PRECISION GEARS LTD ( NOW IMA PG INDIA P.TD ), NAVI MUMBAI V. ADDL CIT RG 5(2), MUMBAI

ITA 378/MUM/2012

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9351 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 1 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-03-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 03-03-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 17-01-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PREMANAND J
• Keywords: Capital asset; Depreciation; Additional evidence; Bad and doubtful debts; Revised return; Revenue expenditure; Capital expenditure
• Section: 37; 37(1)

Judgement Text

, L LL LH HH H INCOME TAX APPELLATE TRIBUNAL,MUMBAI - C BENCH. , ! , BEFORE S/SH.VIJAY PAL RAO, JUDICIAL MEM BER & RAJENDRA,ACCOUNTANT MEMBER /. ITA/378 /MUM/2012, ' ' ' ' # # # # / ASSESSMENT YEAR-2008-09 M/S PRECISION GEARS LTD. (NOW IMA PG INDIA PVT. LTD.), PLOT NO. R-677, MIDC TTC INDL. AREA, THANE BELAPUR ROAD, RABALE, NAVI MUMBAI-400701 PAN: AAACP6442Q VS ACIT RANGE 5(2), AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-400020 ( $% / APPELLANT) ( &'$% / RESPONDENT) '() '() '() '() * * * * / ASSESSEE BY : SHRI. NISHIT GANDHI + * / REVENUE BY : SHRI. PREMANAND J. ' ' ' ' + ++ + ), ), ), ), / DATE OF HEARING : 03.03.2015 -.# + ), / DATE OF PRONOUNCEMENT : 13.03.2015 ' ' ' '1961 1961 1961 1961 + + + + 254 254 254 254( (( (1 11 1) )) ) )7) )7) )7) )7) 8 8 8 8 ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA,AM ! ! ! ! ' ' ' ' : CHALLENGING THE ORDER DATED 16.11.2011 OF THE CIT(A )-9,MUMBAI,THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: WITHOUT PREJUDICE TO ONE ANOTHER: 1. PROVISION FOR BAD ADVANCES RS. 15,91,570: (1) THE LEARNED CIT (A) ERRED IN LAW AS WELL IN FAC TS IN CONFIRMING DISALLOWANCE MADE BY A.O. OF PROVISION MADE FOR DOUBTFUL ADVANCE OF RS.1 5,91,570 PAID FOR ADVANCEMENT OF EXISTING SOFT WARE. (2) THE C.I.T.(A) ERRED IN NOT APPRECIATING IN CORR ECT PERSPECTIVE THE FACTS OF THE CASE AND SUBMISSIONS MADE BY THE APPELLANT. (3) THE C.I.T.(A) ERRED IN CONSIDERING IN PARA 2.1 OF HIS ORDER THE GROUND AS 'PROVISION FOR BAD DEBTS' INSTEAD OF 'PROVISION OF BAD ADVANCE S'. (4) THE C.I.T.(A) ERRED IN TREATING EXPENDITURE FOR UP GRADATION OF E.R.P. SOFT WARE AS CAPITAL EXPENDITURE INSTEAD OF REVENUE EXPENDITURE. (5) THE C.I.T.(A) ERRED IN WRONGLY CONSIDERING THE ISSUE AS PER THE PROVISIONS OF SEC. 36 OF THE LT. ACT, 1961 INSTEAD OF SEC. 37 OF THE I.T. AC T, 1961. 2. ALLEGED DIRECTORS' EXCESS REMUNERATION OF RS.36, 40,038: (1) THE LEARNED CIT (A) ERRED IN LAW AS WELL IN FAC TS IN CONFIRMING DISALLOWANCE MADE BY A.O. OF ALLEGED EXCESS REMUNERATION OF RS.36,40,036 PAID TO THE DIRECTORS. (2) THE C.I.T.(A) ERRED IN NOT APPRECIATING IN CORR ECT PERSPECTIVE THE FACTS OF THE CASE AND SUBMISSIONS MADE BY THE APPELLANT. (3) THE C.I.T.