TMI Blog2006 (3) TMI 196X X X X Extracts X X X X X X X X Extracts X X X X ..... anty is inbuilt in the sale price itself and so the liability is not contingent but an ascertained one and to be allowed in the year of sales. We accordingly delete the disallowance. Software purchase - capital or revenue expenditure - The assessee in the course of its business acquired certain application software. It is made clear that the amount is paid for application software and not system software. The application software enables the assessee to carry out its business operation efficiently and smoothly. However, such software itself does not work on stand alone basis. The same has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Thus, for payment of such application software, though there is an enduring benefit, it does not result into acquisition of any capital asset. The same merely enhances the productivity or efficiency and hence to be treated as revenue expenditure. We accordingly hold that the amount paid is revenue expenditure and not capital expenditure. Payment received from IBM Global Services India Ltd. (IGSI) in respect of transfer of skilled pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue receipt chargeable to tax. The ground raised in ground Nos. 4 and 5 therefore fails. Claiming credit of taxes paid in USA - The Assessing Officer may allow the credit for the taxes paid in USA as per the provision of section 90 of the Act read with article 25(2)(a) of the DTAA between India and USA, whether or not such claim is made in the return or during the assessment proceedings. There cannot be any embargo on entertaining the claim even if such claim is not made in the return or during assessment proceedings. MAT - The debts due to assessee are appearing as asset in the balance sheet. For certain debts which are doubtful, the assessee can provide for such debts by writing off such sum in respect of doubtful debts. By such provision, what is provided is reduction in the value of assets but not meeting any liability. The liability is on the debtors to pay and so far as assessee is concerned, the same is an asset. If the amount is doubtful of recovery, to that extent, the value of asset is reduced but it cannot result into creating any liability on the assessee to pay. In making the provision, the assessee merely restated the value of asset but there is no setting aside any am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Computers, the warranty period is three years and for other products, the warranty period is one year. During the warranty period, if any defects are noticed, necessary rectification/replacement is to be carried out by the appellant free of cost. The appellant on the basis of past experience and certain fair and best estimate basis provided for such warranty liability in respect of sales made during the year. It is the contention of assessee that since the assessee is following mercantile system of accounting; the assessee is required to provide for all known liabilities even though the amount cannot be determined precisely or with certainty. This is in tune with accounting standards notified by the CBDT, where it is mentioned that the provision is to be made for all known liabilities and losses even though the amount cannot be determined with certainty. The assessee, on the basis of its past experience, made provision in respect of goods sold during the year as percentage of sales. For providing such warranty claims, the assessee has entered into back to back arrangement with IBM Global Services India Pvt. Ltd. (IGSI). Pursuant to which the appellant's application in the warr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty towards warranty is inbuilt in the sale price itself and so the liability is not contingent but an ascertained one and to be allowed in the year of sales. We accordingly delete the disallowance of Rs. 4,92,69,808. 3. The next issue of appeal is against treatment of purchase of software amounting to Rs. 33,14,298 as capital expenditure as against claim of assessee as revenue expenditure. 3.1 The assessee acquired certain application software for a sum of Rs. 33,14,298 and claimed the same as revenue expenditure. The Assessing Officer held that since these results in enduring benefit to the assessee, it is a capital expenditure and not revenue expenditure but depreciation on the same is to be allowed. Learned CIT(A) held that in absence of any material to decide the lifespan of said software, the decision relied by the counsel for assessee cannot be examined. He also held that the depreciation on non-tangible asset is allowable under section 32(1)(ii). This implies that software which is an intangible asset can also be a capital asset and hence when the assessee acquires the same, it amounts to capital expenditure and not revenue expenditure. He also relied upon the decision of Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or claiming depreciation. This by itself does not mean that whenever the payment is made for intangible assets, the same always amounts to capital expenditure. 3.5 We have carefully considered the relevant facts, arguments advanced and the decisions cited. For determining the nature as to whether the expenses are capital or revenue, the same can be with regard to facts of each case, as no one test or principle or criteria is paramount or conclusive or of universal application. When expenditure is made not only once and for all but also with a view to bringing into existence an asset or an advantage for the enduring benefit, the same can be properly classified as capital expenditure. At the same time, even though the expenses are once and for all and may give an advantage for enduring benefit but is not with a view to bringing into existence any asset, the same cannot be always classified as capital expenditure. The test to be applied is, is it a part of company's working expenses or is it expenditure laid out as a part of process of profit earning. Is it on the capital layout or is it an expenditure necessary for acquisition of property or of rights of a permanent character, po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase for a consideration of Rs. 18.4 crores and Rs. 5.3 crores respectively. The appellant included the above sum in its return by way of abundant caution. At the same time, along with the return of income, the assessee claimed that the said sum is not chargeable to tax but is capital receipt. The Assessing Officer held that the amount received is not capital receipt as there is no corresponding asset represented in balance sheet. These were created over the years through the expenditure debited to revenue account. The amount received is therefore to be treated as revenue receipt. Learned CIT(A), after considering the terms of agreement as also the sample copies of appointment letters issued by appellant to its employees, held that the appellant has no power to transfer its employees. The power is only to terminate the services but not to direct the employees to join the particular concern. Hence the amount cannot be considered to have been received for transfer of capital asset. He also held that the amount received on transfer of skilled personnel is not for the loss of source of income or income earning apparatus, but is compensation towards loss of business due to loss of skille ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the database relating to appellant's clients and customers to IGSI and was to receive a sum of Rs. 5.3 crores for the transfer of the database. The sum of Rs. 18.4 crores and a sum of Rs. 5.3 crores is not towards any operation carried out by the assessee or its business activities, but are capital receipts. The amount received can neither be considered as fees for technical services within the meaning of section 9(1)(vii) nor royalty within the meaning of section 9(1)(vi). The appellant has not rendered any technical services to IGSI. The assessee is not in business of transferring these personnel after training them. The database accumulated by appellant over the years is an asset though an intangible one. It is one of the recognized accounting principle that intangible asset will not appear in the balance sheet unless paid for. The Assessing Officer was therefore not correct to state that the amount is not for any asset since it is not appearing in the balance sheet. Similarly the amount received is not royalty. He strongly relied upon the decision of Hon'ble Bombay High Court in the case of Mehboob Productions (P.) Ltd v. CIT [1977] 106 ITR 758, the relevant portion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll - a windfall as to the factum and not a windfall as to mere quantum. On both the counts, therefore, the answer to the question whether these receipts constitute income of the assessee must be in the negative and in favour of the assessee. On the basis of above, he submitted that the disputed sum be treated as capital receipt not chargeable to tax or alternatively as capital gain on transfer of certain assets, the cost of which is not ascertainable and hence not chargeable to tax. For the alternate proposition, he relied upon the decision of Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 and the decision of the Tribunal in the case of Voltas Ltd and in the case of Coromandel Fertilizers Ltd v. Dy. CIT [2004] 90 ITD 344 (Hyd.). 4.4 Learned CIT Shri D.K. Gupta strongly relied upon the appellate order. He submitted that the assessee himself treated the amount received as income in its books of account. The same was also offered as income initially but claimed as exempt later on. Though the entry in books of account or nomenclature given thereto is not material, the same is relevant for considering the nature thereof. For this proposition he r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture. Since there is no nexus between the expenses incurred on the employees and the amount received on transfer of such employees, section 41(1) will not apply to such receipt. Similarly for sharing the database, the amount is received and the same is not in respect of expenses incurred earlier. Section 28(iv) will not apply, as it is not the value of any benefit or perquisite. Section 28(iv) will apply to no cash transaction in the nature of benefit or perquisite but not to the monetary transaction itself. For this proposition he relied upon the decision of Hon'ble Gujarat High Court in the case of CIT v. Alchemic (P.) Ltd [1981] 130 ITR 168 and in the case of CIT v. Mafatlal Gangabhai Co. (P.) Ltd [1996] 219 ITR 644 (SC). The amount received is not in the course of carrying on any business and hence under section 28, the same cannot be brought to tax. 4.6 We have carefully considered the relevant facts, arguments advanced and the decisions cited. To understand the controversy, it is necessary to consider the terms of agreement, extracted hereunder:- This agreement is made and entered into as of this twentyfifth day of August, 1997, by and between: (A) Tata IBM Limited (Tat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oftware Training; (f) Systems Integration Services; (g) Project Management; (h) Application Software Services; (i) Network Related Services; (j) Site Services; (k) Information Kiosk Services, and it is the understanding of IBM, Tata and TATA IBM that such services include but is not limited to (l) software design, (m) hardware design, (n) professional services, (0) information technology consulting (p) international procurement operations, (r) value added network, (s) fee based education, (t) systems integration, (u) availability services, and (v) hardware maintenance and software support: (C) Therefore, for and in consideration of the premises and the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: (1) Tata IBM agrees to do the following: (a) Sell all maintenance spares and accessories comparing inventory of TATA IBM relating to IBM computers; (b) Facilitate transfer of its personnel of TATA IBM set out in Annexure I; and (c) Share the database relating to TATA IBM's clients and customers, list whereof is set out in Annexure III he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it may still be income if it partakes of the nature of the income. The idea behind providing inclusive definition in section 2(24) is not to limit its meaning but to widen its net. The word 'income' is of widest amplitude, and it must be given its natural and grammatical meaning. The scheme of section 2(24) read with sections 4 and 10, seems to be that given its ordinary natural meaning the word 'income' will take in any monetary return 'coming in'. It will take in voluntary and gratuitous payments, which are connected or linked with the office, vocation or occupation. 4.8 Income under the Act connotes a periodical monetary return coming in with some sort of regularity or definite source. The source is not necessarily one, which is accepted to be continuously productive but it must be one whose object is the production of a definite return. At the same time, it cannot be said that the receipt, which is not periodical or which is not regulated but of one time receipt, cannot be considered as income. The source need not be continuously productive and it is sufficient if the income is flowing from some exercise or operation by the appellant and in ordinary parl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tary payment is made entirely without consideration and is not traceable to any source, which a practical man may regard as real source of his income, but depends entirely on the whim of the donor, cannot fall in the category of income . In the case before Hon'ble Punjab and Haryana High Court in Atlas Cycle Industries Ltd.'s case, three employees entered into an agreement with the assessee for serving it for an agreed period and deposited a sum by way of security deposit. As these employees left the service before the stipulated period, the assessee-company forfeited the Security deposit. On the question whether such sum is revenue receipt or capital receipt, Hon'ble High Court held thus:- That the assessee had incurred the expenditure on the training of the three employees which had been allowed as business expense. When part of the expense had been realized by the assessee by way of forfeiture of the security deposits, in essence the amounts of the security deposits resulted in the reduction of the expenditure of the company on the training of its personnel and was to be included in the total income of the assessee. Hon'ble Bombay High Court in the case of Ralliw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... By a letter dated 4-6-1976, BME intimated to the assessee that BME was agreeable to extension of the agreement for a further period of one year and accordingly the said agreement stood renewed up to 10-6-1977. But, in the meanwhile, the Government of India sponsored a company C and on 6-10-1976, BME wrote a letter to the assessee stating that since a lot of technical know-how and organization potentialities were needed to handle the date process plan made by BME, the assessee might assign its rights under the said agreement to C which was specializing in the particular line. BME agreed to pay to the assessee a lump sum as consideration for the assessee assigning its rights in favour of C. The agreement between the assessee and BME stood terminated on a payment of Rs. 5 lakhs. The Income-tax Officer held that the amount was assessable and this was upheld by the Tribunal. On a reference: Held, that the agency agreement was entered into by the assessee in the normal course within the framework of the normal business of the assessee and the termination thereof could be treated as a normal incident of the business. Even with the termination of the agreement, the assessee was left free ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rce for a short period of two years. The Tribunal was right in its finding that out of the sum of Rs. 25 lakhs received by the assessee during the year 1988-89 and again Rs. 15 lakhs during the year 1989-90 only a sum of Rs. 5 lakhs was a capital receipt and not liable to tax as income under section 28(ii)(c) of the Income-tax Act, 1961. 4.9 Applying the principles laid down above by us as well as by the various courts extracted herein above, we examine the facts of present case before us. The appellant received a sum of Rs. 18.4 crores being consideration for the value which inheres in the human resources by reason of training, skill, practical experience and work culture for transfer of the personnel. To facilitate such transfer, the amount was paid. Undisputedly, the training, skills and experience as well as work culture was imparted by the assessee. Because of the employment of such personnel with the appellant company, the personnel acquire such skills, experience and work culture. Acquisition of such training, skill, experience and work culture was at the cost of appellant company. Thus, the same can be connected with the office or occupation, which the assessee carries on. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim is to be entertained whether or not such claim is made either in return or during assessment proceedings. 5.3 We are in agreement with the submission by Shri Pardiwala. The Assessing Officer may allow the credit for the taxes paid in USA as per the provision of section 90 of the Act read with article 25(2)(a) of the DTAA between India and USA, whether or not such claim is made in the return or during the assessment proceedings. There cannot be any embargo on entertaining the claim even if such claim is not made in the return or during assessment proceedings. 6. The next ground of appeal relates to computation of income under the provision of section 115JA of the Act. It is the contention of assessee that while computing book profits within the meaning of section 115JA, provision made for doubtful debts should not be added as it do not amount to Provision made for meeting liabilities other than ascertained liabilities within the meaning of Explanation in section 115JA(2). 6.1 The assessee in his profit and loss account debited a sum of Rs. 30,45,96,133 as provision for bad and doubtful debts. The Assessing Officer held that the provision is for unascertained liability. The Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g diminution in the value of asset. This aspect has been considered by ITAT, Pune in the case of J.G. Vacuum Flasks (p.) Ltd. 6.5 We have carefully considered the relevant facts, arguments advanced and the decisions cited. Hon'ble Supreme Court in the case of Surana Steels (P) Ltd. v. Dy. CIT [1999] 237 ITR 777 held that while computing book profit, one has to refer the provision of Companies Act, 1956. As per Part III of Schedule VI of Companies Act, 1956, the expression 'provision' shall mean any amount written off or retained by way of providing for depreciation renewals or diminution in value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy . Thus, as per the aforesaid definition, the provision can be for diminution in value of asset or for meeting any liability. Under clause (c) of Explanation to section 115JA, the amount to be increased is the amount set aside to provision made for meeting liabilities other than ascertained liabilities . Clause (c) of the said Explanation do not require to increase the book profit by all sorts of provision but only in respect of provision for meeti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he year. The assessee cannot compute its book profit before the end of the financial year. Thus, the assessee is not required to pay any advance tax as per provision of section 208. In absence of any liability to pay advance tax, interest under section 234B is not chargeable. He also submitted that though the decision by Hon'ble Karnataka High Court is rendered with reference to section 115J, the ratio laid down therein will apply even when income is computed under the amended provision of section 115JA. 7.3 Learned DR strongly relied upon the appellate order. He submitted that interest under section 234B is mandatory in nature in view of the decision of Hon'ble Supreme Court in the case of CIT v. Anjum M.H Ghaswala [2001] 252 ITR 1, CIT v. Hindustan Bulk Carriers [2003] 259 ITR 449 (SC) and by Patna High Court in the case of Mrs. Prabha Lal v. CIT [2004] 269 ITR 212.The interest is compensatory in nature. In the case of CIT v. Kotak Mahindra Finance Ltd [2004] 265 ITR 119 (Bom.), it is held that even when income is computed under section 115J, interest can be levied under section 234B. Similar view has been taken by Hon'ble Punjab and Haryana High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is less than 30 per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to 30 per cent of such book profit. It is thus, by way of deeming fiction that this income has been considered to be the deemed income. The profit and loss account has to be prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. In the Explanation under section 115J(1A) it is provided that for the purposes of this section book profit means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (1A) as increased by various amounts given in the section. Thus, for the purpose of assessing tax under section 115J, firstly, the profit as computed under the Income-tax Act has to be prepared and thereafter the book profit as contemplated by the provisions of section 115J are to be determined and then the tax is to be levied. The liability of the assessee for payment of tax under section 115J arises if the total income as computed under the provisions of the Act is less than 30 per cent of its book profits. This exercise for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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