Bridgeco Technologies India Pvt. Ltd., Bangalore V. Deputy Commissioner of Income Tax, Bangalore

ITA 1686/BANG/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 7672 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-08-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 21-08-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 22-09-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B R RAMESH JT
• Assessee Lawyers: R SATHYANARAYANA
• Keywords: Revenue expenditure; Capital expenditure
• Section: 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI MANJUNATHA G., ACCOUNTANT MEMBER ITA NO.1686/BANG/2016 ASSESSMENT YEAR : 2011-12 BRIDGECO TECHNOLOGIES INDIA PVT. LTD., (PRESENTLY MERGED WITH M/S. MICROCHIP TECHNOLOGY INDIA PVT. LTD.,), NO.149/B, EPIP INDUSTRIAL AREA, 1 ST PHASE, WHITEFIELD, BANGALORE 560 066. PAN: AADCB 5754G VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 4(1)(2), [FORMERLY ITO, WARD 11(1)], BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI R. SATHYANARAYANA, CA RESPONDENT BY : SHRI B.R. RAMESH, JT.CIT(DR)(ITAT) DATE OF HEARING : 21.08.2017 DATE OF PRONOUNCEMENT : 24.08.2017 O R D E R PER MANJUNATHA G., ACCOUNTANT MEMBER THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER OF CIT(APPEALS)-1, BANGALORE DATED 02.06.2016 AND IT P ERTAINS TO ASSESSMENT YEAR 2011-12. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE COMPANY ENGAGED IN THE BUSINESS OF EMBEDDED SOFTWARE DEVELOPMENT, R ELATED MARKETING ITA NO.1686/BANG/2016 PAGE 2 OF 6 SERVICES AND GLOBAL FINANCIAL OPERATIONS FILED ITS RETURN OF INCOME FOR AY 2011-12 ON 23.11.2011 DECLARING NIL INCOME, AFTER C LAIMING DEDUCTION U/S. 10A OF THE INCOME-TAX ACT, 1961 [THE ACT]. THE CA SE WAS SELECTED FOR SCRUTINY AND ACCORDINGLY NOTICE U/S. 143(2) AND 142 (1) ALONG WITH QUESTIONNAIRE CALLING FOR VARIOUS DETAILS WERE ISSU ED. IN RESPONSE TO THE NOTICES, THE AR OF ASSESSEE APPEARED FROM TIME TO T IME AND FURNISHED THE DETAILS AS CALLED FOR. 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, TH E AO NOTICED THAT AS PER ANNEXURE-IV TO THE 3CD REPORT, THE ASSESSEE HAS DEBITED A SUM OF RS.16,35,272 TO THE PROFIT & LOSS ACCOUNT TOWARDS C APITAL EXPENDITURE DEBITED TO P&L ACCOUNT. HOWEVER, THE SAME HAS NOT BEEN ADDED TO THE INCOME IN THE STATEMENT OF TOTAL INCOME. THE AR OF THE ASSESSEE WAS MADE AWARE OF THIS AND HE AGREED FOR ADDITION OF TH E SAME TO THE TOTAL INCOME. ACCORDINGLY, THE AO MADE AN ADDITION OF RS. 16,35,272 TO THE INCOME UNDER THE NORMAL PROVISIONS OF THE ACT. A S IMILAR ADJUSTMENT HAS BEEN MADE TOWARDS BOOK PROFIT U/S. 115JB OF THE ACT . 