TMI Blog2020 (8) TMI 174X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 14A - HELD THAT:- Assessing Officer accepted the contention of the assessee that no expenditure has been incurred for earning the dividend income and therefore no disallowance under Section 14A was called for. Without appreciating this aspect, the Assessing Officer disallowed ₹ 3 lacs under section 14A of the Act on an ad-hoc basis, and while doing so the Assessing Officer has not established any nexus between the expenditure and earning of dividend income. The CIT(A) also failed to look into this aspect. Thus, Ground No. 2 is allowed. - ITA No. 1955/DEL/2016, ITA No. 1956 to 1959/DEL/2016 - - - Dated:- 6-8-2020 - Shri R. K. Panda, Accountant Member And Ms Suchitra Kamble, Judicial Member For the Appellant : Sh. Rohit Jain, Adv, Ms. Tejasvi Jain, CA, Ms. Somya Jain, CA For the Respondent : Sh. Mritunjay Barnawal, Sr. DR ORDER PER SUCHITRA KAMBLE, JM These appeals are filed by the assessee against orders dated 27/01/2016 for A.Ys. 2001-02 to 2005-06 passed by the Commissioner of Income Tax (Appeals)- 1, Noida. 3. The Grounds of appeal are as follows: ITA NO. 1955/Del/2016 (A.Y. 2001-02) 1. That on facts and circumstances of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment Year 2001-02. The assessee company is in the business of manufacture and sale of Sugar, Turbines, Gear and Gear Boxes and project related activities in the field of settling up of Sugar plants, water treatment plants and mini hydel power projects. Apart from these activities, various sale of spares and servicing and engineering services are also being undertaken by the company. The business activities are being undertaken at diverse locations through various divisions/units of the company. Triveni Engineering and Industries Ltd. i.e. assessee company filed its return of income on 31.10.2001 declaring business income of ₹ 13,38,43,652/- which was entirely set off against brought forward losses/allowances. The assessee also claimed long term capital loss of ₹ 1,27,04,048 which has been carried forward to subsequent year. Book profit of ₹ 6,86,74,133/- was declared u/s 115JB of the Income Tax Act, 1961 and taxes were paid thereupon by the assessee. The return was processed u/s 143(1) on 24.02.2003 and selected for scrutiny. Notice u/s 143(2) dated 18.10.2002 was issued and duly served upon the assessee. Notice u/s 143(2) and 142(1) dated 12.12.2002 along with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere treated as deferred revenue expenditure, the aforesaid expenses, being revenue in nature, were claimed as deduction in the return of income. The Assessing Officer however, disallowed the aforesaid expenses holding the same to be capital expenditure on the ground that the same resulted in enduring benefit to the assessee, and allowed depreciation @ 60% on the same. Accordingly, the Assessing Officer made disallowance of ₹ 81,62,280 (₹ 1,16,60,440 - ₹ 34,98,120), after allowing depreciation of ₹ 34,98,120 [@ 30% since installed after 30th September, 2000]. On further appeal, the CIT(A), despite agreeing that expenditure was incurred to improve the efficiency and productivity of the assessee, confirmed the action of the Assessing Officer, holding that such efficiency and productivity is a long-term enduring benefit, going beyond the year under consideration. The Ld. AR submitted that the aforesaid action of the Assessing Officer/CIT(A) is without judicious appreciation of the facts of the case and the position in law. During the relevant Assessment year 2001-02, the assessee entered into a License Agreement dated 20.9.2000 with SAP India Systems Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ense. Accordingly, since no ownership of any software is acquired by the assessee as a consequence of the impugned expenditure and it is only the limited right to use the concerned software product which the assessee acquires without acquiring the right of transferring the impugned software, no benefit of an enduring nature has been derived by the assessee as result of impugned expenditure. The said expenditure has been incurred only for smooth working and for improving the functioning of the organization. That apart, in the modern era of fast changing technology, where software becomes obsolete quite fast and needs to be replaced / upgraded by an assessee, the software, in any, case cannot also be said to result in any enduring benefit to the assessee to be considered as capital expenditure. The Ld. AR pointed out details of the expenditure, which comprised of the following : (a) SAP implementation costs; (b) Development and creation of Turbine Frame (c) Maintenance of SAP software (d) Cluster software charges (e) Consultancy charges (f) Annual Maintenance charges (g) Software for Torsional Analysis The Ld. AR further submitted that on these expenses inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Mumbai Bench of the Tribunal in the case of Glenmark Pharmaceuticals Ltd. v. DCIT: ITA No.1110, 1221, 4434/Mum/2007, wherein on similar facts, the Tribunal allowed the expenditure incurred by the assessee on ERP implementation, after analyzing the various clauses of license agreement entered into by the assessee. Further, the Ld. AR relied upon the following decisions wherein expenditure towards development of software has been held to be allowable as revenue deduction: CIT(A) Vs. ACL Wireless Ltd: 361 ITR 210 (Del) CIT v. Technovate E Solutions P. Ltd: 254 ITR 110 (Del.) CIT v. Varindra Agro Chemicals: 309 ITR 272 (P H) CIT vs Kotak Securities Ltd (No. 1): 346 ITR 349 (Bom) CIT v. Uhde India P. Ltd: 358 ITR 395 (Bom) CIT v. IBM India Ltd: 357 ITR 88 (Kar.) CIT v. Lakshmi Vilas Bank Ltd. 97 taxmann.com 105(Mad) CIT v. Shri Renuga Textiles Mills Ltd.: 366 ITR 649 (Mad) CIT v. Southern Roadways Ltd: 282 ITR 379 (Mad.) CIT v. Karur Vysya Bank Ltd: 229 Taxman 396 (Mad) CIT v Southern Roadways Ltd.:288 ITR 15 (Mad) CIT v. Harper Collins Publishers India Ltd.: 166 TTJ 152 (Del. Trib.) ITO v. Spice Communications Ltd: 35 SOT 78 (Del Trib.) Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefits associated with the software would accrue over a protracted period of time. The benefits derived through other expenses on software design development, similarly confer long term benefits to assessee. Hence such expenditure is in the capital field and rightly disallowed by the Assessing Officer. In Assessment Year 2000-01 the Assessing Officer disallowed and held that the expenses are capital in nature and allowed depreciation benefits. Thus the Assessing Officer as well as CIT(A) was right in holding that these expenses are capital in natures. The Ld. DR relied upon the assessment order and order of the CIT(A). 7. We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that no ownership of any software is acquired by the assessee as a consequence of the ERP expenditure. This fact was not disputed by the Assessing Officer. The assessee has only limited right to use the concerned software product which the assessee acquired without acquiring the right of transferring the said software. Thus, from the perusal of the material on record it can be seen that no benefit of an enduring nature has been derived by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd law. In terms of the provisions of Section 14A of the Act, only expenditure incurred, having relation with earning of exempt income, is not an allowable deduction under the provisions of the Act. The phrase expenditure incurred used in the aforesaid section refers to actual expenditure, which has proximate nexus with exempt income, and not some imaginary or notional expenses, for the purposes of disallowance under that section. The provisions of Section 14A are applicable if and only if the assessing officer, at the first place, finds that the assessee has actually incurred expenses, which have proximate nexus with earning of exempt dividend income and not otherwise. In other words, the onus is on the Assessing Officer to find proximate nexus of expenses with earning of exempt income, before computing any disallowance under section 14A of the Act. The Ld. AR submitted that in the absence of such nexus being established, it is not open to the Assessing Officer to disallow any part of the expenditure on proportionate basis. Thus, the prerequisite condition for applying the provisions of Section 14A of the Act is that some expenditure must be incurred in relation to the earning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t connection between the exempt income and the actual expenditure incurred. In order to justify disallowance of any part of the expenditure under the said section, the onus is on the Revenue to bring on record nexus between the expenditure and the exempt income. The decision of the Hon ble Kerala High Court in the case of CIT(A) Vs. Catholic Syrian Bank Ltd and Ors 330 ITR 556/237 CTR 164. The Ld. AR relied upon the decision of the Hon ble Kerala High Court in case of Catholic Syrian Bank (Supra), the decision of Ahmedabad Bench of Tribunal in case of ACIT Vs. Torrent Pharmaceuticals Ltd 137 ITD 301 as well as the decision of the Delhi Bench of the Tribunal in case of SIL Investment Ltd. vs. ACIT: 148 TTJ 213 (Del.), wherein the Tribunal held that no disallowance could be made under Section 14A of the Act out of audit fees, normal travelling expenses, etc. The Ld. AR also referred the decision of Amritsar Bench of the Tribunal in case of DCIT v. Jammu and Kashmir Bank Ltd. 152 TTJ 522. In the light of the aforesaid, the Ld. AR submitted that there is no rationale/justification as to how ₹ 3 lac of administrative expenditure could be assumed to be incurred for earning exempt i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT(A). Thus, we are remanding back this issue to the file of CIT(A) for proper adjudication after taking cognizance of all the relevant evidences produced by the assessee. Needless to say, the assessee be given proper opportunity of hearing by following principles of natural justice. Ground No. 1 is partly allowed for statistical purpose. As regards to Ground No. 2 3, the Ld. AR submitted that the same are requires to be verified and the same may be set aside to the file of the CIT(A). Thus, we are remanding back this issue to the file of CIT(A) for proper adjudication after taking cognizance of all the relevant evidences produced by the assessee. Needless to say, the assessee be given proper opportunity of hearing by following principles of natural justice. Ground No. 2 and 3 are partly allowed for statistical purpose. 15. In result, ITA No. 1958/Del/2016 filed by the Assessee for A.Y. 2004-05 is partly allowed for statistical purpose. 16. As regards Assessment Year 2005-06, the same is identical to Ground No. 2 to Assessment Year 2004-05 and same needs to be set aside to the file of the CIT(A). Thus, we are remanding back this issue to the file of CIT(A) for proper ..... X X X X Extracts X X X X X X X X Extracts X X X X
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