BIRLASOFT LTD. (FORMERLY KNOWN AS BIRLASOFT INDIA LTD AND MERGED WITH . KPIT TECHNOLOGIES LTD ),PUNE V. ACIT, CIR4CLE-5(1), PUNE

ITA 6024/DEL/2019

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Birlasoft Ltd., engaged in software development services, appealed against the order of the Commissioner of Income Tax (Appeals) which sustained the disallowances made by the Assessing Officer on two counts: the disallowance of the 'Lease Equalization Reserve' and the disallowance of bad debts. The Tribunal examined the accounting treatment of the lease payments under Accounting Standard 19 and the nature of the bad debts claimed. The Tribunal found that the lease equalization reserve was a legitimate business practice to spread the lease expenses over the term of the lease and not a provision or contingent liability. Regarding the bad debts, the Tribunal recognized them as business losses, thus allowable under section 37 of the Act.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 101802 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-04-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2014-2015
• Other Referred Cases: Calcutta Co. Ltd. vs. ITA No.6024/Del/2019, Badridas Daga vs. CIT, Devi Films Private Ltd. vs. CIT, CIT vs. Mysore Sugar Co. Ltd., Salora International Ltd. vs. JCIT, CIT vs. Shreyans Industries Limited, CIT vs. Indian Biselers, CIT vs. City Union Bank Ltd., CIT vs. Vijay Construction, CIT vs. Mahindra N. Shah, ITO vs. Gokaldas Pragji, Gujarat Fluoro Chemicals Ltd. vs. JCIT, ACIT vs. Shantilal Balabhai, ITO vs. Ashok Kumar Lalitkumar, Yubo Investment Co. Pvt. Ltd vs. DIT, TRF Ltd vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PRATIBHA MEENA
• Assessee Lawyers: NEERAJ JAIN
• Keywords: Business expenditure; Bad and doubtful debts; Rule of consistency; Commercial expediency; TDS
• Section: 143(3); 234B; 28; 37(1); 207

Judgement Text

" 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘A’: NEW DELHI BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER AND SHRI AVDHESH KUMAR MISHRA,ACCOUNTANT MEMBER ITA No.6024/Del/2019,A.Y. 2014-15 Birlasoft Ltd. (Formerly known as Birlasoft India Ltd. and merged with KPIT Technologies Ltd.) 35 & 36 Rajiv Gandhi Info Tech Park, Phase-I, MIDC Hinjewadi, Pune (Mah) PAN: AAACK7308N Vs. Assistant Commissioner of income Tax,Circle- 5(1), Central Revenue Building, IP Estate, New Delhi (Appellant) (Respondent) Appellant by Sh. Neeraj Jain, Advocate Respondent by Ms. Pratibha Meena, Sr.DR Date of Hearing 16/01/2025 Date of Pronouncement 16/04/2025 ORDER PER AVDHESH KUMAR MISHRA, AM This appeal of the assessee for the Assessment Year (hereinafter, the ‘AY’) 2014-15 is directed against the order dated 30.04.2019of the Commissioner of Income Tax (Appeals)-2, New Delhi [hereinafter, the ‘CIT(A)’] 2. Vide three grounds & its sub grounds, three issues raised in this appeal are as under: i. Disallowance of Lease Equalization Reserve of Rs.86,30,697/-. ITA No.6024/Del/2019 Birlasoft Ltd. 2 ii. Disallowance of bad debts of Rs.32,21,200/- written off under section 36(2) of the Income Tax Act, 1961 (hereinafter, the ‘Act’). iii. Chargeability of interest under section 234B and 234C of the Act. 3. The relevant facts giving rise to this appeal are that the assessee provides software development services. The assessee filed its Income Tax Return (hereinafter, the ‘ITR’) on 28.11.2014declaring income of Rs.20,61,14,690/-. The case was scrutinized and consequential assessment was completed at income of Rs.21,79,66,587/- under section 143(3) of the Income Tax Act, 1961 (hereinafter, the ‘Act’) by the Assessing officer (hereinafter, the ‘AO’). The assesseehas claimed a deduction of Rs.86,30,697/- as “rent/lease equalization reserve” in its computation of income. This “rent/lease equalization reserve” has not been debited to the Profit& Loss Account of the assessee.The AO show caused the assessee to explain the claim of ‘lease/rent equalization reserve’ of Rs.86,30,697/-. The assessee claimed that it created this reserve in terms of Accounting Standard 19, which provided for equalization of aggregate lease rental over the period of lease on a straight-line basis. Further, the assessee gave detailed explanation justifying its claim. However, the AO was not satisfied with the same; therefore, he disallowed the said deduction of Rs.86,30,697/- on the reasoning that such reserve was in the nature of provision as the same had not finally crystalized in the relevant year. The AO further held that the assessee had not actually incurred the said ITA No.6024/Del/2019 Birlasoft Ltd. 3 expenditure in the relevant year. This disallowance was sustained by the Ld. CIT(A) holding that the assessee hadfailed to establish that the said expenditure had been incurred during the relevant year; therefore, the same was a contingent liability. The AO further, made disallowance of bad debts of Rs.32,21,200/- on the reasoning that the assessee had failed to demonstrate that such advances were part of taxable income and these debts had actually become bad non-recoverable. Aggrieved, the assessee filed appeal before theCIT(A), who did not find any infirmity in the assessment order; therefore, he sustained both disallowances. 