- for the AY 2010-11 were allowed by the revenue in the assessment proceedings completed u/s 143(3) of the Act. Finally the ld. AR prayed that since the assessee has already credited the billed amount in its books of accounts and treated as income after raising bills on the Directorate of Education, Delhi, which was partly admitted by the customer and therefore the AR of the assessee submitted that part of the amount which was not acknowledged by the customer is allowable as genuine business loss and therefore prayed for the deletion of disallowance which stands allowed by the department in the succeeding and preceding years. 23. The ld. DR heavily relied on the orders of the authorities below by submitting that the provision for rebate was wrongly claimed by the assessee to set off the profit which was of contingent in nature and did not satisfy the conditions laid down u/s 36(1)(vii) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we hold that the orders of ld. CIT(A) is not correct and accordingly set aside the same and direct the AO to delete the disallowance of ₹ 2,50,00,000/-. 25. The issue raised in the ground no.6 is qua the upholding the disallowance of ₹ 19,00,418/- being difference between the provision for leave encashment and the amount actually paid on that account as made by the AO by holding that the clause (i) of section 43B of the Act. 26. The brief facts of the case are that the assessee has provided an amount of ₹ 40,71,369/- as provision for leave encashment. The AO during the course of assessment proceedings issued show cause notice to the assessee to explain as to why the provisions should not be disallowed. In reply to the show cause notice, the assessee submitted that the said provisions were made on the basis of actuarial report which was liability of the assessee and was accordingly provided. However, the AO not finding the reply convincing rejected the same by stating that the said provision is covered by the provisions of section 43B(f) of the Act and therefore not admissible. Accordingly, the AO disallowed ₹ 40,71,369/-. The ld. CIT(A) partly al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Hon ble Supreme Court. Subject to our above observations, the matter is restored to the file of the AO to be adjudicated afresh as per the decision of the Hon ble Supreme Court in the case of Exide Industries Ltd. (supra) We find that the facts of the case before us is identical as decided by the coordinate bench in the decisions(supra) and therefore by following the decision of the bench respectfully , we restore the matter back to the file of the AO by setting aside the order of CIT(A) and decide the issue accordingly. The ground raised by the assessee is allowed for statistical purposes. 28. Grounds of appeal no.7 is with respect to disallowance made u/s 14A by the ld. CIT(A) by applying the provisions of section 14A r.w.r.8D of the Rules. 29. The brief facts of the case are that during the course of assessment proceedings, the AO noted that the assessee has received a dividend income of ₹ 2,67,21,188/- from M/s Bejing Aptech Jade Bird Information Technology Co. Ltd. The AO also observed that the assessee made investments of ₹ 23,85,10,346/- in the subsidiary companies in India and these subsidiary companies did not declare dividend durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year. The second limb of argument of the ld.AR was that the total investments made in the subsidiary companies were to the tune of ₹ 23,85,10,386/- whereas the share capital of the assessee company were ₹ 43,15,11,170/- by drawing our attention to page 57 of the paper book which is the copy of audited balance sheet as on 31.3.2007 and thus submitted that no interest disallowance is called for as the assessee s own fund were sufficient to cover the investment in the shares in subsidiary companies by strongly relying on the decision in the case of Hon ble Bombay High Court in the case of SBI DHFL Ltd reported in 376 ITR 296 (Bom) and in the case of CIT V/s HDFC Bank Ltd reported in 383 ITR 529 (Bom). Considering the facts of the case and in the light of the various decisions cited above, we find that the assessee has made investment in the subsidiary companies during the year which is a finding of fact recorded by the authorities below. It is also clear from the copy of audited balance sheet as on 31.3.2007 that the assessee s own funds were sufficient to meet the investment in the subsidiary company. Moreover, the investments made in the subsidiary compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 5,15,396. 36. We have considered the rival submissions on the issue. It was vehemently argued before us by the ld.AR that some items of ITNS aggregating amount ₹ 5,15,396/- could not be reconciled in absence of information. The ld. Counsel drew our attention to the page 719 to 750 of the paper book by pointing out that the amount of ₹ 5,15,396/- is made up of so many parties with whom the assessee never had any business dealings and it was also submitted that the assessee has not even claimed credit of TDS deducted by the parties on the said amount. The ld. AR submitted that since the assessee was not aware of the fact and the assessee had never rendered any services to those parties and therefore, the same could not be treated as income of the assessee on the basis of mere ITNS information without making any inquiries from those parties when the assessee has disowned transactions. The ld.AR prayed that the addition was required to be deleted as there is no proper enquiry or verification on the part of the AO and addition was made just by rejecting an ITNS information. 37. The ld. DR relied on the orders of authorities below. 38. It is clear from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,01,60,495/- to the profit and loss account towards brand building expenses. The AO found that these expenses are capital in nature and therefore issued noticed dated 14.9.2009 calling upon the assessee as to why the such expenses should not be treated as capital expense and ultimately disallowed the same and added the same to the total income of the assessee. 