4. THE ASSESSEE CARRIED THE MATTER IN APPEAL CHALLE NGING THE ADJUSTMENT MADE BY THE AO TOWARDS DISALLOWANCE OF C APITAL EXPENDITURE ON BOOK PROFITS COMPUTED AS PER THE PROVISIONS OF SECT ION 115JB OF THE ACT. THE CIT(APPEALS) FOR THE REASONS RECORDED IN HIS OR DER DATED 02.06.2016 DISMISSED THE APPEAL FILED BY THE ASSESSEE AND UPHE LD THE ADDITIONS MADE BY THE AO TOWARDS BOOK PROFITS U/S. 115JB OF THE AC T ON ACCOUNT OF ITA NO.1686/BANG/2016 PAGE 3 OF 6 DISALLOWANCE OF CAPITAL EXPENDITURE DEBITED TO PROF IT & LOSS ACCOUNT. AGGRIEVED BY THE CIT(A)S ORDER, THE ASSESSEE IS IN APPEAL BEFORE US. 5. THE LD. AR OF THE ASSESSEE SUBMITTED THAT THE LD . CIT(APPEALS) ERRED IN UPHOLDING THE ADJUSTMENT MADE BY THE AO TOWARDS BOOK PROFITS COMPUTED U/S. 115JB WITHOUT APPRECIATING THE FACT T HAT THE AMOUNT REPRESENTS COMPUTER SOFTWARE EXPENSES AND AS PER TH E AUDITED FINANCIAL STATEMENTS AND ARE PREPARED AS PER SCHEDULE VI TO T HE COMPANIES ACT, 1956 R.W. ACCOUNTING STANDARDS U/S. 211(3C) OF THE COMPANIES ACT,1956. THE LD. AR FURTHER REFERRED TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. V. CIT (2002) 255 ITR 273 (SC) SUBMITTED THAT THE AO DOES NOT HAVE THE JURISDICTION TO GO BE HIND THE NET PROFIT SHOWN IN THE PROFIT & LOSS ACCOUNT, EXCEPT TO THE EXTENT PROVIDED IN THE EXPLANATION TO SECTION 115J OF THE ACT. THE LD. AR FURTHER REF ERRED TO THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT V. G.E. POWER SERVICES INDIA LTD. (2008) 171 TAXMAN 0010 AND SUBMITTED THAT EXPENSES INCURRED ON SOFTWARE USED IN COMPUTERS IS A REVENUE EXPENDITURE AND IT CANNOT BE SAID TO BE AN ASSET OF ENDURING NATURE TO TREAT IT AS A CAPITAL EXPENDITURE. 6. THE LD. DR STRONGLY SUPPORTED THE ORDER OF CIT(A PPEALS) AND SUBMITTED THAT THE ASSESSEE ITSELF HAS REPORTED IN THE TAX AUDIT REPORT THAT EXPENDITURE INCURRED TOWARDS SOFTWARE EXPENSES IS C APITAL IN NATURE WHICH IS NOT ALLOWABLE AS A DEDUCTION UNDER THE PROVISION S OF THE ACT. THE AO HAS MADE ADDITIONS TOWARDS TOTAL INCOME UNDER THE N ORMAL PROVISIONS OF ITA NO.1686/BANG/2016 PAGE 4 OF 6 THE ACT AND A SIMILAR ADJUSTMENT HAS BEEN MADE TOWA RDS BOOK PROFITS COMPUTED U/S. 115JB AND HENCE THE ADJUSTMENT MADE B Y THE AO TOWARDS BOOK PROFITS IS IN ACCORDANCE WITH THE LAW AND THE SAME SHOULD BE UPHELD. 7. WE HAVE HEARD BOTH THE PARTIES AND CONSIDERED TH E MATERIAL AVAILABLE ON RECORD. THE AO MADE THE ADDITIONS TO WARDS SOFTWARE EXPENSES ON THE BASIS OF TAX AUDIT REPORT WHICH CAT EGORICALLY STATES THAT EXPENDITURE INCURRED TOWARDS SOFTWARE IS CAPITAL IN NATURE. ACCORDING TO THE AO, THE ASSESSEES AR HAS AGREED FOR THE ADDITIONS TO THE TOTAL INCOME. THE AO FURTHER OBSERVED THAT ONCE ADDITION IS MADE TOWARDS CAPITAL EXPENDITURE UNDER THE NORMAL PROVISIONS OF THE ACT, A SIMILAR ADJUSTMENT IS REQUIRED TO BE MADE TOWARDS BOOK PROFIT COMPUTED U/ S. 115JB OF THE ACT. THE CONTENTION OF THE ASSESSEE IS THAT THE AO IS NO T HAVING JURISDICTION TO RECOMPUTE THE BOOK PROFIT COMPUTED AS PER THE PROVI SIONS OF THE COMPANIES ACT, 1956 AND