(A) ERRED IN NOT APPRECIATING THAT TH E CENTRAL GOVERNMENT VIDE LETTER DATED 11TH MARCH, 2011, U/S. 309 (5B) OF THE COMPANIES AC T,1956 PERMITTED WAIVER OF RECOVERY OF EXCESS REMUNERATION OF RS.36,40,038 PAID TO THE DIRECTORS, WHICH TANTAMOUNTS TO SANCTIONING THE EXCESS REMUNERATION PAID TO THE DIR ECTORS. 3. DEPRECIATION ON EXPENDITURE TREATED AS REVENUE E XPENDITURE BY THE APPELLANT BUT HELD AS CAP EARLIER YEARS THE C.I.T. (A) ERRED IN NOT GIVING NECESSARY DIRECT ION TO THE A.O. TO ALLOW DUE DEPRECIATION ON EXPENSES LIKE REPAIRS AND MAINTENANCE, SOFT WARE EX PENSES, TREATED BY THE APPELLANT AS REVENUE 2 ITA NO.378/MUM/2012-AY.2008-09,PGL 2 EXPENDITURE, BUT HELD AS CAPITAL EXPENDITURE BY THE I.T.A.T. OR C.I.T.(A) OR A.O. IN EARLIER YEARS AND IN CURRENT YEAR AS WELL. ASSESSEE-COMPANY,ENGAGED IN BUSINESS OF MANUFACTURI NG OF BLISTER PACKING MACHINES,FILED ITS RETURN OF INCOME ON 30.09.2008 DECLARING TOTAL INCO ME OF RS. 4.20 CRORES.LATER ON A REVISED RETURN WAS FILED ON 24.11.2008 DECLARING INCOME OF RS. 4.13 CRORES.THE ASSESSING OFFICER (AO) COMPLETED THE ASSESSMENT U/S.143(3) OF THE ACT,ON 1 0.12.2010,DETERMINING THE INCOME OF THE ASSESSEE AT RS.4,65,79,200/-. 2. FIRST GROUND OF APPEAL IS ABOUT PROVISION OF BAD AD VANCES, AMOUNTING TO RS.15,91,570/-. DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE AS SESSE HAD DEBITED A SUM OF RS. 15.91 LAKHS ON ACCOUNT OF PROVISION FOR DOUBTFUL DEBTS, THAT TH E AMOUNT IN QUESTION WAS GIVEN TO M/S. BEEHIVES TECHNOLIGIES(BT) ON 04.04.2006. HE DIRECTE D THE ASSESSEE TO FURNISH THE COMPLETE DETAILS OF THE TRANSACTION.VIDE ITS LETTER,DATED 23 .08.10,THE ASSESSEE STATED THAT THE SUM WAS PAID TO BT FOR PREPARING ELECTRONIC REPORTING PROCEDURE(ER P).THE AO WAS OF THE OPINION THAT THE ERP WAS A COMPOSITE SOFTWARE AND THEREFORE HE ASKED THE ASSESSE AS TO WHY THE EXPENDITURE SHOULD NOT BE TREATED AS CAPITAL EXPENDITURE AND SHOULD NOT BE DISALLOWED.THE ASSESSEE CLAIMED THAT BT COULD NOT PROVIDE THE SERVICES SO THE DISPUTED AMOUNT WAS WRITTEN OFF IN THE BOOKS OF ACCOUNT. HE ASKED THE ASSESSEE TO FURNISH THE DETAILS OF EFFORTS MADE BY IT TO RECOVER THE OUTSTANDING DUES. IN RESPONSE IT WAS STATED THAT AMOUNT IN QUESTION WAS WRITTEN OFF,BUT NO LEGAL ACTION WAS FILED AGAINST BT.THE AO HELD THAT THE AMOUNT OF RS. 15.91 LAKHS W AS PAID AS AN ADVANCE FOR THE PURCHASE OF A CAPITAL ASSET, THAT THE ASSESSEE HAD NOT ACTUALLY W RITTEN OF THE AMOUNT, THAT IT HAD MADE A PROVISION IN THE BOOKS OF ACCOUNTS.FINALLY,HE MADE AN ADDITIO N OF RS. 15.91 LAKHS TO THE INCOME OF THE ASSESSEE. 3. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA).BEFORE HIM,IT WAS CONTENDED THAT ASS ESSEE HAD GIVEN ADVANCE TO BT FOR UP- GRADATION OF ERP SOFTWARE SYSTEM,THAT THE WORK COUL D NOT BE COMPLETED TO THE SATISFACTION,THAT IT DEMANDED BACK THE ADVANCE FROM BT,THAT THE AMOUNT I N QUESTION WAS NEVER SHOWN AS INCOME IN EARLIER YEAR,THAT ASSESSEE HAD MADE CLAIM U/S. 37 O F THE ACT AND NOT U/S. 36(1). AFTER CONSIDERING THE ASSESSMENT ORDER AND THE SUBMISSIONS OF THE ASS ESSEE THE FAA REFERRED TO THE CASES OF MARUTI UDYOG LTD.(92 ITD 119),ARAWALI CONSTRUCTION PVT. LT D.(259 ITR 30),AMWAY INDIA ENTERPRISES (111 ITD 112).HE HELD THAT ERP SOFTWARE WAS A CAPIT AL ASSET, THAT IF THE UPGRADATION RESULTED IN HIGHER EFFICIENCY, AS CLAIMED BY THE ASSESSEE, IT W OULD RESULT IN ACQUISITION OF AN ENDURING BENEFIT. FINALLY,HE HELD THAT ERP SOFTWARE PURCHASE EXPENDIT URE FELL IN THE TERRITORY OF CAPITAL EXPENDITURE. 4. BEFORE US,AUTHORISED REPRESENTATIVE (AR) STATED THA T ASSESSEE HAD MADE THE CLAIM U/S.37 OF THE ACT,THAT THE PAYMENT MADE FOR ERP WAS OF REVENUE NA TURE.HE RELIED UPON THE CASE OF IVM WORLD TRADE CORPORATION(186 ITR 412) DELIVERED BY THE HON BLE BOMBAY HIGH COURT. HE ALSO REFERRED TO THE CASE OF SADAN ROADWAYS LTD. (288 ITR 15)OF H ONBLE MADRAS HIGH COURT.DEPARTMENTAL REPRESENTATIVE(DR) RELIED UPON THE ORDER OF THE FAA , 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE HAD MADE A CLAIM U/S.37 OF THE ACT STATING THAT EXPENDITURE INCURRED BY IT ON ACCOUNT OF UPGRADATION OF ERP SOFTWARE WAS REVENUE EXPENDITURE ,THAT IT HAD ADVANCED A SUM OF RS.15.91 LAKHS TO BT BUT THE WORK WAS NOT EXECUTED TO THE SA TISFACTION OF THE ASSESSEE.THE INCURRING OF EXPENDITURE IS NOT DOUBTED BY BOTH THE REVENUE AUTH ORITIES.IT IS ALSO A FACT THAT AMOUNT WAS NOT WRITTEN OFF AS PER THE PROVISIONS OF SECTION 36 OF THE ACT.SO,THE NARROW ISSUE BEFORE US AS TO WHETHER THE ADVANCE PAYMENT MADE TO BT SHOULD BE AL LOWED OR NOT.AS PER THE AO AND THE FAA IT WAS AN EXPENDITURE OF CAPITAL NATURE AND THE ASSESS EE CLAIMS IT TO BE BUSINESS LOSS.WE FIND THAT BT WAS ASKED TO UPGRADE THE EPP SOFTWARE AND IT COULD NOT PERFORM THE JOB SATISFACTORILY. THEREFORE, THE ADVANCE PAYMENT MADE TO BT HAS TO BE TREATED A BUSINESS LOSS.IN OUR OPINION,THE EXPENDITURE 3 ITA NO.378/MUM/2012-AY.2008-09,PGL 3 INCURRED BY THE ASSESSEE FOR UP-GRADATION OF SYSTEM WAS ALLOWABLE AS REVEUE EXPENDITURE.HERE WE WOULD LIKE TO FOLLOW THE THE JUDGMENT OF HONBLE BO MBAY HIGH COURT OF IVM WORLD TRADE CORPORATION( SUPRA).IN THAT MATTER ALSO THE ASSESSE E HAD MADE ADVANCE PAYMENT FOR AN EXPENDITURE THAT WAS REVENUE IN NATURE.AS THE RECEIVER OF THE A DVANCE PAYMENT BECAME INSOLVENT,SO,THE ENTIRE AMOUNT INCLUSIVE OF THE INTEREST AND THE PRINCIPAL AMOUNT ADVANCED BY THE ASSESSEE WAS WRITTEN OFF BY THE ASSESSEE.THE ASSESSEE CLAIMED IT AS A BU SINESS LOSS.THE AO DISALLOWED IT AND THE TRIBUNAL HELD THAT THE LOSS WAS NOT DEDUCTIBLE UNDE R SECTIONS 36 AND 37 OF THE ACT.ON A REFERENCE, THE HONBLE COURT HELD THAT THE AMOUNTS WERE ADVANC ED BY THE ASSESSEE WAS ALLOWABLE AS REVENUE EXPENDITURE, THAT THE AMOUNTS ADVANCED WERE FOR BUS INESS PURPOSES,THAT THE ADVANCES MADE PROVED IRRECOVERABLE, THAT THE CONSEQUENT LOSS WAS A BUSINESS LOSS AND NOT A CAPITAL LOSS. RESPECTFULLY,FOLLOWING THE ABOVE JUDGMENT,WE DECIDE GROUND NO.1 IN FAVOUR OF THE ASSESSEE. 