4. The Ld. Counsel, at the outset, contended that the aforesaid actions of the AO and Ld. CIT(A) were based on incorrect and erroneous appreciation of the facts of the case and law. It was specifically submitted that the leasing agreement generally had an escalation clause, wherein, lease rentals were proposed to be increased on year-to-year basis or upon some agreed duration. In terms of Accounting Standard-19, the lease rentals needed to be recognized over the period of the lease on a straight- line basis. Para 23 of AS 19 provides as follows: \"23. Lease payments under an operating lease should be recognized as an expense on a straight line basis over the lease tern unless another systematic basis is more representative of the time pattern of the user's benefit.” It was further submitted that the lease rental in the present case was increasing over the years. Hence, the lease rentals recognized over the ITA No.6024/Del/2019 Birlasoft Ltd. 4 period of the lease on a straight-line basis had resulted benefit, in physical terms, from the leased asset in initial year when the actual rentals were lesser. However, increased rentals in later part of the lease agreement became revenue neutral in case aggregate rentals were taken into consideration for the entire period of lease agreement. Hence, the said accounting treatment did not ultimately result in creation of a reserve instead, it resulted in creation of a liability in the initial years when the lease payments were lower than the expense in this regard from the perspective of the lease. The assessee had followed the straight-line basis over the lease term as evident from its accounting policy mentioned in the audited book results. 4.1 The Ld. Counsel further submitted that the appellant assessee had taken its office premises on lease in Noida, Chennai, Bangalore, Hyderabad and work out the lease equalization in respect of each and every lease as per AS-19 in the books of accounts. The lease equalization so worked out was claimed by the assessee as deduction while computing its total income. It was submitted that the assessee had debited the equated rental expenditure of Rs.8,95,44,771/- instead of the actual rent expenses of Rs.9,81,75,768/- to its Profit & Loss account. Therefore, in order to recognize lease rental expense on straight-line basis over the lease term further claimed Rs.86,30,697 in its ITR the form of a equalization reserve. The Ld. Counsel drew our attention to the assessee’s reply dated ITA No.6024/Del/2019 Birlasoft Ltd. 5 21.09.201 filed before the AO enclosing detailed year-wise working of rent/lease equalization reserve, actual rentals and equated rental during the relevant previous year. The actual rental and the rent expenditure accounted in the books of accounts was Rs.l1,74,50,631/-. The complete break-up of the rent expenditure was enclosed as Annexure 5 of the said reply (Refer Pg.56 - 117 @ 62&100 of the PB). It was further submitted that the equated rent expenditure was charged to the Profit& Loss account on consistence basis every year and actual rent expenditure incurred had been claimed in the ITR as done in the relevant year. The relevant extract of audited accounts for AY 2011-12 and AY 2013-14 were place before us. No such disallowance was made in these preceding and subsequent years. 4.2 For further clarity, the Ld. Counsel submitted that the lease equalization reserve was created when the rentals were not constant over period of lease agreement. Here, the lease rentals had increased as per the term of the agreements. The aggregate rentals over the entire period of lease divided by the number of months of lease resulted the equalized rent per month, which had been claimed in the Profit & Loss account. The reserve was the difference between the equalized rent and the actual rent paid for the period. The said difference of actual rent over the equalized renthad been shown as reserve following AS-19. In the relevant year, the actual rent expense was higher than the rent booked in the accounts. Therefore, the difference was claimed separately in the ITR. ITA No.6024/Del/2019 Birlasoft Ltd. 6 5. The next issue is in respect of the disallowance of bad debts of Rs.32,21,200/-. The Ld. Counsel drew our attention to the assessee’s reply dated 21.09.201 filed before the AO enclosing details of bad debts. It was specifically submitted that these debts were securities given to various persons for the business purposes of the assessee. It was submitted that the sum of Rs.13,99,504/- deposited to STPI Authority, Noida, Rs.2,57,501/- with BSNL and VSNL were written off as the same were not recoverable. These sums were verifiable from the Govt. Records. Rental deposit ofRs.7,48,890/- given for the employees’ accommodations were written off on the ground that these amounts were not recoverable. Miscellaneous amounts given for business purposes were also written off. Deposits of Rs.5,29,539/- given to rent works for the IT assets were also written off on the ground that these were not recoverable. It was categorically submitted that since these debts were securities; therefore, these would never route through the Profit & Loss account of the assessee. 