ACCOUNTING STANDARDS REFERR ED TO IN SECTION 211(3C) OF THE COMPANIES ACT, 1956, EXCEPT TO THE E XTENT PROVIDED IN EXPLANATION 1 TO SECTION 115JB. SINCE DISALLOWANCE MADE TOWARDS CAPITAL EXPENDITURE IS NOT AN ITEM OF ADDITION UNDER THE EX PLANATION TO SECTION 115JB, THE AO DOES NOT HAVE ANY JURISDICTION TO ALT ER THE BOOK PROFIT COMPUTED AS PER THE PROVISIONS OF SECTION 115JB OF THE ACT. 8. HAVING HEARD BOTH THE SIDES, WE FIND FORCE IN TH E ARGUMENTS OF THE ASSESSEE FOR THE REASON THAT THE HONBLE SUPREME CO URT IN THE CASE OF APOLLO TYRES LTD. V. CIT (2002) 255 ITR 273 (SC) HAS CONSIDERED A SIMILAR ITA NO.1686/BANG/2016 PAGE 5 OF 6 ISSUE AND OBSERVED THAT THE AO WHILE COMPUTING THE INCOME U/S. 115J HAS ONLY THE POWER OF EXAMINING WHETHER THE BOOKS OF AC COUNT ARE CERTIFIED BY THE AUTHORITIES UNDER THE COMPANIES ACT AS HAVING B EEN PROPERLY MAINTAINED IN ACCORDANCE WITH THE COMPANIES ACT. T HE AO THEREFORE HAS THE LIMITED POWER OF MAKING INCREASES AND REDUCTION S AS PROVIDED FOR IN THE EXPLANATION TO THE SAID SECTION. TO PUT IT DIFFERE NTLY, THE AO DOES NOT HAVE THE JURISDICTION TO GO BEHIND THE NET PROFIT SHOWN IN THE PROFIT & LOSS ACCOUNT, EXCEPT TO THE EXTENT PROVIDED IN THE EXPLA NATION TO SECTION 115J OF THE ACT. WE FURTHER OBSERVE THAT THE HONBLE DELHI HIGH COURT IN THE CASE OF V. G.E. POWER SERVICES INDIA LTD. (2008) 171 TAXMAN 0010 HELD THAT EXPENSES INCURRED ON SOFTWARE USED IN COMPUTERS IS A REVENUE EXPENDITURE. IT IS WELL KNOWN THAT SOFTWARE USED I N COMPUTERS GET OBSOLETE IN A SHORT SPAN OF TIME AND IN ANY CASE NEEDS TO BE UPDATED FROM TIME TO TIME. IT, THEREFORE, CANNOT BE SAID TO BE AN ASSET OF ENDURING NATURE. THE TRIBUNAL WAS RIGHT IN ALLOWING THE EXPENDITURE AGAI NST THE BOOK PROFITS. 9. IN THIS VIEW OF THE MATTER AND ALSO RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF APOLLO TYRES LTD. V. CIT (2002) 255 ITR 273 (SC) , WE ARE OF THE CONSIDERED OPINION THAT THE AO DOES NOT HAVE ANY JURISDICTION TO ALTER THE NET PROFIT SHOWN IN THE PROFIT & LOSS ACCOUNT, EXCEPT TO THE EXTENT PROVIDED IN THE EXPLA NATION TO SECTION 115JB OF THE ACT. SINCE THE DISALLOWANCE MADE TOWARDS CA PITAL EXPENDITURE IS NOT AN ITEM OF ADDITION UNDER THE EXPLANATION TO SECTIO N 115JB, THE AO DOES NOT HAVE ANY POWER TO ALTER THE BOOK PROFIT COMPUTE D UNDER THE PROVISIONS ITA NO.1686/BANG/2016 PAGE 6 OF 6 OF SECTION 115JB OF THE ACT. THEREFORE, WE DIRECT THE AO TO DELETE THE ADDITION MADE TOWARDS CAPITAL EXPENDITURE TO BOOK P ROFITS COMPUTED UNDER THE PROVISIONS OF SECTION 115JB OF THE ACT. 10. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 24 TH DAY OF AUGUST, 2017. SD/- SD/- ( VIJAY PAL RAO ) ( MANJUNATHA G. ) JUDICIAL MEMBER A CCOUNTANT MEMBER BANGALORE, DATED, THE 24 TH AUGUST, 2017. / D ESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.