6. NEXT GROUND OF APPEAL IS ABOUT EXCESS REMUNERATION, AMOUNTING TO RS. 36.40 LAKHS, PAID TO DIRECTOR.DURING THE ASSESSMENT PROCEEDINGS,THE AO F OUND THAT THE AUDITOR IN FORM NO.3CB, VIDE NOTE NO.3,HAD REPORTED THAT THE ASSESEE HAD PAID RS .36,40,038/- IN EXCESS OF LIMITS PRESCRIBED UNDER THE COMPANIES ACT. HE ASKED THE ASSESSEE TO S HOW CAUSE AS TO WHY SUCH EXCESSIVE REMUNERATION PAID IN CONTRAVENTION TO THE PROVISION S OF THE COMPANIES ACT SHOULD NOT BE DISALLOWED U/S.37(1) OF THE ACT. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSE,THE AO HELD THAT THERE WAS NO DISPUTE ABOUT THE TOTAL REMUNERATION D EBITED AND THE REMARKS MADE BY THE AUDITORS, THAT THE ASSESSEE HAD FAILED TO PROVE THAT WORKING GIVEN BY THE AUDITORS WAS INCORRECT.INVOKING THE PROVISIONS OF EXPLANATION TO 37(1) OF THE ACT,THE A O DISALLOWED THE EXCESSIVE REMUNERATION OF RS. 36.40 LAKHS AND ADDED BACK TO THE TOTAL INCOME OF T HE ASSESSEE. 7. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FAA. BEFORE HIM, IT WAS CONTENDED THAT THE AUDITORS HAD NOT CONSIDER ED SCHEDULE 13 OF THE COMPANIES ACT WHILE WORKING OUT THE REMUNERATION,THAT AN APPLICATION WA S MADE IN FORM NO.25A TO THE CENTRAL GOVERNMENT FOR APPROVAL OF EXCESS REMUNERATION WHIC H WAS SANCTIONED VIDE LETTER DATED 14.04. 2010,THAT THE EXCESS REMUNERATION PAID TO THE DIREC TORS WAS AN ALLOWABLE EXPENDITURE. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE A ND THE ASSESSMENT ORDER,THE FAA HELD THAT ASSESSES OWN AUDITOR HAD REPORTED THE PAYMENT OF E XCESS REMUNERATION,THAT A COPY OF SANCTIONED LETTER GRANTED BY THE CENTRAL GOVERNMENT FOR EXCES SIVE REMUNERATION PAID WAS FILED BEFORE HIM.THE FAA CALLED FOR A REMAND REPORT FROM THE AO WITH REGARD TO THE ADDITIONAL EVIDENCE SUBMITTED BY THE ASSESSEE IN FORM OF THE SANCTION L ETTER OF THE CENTRAL GOVERNMENT.AFTER CONSIDERING THE REMAND REPORT,DATED 11.02.11,THE FA A HELD THAT THE PROVISIONS OF SECTION 309(5A) AND 309(5B) OF THE COMPANIES ACT WERE APPLICABLE TO THE CASE UNDER CONSIDERATION,THAT THE ASSESSEE WAS NOT ENTITLED TO GET DEDUCTION OF THE E XCESSIVE REMUNERATION PAID, THAT THE EXCESSIVE REMUNERATION WAS NOT ALLOWABLE U/S. 37(1) OF THE AC T, THAT IT WAS PAID OVER AND ABOVE THE PRESCRIBED LIMITS OF THE COMPANIES ACT.HE CONFIRMED THE DISALLOWANCE MADE BY AO. 8. BEFORE US, THE AR ARGUED THAT THE CENTRAL GOVERNMEN T HAD ALLOWED PAYMENT OF EXCESS REMUNE - RATION TO THE DIRECTORS,THAT SANCTION LETTER WAS MA DE AVAILABLE TO THE FAA,THAT PROVISIONS OF EXPLANATION TO SECTION 37(1) WERE NOT APPLICABLE WI TH REGARD TO THE PAYMENT.HE REFERRED TO THE PAGE NO.38 OF THE PAPER BOOK.HE ALSO RELIED UPON TH E ORDER OF THE TRIBUNAL DELIVERED FOR THE YEAR 2001-02 TO 2004-05 WHEREIN ALLEGED EXCESSIVE REMUNE RATION TO THE DIRECTORS DISALLOWED U/S. 40A (2)(B)OF THE WAS DELETED.DR SUPPORTED THE ORDER OF THE FAA. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE HAD MADE EXCESSIVE PAYMENT OF REMUNERATION TO THE DIRECTOR,BUT SAME WAS APPROVED BY THE CENTRAL GOVERNMENT,AS REQUIRED BY THE COMPANIES ACT.IN THESE CIRCUMSTANCES,WE ARE OF THE OPINION THAT THERE WAS NO CONTRAVENTION OF THE PROV ISIONS OF THE ACT.THEREFORE,REVERSING THE ORDER OF THE FAA, WE DECIDE GROUND NO.2 IN FAVOUR OF THE ASSESSEE. 4 ITA NO.378/MUM/2012-AY.2008-09,PGL 4 10. NEXT GROUND OF APPEAL IS ABOUT DEPRECIATION ON EXPE NDITURE TREATED AS REVENUE EXPENDITURE BY THE ASSESSEE BUT HELD AS CAPITAL EXPENDITURE IN EAR LIER YEARS.BEFORE THE FAA IT WAS ARGUED THAT THE AO HAD NOT ALLOWED DEPRECIATION ON REVENUE EXPENSES THOUGH HE HAD DISALLOWED IT AND HAD CAPITALISED THE SAME,THAT IN THE INITIAL YEARS THE AO HAD ALLOWED DEPRECIATION WAS ALLOWED WHILE PASSING ORDERS U/S.143(3)OF THE ACT,THAT IN THE SUC CEEDING YEARS HE DID NOT GRANT THE ASSESSEE ANY DEPRECIATION. THE FAA HELD THAT IN THE PRECEEDING YEARS NO SUCH C LAIM WAS MADE BY THE ASSESSEE BEFORE THE AO,THAT IT HAD NOT FURNISHED APPROPRIATE CHART ALON G WITH THE RETURN,THAT THE AO HAD NOT DISCUSSED THE ISSUE IN THE ASSESSMENT ORDER,THAT IN ABSENCE O F APPROPRIATE MATERIAL OR EVIDENCES,GROUND CONCERNING BELATED CLAIM FOR DEPRECIATION ON EARLIE R YEARS EXPENDITURE DISALLOWED BY THE AO WAS NOT ADMISSIBLE. 11 .BEFORE US,THE AR SUBMITTED THAT DISALLOWANCE OF RE VENUE EXPENDITURE AND CAPITALISATION OF SAME WAS NOT DISPUTED,THAT IN THAT PARTICULAR YEAR THE ASSESSEE WAS ALLOWED DEPRECIATION.DR LEFT THE ISSUE TO THE DISCRETION OF THE BENCH. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.IN OUR,OPINION IF THE AO CAPITALISED CERTAIN REVENUE EXPENDITURE AND ALLOWED DEPRECIATION IN THAT YEAR THEN THERE IS NO JUSTIFICATION FOR NOT ALLOWING THE SAME IN SUBSEQUE NT AY.S.IN THE INTEREST OF JUSTICE WE ARE REMITTING BACK THE ISSUE TO THE FILE OF THE AO FOR FRESH ADJUDICATION.WE WANT TO CLARIFY THAT FILE BEING SENT BACK TO THE AO TO VERIFY THE CLAIM MADE BY THE ASSESSEE OF CAPITALIZATION OF REVENUE EXPENSES IN EARLIER YEARS.IF THE AO HAS ALREADY ALL OWED DEPRECIATION IN THOSE YEARS AND DENIED THE BENEFIT TO THE ASSESSEE,THEN HE SHOULD ALLOW DEPREC IATION TO THE ASSESSEE AS PER THE PROVISIONS OF THE ACT.HE IS DIRECTED TO AFFORD A REASONABLE OPPOR TUNITY OF HEARING TO THE ASSESSEE.GROUND NO.3 IS DECIDED IN FAVOUR OF THE ASSESSEE IN PART. AS A RESULT,APPEA L FIELD BY THE ASSESSEE STANDS PARTLY ALLOWED. ( 9 '() + 8): ; + ) <=. ORDER PRONOUNCE D IN THE OPEN COURT ON 13TH,MARCH,2015 . 8 + -.# ? @' 13 EKPZ , 201 5 . + 7 A SD/- SD/- ( / VIJAY PAL RAO) ( ! ! ! ! / RAJENDRA) / JUDICIAL MEMBER /ACCOUNTANT MEMBER , / MUMBAI, @' /DATE: 13.03 . 2015. SK 8 8 8 8 + ++ + &) &) &) &) B #) B #) B #) B #) / COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / $% 2. RESPONDENT / &'$% 3. THE CONCERNED CIT(A)/ C D , 4. THE CONCERNED CIT / C D 5. DR C BENCH, ITAT, MUMBAI / E7 &)' L LL LH HH H , . . . 6. GUARD FILE/ 7 F ') ') ') ') &) &)&) &) //TRUE COPY// 8' / BY ORDER, G / < DY./ASST. REGISTRAR , /ITAT, MUMBAI