42. The assessee filed reply vide letter dated 6.11.2009 submitting therein that these expenses were in the form of retainer-ship fees, marketing expenses, art work charges for CD s designs for leaflets, brochures, colour prints, campaign illustrations etc. Thus, these were incurred in the normal course of business as routine expenses. It was submitted before the AO that these expenses do not give any benefit of enduring nature and were incurred for existing and running business. In support of these contentions, the assessee relied on number of decisions which were reproduced by the AO at page 6 of the assessment order. Finally, the AO disallowed these expenses under the head brand building expenses by observing that that the brand building expenses were not routing expenses and not incurred in the ordinary course ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncurred expenses on marketing/advertising and retainer-ship etc. for running and operation of business more profitably and efficiently which did not result in the creation of fixed asset or creation of any benefit of enduring nature in favour of the assessee and thus observation and findings of the AO was not correct and the ld. CIT(A) has rightly deleted the addition made by the AO after considering the submissions of the assessee and by recording the findings of facts that the expenditure incurred were of revenue in nature expended for day to day running and operation of assessee s business. We are of the opinion that the order passed by the ld.CIT(A) is correct and does not require any interference from our part and accordingly we uphold the same on this issue by dismissing the appeal of revenue. I.T.A. No.723/Mum/2013 (by assessee) Grounds of appeal taken by the assessee are reproduced below : 1 The l.d CIT(A) erred in law and on facts and in the circumstances of the case in confirming the disallowance of ESOP expenses of ₹ 3,64,49,900/- 2. The l.d CIT(A) erred in law and on facts and in the circumstances of the case in confirming t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding dues. Similarly the telephone advances were given for availing telephone facility which was written off by the assessee when the same could not be recovered from the telephone department or adjusted against the dues. Ultimately, the AO disallowed the whole some ₹ 1,04,08,418/- and added the same to the total income of the assessee. 49. Before the ld. CIT(A) the assessee submitted that the advances give to electricity department and telephone department were not recoverable. When the assessee was not able to get refund of deposits as the franchises operating form the (rented) premises had committed default in the payment of bills and violated the conditions for allotment of connections. Similarly, in the case of telephone deposits the department has adjusted the outstanding bills and penalty against the security deposits and cancelled these connections. It was also submitted that these amounts were written off as a matter of commercial exigency as pursuing recovery proceedings would have proved expensive as the cost of litigations would have been more than the amount recoverable. Ultimately, the ld. CIT(A) rejected the contentions of the assessee and dismissed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee for obtaining electricity and telephone connections. Out of these, in good number of cases, the franchisee could not pay their telephone and electricity bills and as result the of substantial part of these advances were consumed by way of adjustments of these deposits by the departments against the electric and telephone bills. The ld. AR also argued that these deposits were made in the ordinary course of business of the assessee and assessee could not recover at all from these franchisee. If in the subsequent years these advances were recovered the same would be chargeable to tax under section 40(1)(1). It was also argued by the ld.AR that the assessee s record were damaged and destroyed due to unprecedented flood in Mumbai in 2005 and were also received due amount of compensation from ICICI Lombard against the insurance policy taken by the assessee which were furnished before the authorities below and also forming part of this record at pages at 235 to 272 of the paper book. Due to all these reasons the ld. AR submitted that it became impossible to seek refund from the department like electricity and telephone without having the receipts/documents. Lastly, the ld. AR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rises advertising expenses etc, without appreciating that the said expenditure has not been incurred for the purpose of the business of the year under consideration only. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)erred in holding brand building expenditure as revenue in nature, without considering the fact that admittedly, the assessee had incurred the said expenditure for the creation of a brand, which is a capital asset of enduring nature and intended to be used for revenue generation over several years/beyond the relevant assessment year. 4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A)erred in deleting the addition of ₹ 2,12,854/- as unexplained cash receipt, ignoring the fact that the assessee had failed to reconcile the ITS details and to show that the said receipt did not pertain to it 54. Grounds of appeal raised by the revenue in this appeal bearing Ground No.1,2, 3 and 4 are identical to that of appeal filed by the assessee bearing ITA No.946/Mum/2013. Therefore out decisions in ITA No.946/Mum/2013 would mutatis mutandis apply to these grounds as well. Accordingly t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d papers as may be necessary. 56. The issue raised in grounds of appeal bearing Ground No.1,2 and 3 have already been decided by us in ITA No.946/Mum/2013, therefore, our decision in ITA No.946/Mum/2013 would mutatis mutandis apply to these grounds as well. Accordingly, appeal of the assessee is allowed. 57. ITA No. 2003/Mum/2014 (by revenue) 58. Grounds of appeal taken by the revenue read as under : 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.l0,90,275/- on account of brand building expenses relying on the decision of the CIT(A) in assessee's own case for A.Y. 2008-09 and not upholding the Assessing Officer's view that the brand building expenses are capital in nature and hence not deductible as revenue expenditure. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding brand building expenditure as revenue in nature merely because the said expenditure comprised of advertisement expenses etc.,without appreciating that the said expenditure had not been incurred for the purpose of business of the year under ..... X X X X Extracts X X X X X X X X Extracts X X X X
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