9911796707
TMI Blog2023 (1) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts and in the circumstances of the case and in law, the Hon'ble Commissioner of Income Tax -(Appeals) [CIT(A)] erred in computing the total income of the Appellant at Rs. 27,36,18,810 as against Rs. 22,55.54,223 as declared by the Appellant in its return of income. 2. Ground No. 2: Capitalization of software charges amounting to Rs. 5,52,26,376 debited to Profit and Loss account On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the disallowance made by the Assessing Officer (AO) in relation to recurring software expenses of Rs. 5,52,26,376 debited to Profit and Loss account holding the same to be capital in nature. The Appellant prays that the aforesaid recurring software expenses are revenue in nature and the disallowance be deleted. Without prejudice to the above, the Appellant prays that depreciation @ 60% on the amount of expenditure capitalized be allowed. 3. Ground No. 3: Disallowance of expenditure incurred on travelling & conveyance of Rs. 38,17,400 On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the ad-hoc disallowance made by the AO i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be at arm's length. The assessment was thereafter completed under section 143(3) read with section 94CA(4) of the Act vide Assessment Order, dated 26.03.2015. The Assessing Officer made following additions/disallowance (i) disallowed Software Charges of INR 3,86,58,463/- and capitalized the same (ii) disallowed expenses amounting to INR 90,32,800/- under heads of travelling and conveyance and legal and professional fees, and (iii) disallowed interest expense of INR 3,73,326/-, and capitalized the same by adding the same to capital work-in-progress. The aforesaid additions/disallowances were also sustained by the CIT(A) and therefore, the Appellant is in appeal before us on the grounds reproduced in paragraph 2 above which are taken up seriatim hereinafter. Ground No. 1 4. Ground No. 1 is general in nature and therefore, does not require adjudication Ground No. 2 5. Ground No. 2 relates to capitalization of software charges amounting to INR 5,52,26,376/- debited to Profit & Loss account. 6. During the assessment proceedings, the Assessing Officer noticed that the Appellant debited to the Profit & Loss Account INR 9,00,77,826/- as "Software Charges" under Schedule 17 - " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng different types of software's and replaced all by one software which was purchased from the parent company which clearly states that the said software was not for a year or two, it would be definitely for several years. Accordingly, the AO has correctly considered the expenditure incurred by the appellant in respect of software expenses as capital expenditure. Hence, this ground of appeal is dismissed." 8. Being aggrieved, the Appellant is now in appeal before us challenging the order passed by CIT(A). 9. Ld. Authorised Representative for the Appellant had contended that the Appellant had been using Oracle Software for financial accounting, stock maintenance and other purposes. During the relevant previous year, a new software, i.e., S3 ERP (being SAP software developed/acquired by Firmenich SA - Switzerland) was adopted/implemented by the Appellant w.e.f. 01.10.2010. The implementation of the software was done in a phased manner with the help of SAP technical support. Once implemented, the software needed constant repairs, creation of back-up and updation to ensure consistent working of the software. The recurrent expenses included professional charges incurred towards m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, the report of the external auditor furnished by the Appellant, which also gives details of allocation on the basis of allocation keys, has been issued on 15.02.2013 and covers period starting from 01.07.2011 to 30.06.2012 and therefore, does not cover the relevant previous year. The Appellant has also furnished the details of software licenses utilized by the Appellant (placed at page 62 and 63 of the paper book) in respect of which the Appellant has been "re-billed". The facts that the aforesaid documents/details were filed before the Assessing Officer/CIT(A) has not been disputed by the Revenue. While the Assessing Officer referred to some of the documents filed by the Appellant, the CIT(A) has returned a finding that the Appellant has not provided any description in respect of expenses incurred. The finding returned by the CIT(A) is contrary to the material on record. Further, while concluding that the expenditure incurred by the Appellant in respect of software was capital in nature, the CIT(A) has proceeded on the presumption that the software would have useful life for many years. The approached adopted by the CIT(A) cannot be countenanced as it is based upon presu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Appellant was sent to the Assessing Officer for remand report. The Assessing Officer submitted remand report, dated 18.10.2018 and in response to the same the Appellant filed letter, dated 25.01.2019. After taking into consideration the remand report and their response received to the Appellant, the CIT(A) confirmed the order passed by Assessing Officer holding that despite reasonable opportunity having been granted, the Appellant has failed to substantiate the expenses in the remand proceedings. There was huge increase in expenses as compared to the revenues for which no supporting documents were submitted by the Appellant. The CIT(A) also observed that despite incurring expenses of INR 9 Crore, the Appellant was not able to provide party-wise segregation details and co-relate the invoices with the expenses debited to the Profit & Loss Account. 17. Being aggrieved, the Appellant is now before us challenging the order passed by CIT(A). 18. We have considered the rival submissions and perused the material on record. The Assessing Officer had made the disallowance for the reason that the increase in the expenses was not matched by the corresponding increase in the Revenue. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings, the Assessing Officer vide letter, dated 13.02.2015, asked the Appellant to furnished the details of capital work-in-progress and state whether any interest expenditure was capitalized. According to the Assessing Officer, no response was received from the Appellant in this regard and therefore, the Assessing Officer presumed that no interest was capitalized as part of work-in-progress. Therefore, after making an observation to the effect that the Appellant had, both, borrowed as well as own funds, and had incurred expenditure for capital work-in-progress out of both, the Assessing Officer disallowed interest expenses of INR.3,73,326/- being 2.15% of capital work-in-progress out of the interest expense of INR 1,85,53,000/- claimed by the Appellant as Revenue expenditure and capitalized the same as capital work-in-progress. 21. Being aggrieved, the Appellant preferred appeal before CIT(A) on this issue. Before CIT(A) it was contended on behalf of the Appellant that the Appellant had submitted the details of the addition to fixed assets and unsecured loans vide letter dated 24.12.2014 and 26.02.2015. Attention of the CIT(A) was also attracted to the Credit Facility Agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had contended that the Appellant had own funds of INR 59,38,43,000/- whereas increase in capital work-in-progress is INR 1,59,30,000/-. It is not the case of Revenue that the Appellant did not have sufficient own funds. To the contrary the Assessing Officer had clearly stated that the Appellant also had own funds but proceeds to make disallowance on the presumption that, both, borrowed funds and own funds have been used. The Appellant has furnished the relevant working capital facility agreements and ledger account to show that the unsecured loans were for working capital, and the interest paid thereon is also clearly reflected in the financial statements in Schedule 18 - "Interest - On working capital loans". In our view, in absence of any information/circumstances to suggest, in some form or manner, any diversion of working capital loans for funds by the Appellant, in the facts and circumstances of the present case, the presumption drawn by the Assessing Officer cannot be sustained as it has no basis. Accordingly, we overturn the decision of CIT(A) and delete the disallowance on interest of INR 3,73,326/- made by the Assessing Officer. Ground No.5 raised by the Appellant is allo ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