5.1 It was submitted that the AO had disallowed the bad debts under section 36 of the Act as against the claim of the bad debts under section 37(1) (as business expenditure) of the Act. In this regard, it was submitted that such advances/deposits were given by the appellant assessee in the ordinary course of the business, and, thus, if such amount became irrecoverable, the same would be allowable as loss under section 28 of the Act. Reliance was placed on the decision of Supreme Court in the case of ITA No.6024/Del/2019 Birlasoft Ltd. 7 Calcutta Co. Ltd.: 37 ITR 1 wherein the Hon’ble Court observed that it was not practical for law makers to specifically provide for allowance of all types of expenses that might be incurred during the course of business or profession and therefore, general commercial principles should also be borne in mind while computing the taxable income. Losses incidental to business, which are revenue in nature, such as loss of stock-in-trade on account of fire; embezzlement or theft of cash during the course of business, etc. were held to be admissible deduction in the computation of taxable income on the basis of common principles of accounting and commercial expediency. The Ld. Counsel also placed reliance on following decisions:Badridas Daga vs. CIT: 34 ITR 10, Devi Films Private Ltd. vs. CIT: 75 TTR 301, CIT V. Mysore Sugar Co. Ld.: 46 ITR 649 (SC), Salora International Ltd. v. JCIT: 129 Taxman 68 (Del.), CIT V. Shreyans Industries Limited: 207 CTR 281 (P&H), CIT V. Indin Biselers: 181 ITR 69 (Mad.), CIT V. City Union Bank Ld.: 291 ITR 144 (Mad), CIT v M/s Vijay Construction: 311 ITR 381 (Mad.) 10, CIT V. Mahindra N. Shah: 200 CTR 18 (Guj.), ITO v. Gokaldas Pragji: 24 ITD 25 (Ahd.), Gujarat Fluoro Chemicals Ltd. v. JCIT: 76 TTJ 313 (Ahd.), ACIT v. Shantilal Balabhai: 74 TTJ 506 (Abd.), ITO vs. Ashok Kumar Lalitkumar: 53 ITD 326 (Ahd.), Yubo Investment Co. Pvt. Ltd v. DIT: ITA No. 807/Mad/2012 (Chennai), TRF Ltd vs. CIT: 323 ITR 397 (SC), etc. in view of the above, the Ld. Counsel prayed for relief. ITA No.6024/Del/2019 Birlasoft Ltd. 8 6. The Ld. Sr. DR, placing reliance on the findings of lower authorities, argued vehemently. 7. We have heard both parties and perused the material available on record. We find merit in the arguments/submission of the Ld. Counsel. The first issue, in simple term, is only that whether the difference between the actual rent paid and the equated rent is allowable as expenditure. In the present case, the appellant assessee has created a separate head for this differential amount as ‘rent/lease equalization reserve’ and claimed the same separately in the ITR as expenditure. There is no dispute about the clauses of the rent agreements, which provide the incremental increase in rental value as per the lease agreements. Undisputedly, the enhanced rent is not in dispute. The entire rent has been paid through banking channel after deduction of tax at source (TDS). The genuineness of such enhanced rent as business expenditure is not the matter of dispute. The dispute is confined to the head ‘rent/lease equalization reserve’ through which the said difference between the actual rent paid and the equated rent debited to the Profit & Loss account was claimed as deduction in the ITR. We have considered the entire material placed on the record and above submissions and of the considered view that none of the lower authorities has appreciated the facts of this issue, accounting standard followed by the assessee and the relevant provisions of the Act. There is no bar in claiming the actual rent in theProfit & Loss account but the ITA No.6024/Del/2019 Birlasoft Ltd. 9 assessee, following the principle of consistency and Accounting Standard- 19, has claimed the same rent as expenditure for the entire period of lease spanning over more than one year. The quantum of increase in the rent as per the lease agreement has been claimed separately under the head ‘rent/lease equalization reserve’ in the computation of the income. This method of accounting is being followed consistently over the years and the Revenue is accepting it in some preceding and subsequent years. In principle, the same has to be allowed as business expenditure irrespective of nomenclature under which such expenditure is put into. The said head ‘lease/rent equalization reserve’ is not the contingent liability and a reserve. In view of the above, we are of the considered view that the said disallowance of Lease Equalization Reserve of Rs.86,30,697/-made by the AO and sustained by the Ld. CIT(A) is not genuine. Hence, the same is deleted. 8. The next issue is in respect of the disallowance of bad debts of Rs.32,21,200/-. In principle, the said claim of bad debts of Rs.32,21,200/- is not the trading loss. However, we find merit in the arguments/submission of the Ld. Counsel. In view of the ratio laid down by the Hon’ble Supreme Court and various Hon’ble High Courts in cases mentioned above in para 5.1, we are of the considered opinion that the said claim of Rs.32,21,200/- as bad debts is nothing but the business loss allowable under section 37 of the Act.In view of the above, we are of the ITA No.6024/Del/2019 Birlasoft Ltd. 10 considered view that the said disallowance of Lease Equalization Reserve of Rs.86,30,697/- made by the AO and sustained by the Ld. CIT(A) is not genuine. Hence, the same is deleted. 9. The charging of interest under the Act is consequential. Hence this ground is dismissed. 10. In the result, the appeal of the assessee is allowed as above. Order pronounced in open Court on 16th April, 2025 Sd/- Sd/- (SATBEER SINGH GODARA) (AVDHESH KUMAR MISHRA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 16/04/2025 Binita, Sr. PS *Kavita Sr. PS Copy forwarded to: 1. Appellant 2. Respondent 3. PCIT 4. CIT(A) 5. Sr. DR-ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI "