M/s. MECON Limited, Ranchi V. ACIT, Ranchi

ITA 5/RAN/2013

• Counselvise Citation: 525114 RSA 2013
• Duration Of Justice: 2 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-05-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: misc
• Appeal Filed On: 13-02-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RANJIT MADHUKAR
• Keywords: Depreciation; Unabsorbed depreciation; Revenue expenditure; Capital expenditure
• Section: 115JB; 32; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, RANCHI CIRCUI T BENCH, RANCHI (BEFORE SHRI P.K.BANSAL, HONBLE A.M.& SHR I D,T. GARASIA, HONBLE J.M.) I.T.A. NO. 17/RAN/2013 : ASSESSMENT YEAR 2007 -08 ACIT, CIRCLE-2, RANCHI -VS- M/S. MECON LIMITED, RANCHI (APPELLANT) PAN: AACCM 2119 B (RESPONDENT) I.T.A. NO. 05/RAN/2013 : ASSESSMENT YEAR 2007 -08 M/S. MECON LIMITED, RANCHI -VS- ACIT , CIRCLE-2, RANCHI (APPELLANT) (RESPONDENT) DEPARTMENT BY : SHRI RANJIT MADHUKAR, D.R. ASSESSEE BY : SHRI S.K.PODDAR WITH SHRI M. K.CHOUDHARY, ADVOCATE DATE OF CONCLUDING THE HEARING : 03.05.2013 DATE OF PRONOUNCING THE ORDER : 07.05.2013 O R D E R PER BENCH : THIS APPEAL BY THE REVENUE AND THE CROSS OBJECTION FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER PASSED BY T HE COMMISSIONER OF INCOME-TAX (APPEALS), RANCHI DATED 30/10/2012 FOR A SSESSMENT YEAR 2007-08. I.T.A. NO. 17/RAN/2013 2. THE REVENUE HAS TAKEN THE FOLLOWING GROUNDS IN I TS APPEAL. 1. THAT THE LD. COMMISSIONER OF INCOME-TAX, RANCHI HAS ERRED BY GIVING DIRECTION TO REDUCE THE ELIGIBLE AMOUNT UNDE R SECTION 115JB BY AN AMOUNT OF RS.78 LAKH, HOWEVER ON ONE SIDE, HE CONFIRMED THE SAME ADDITION MADE BY THE ASSESSING OFFICER AMO UNTING TO TOTAL RS.78 LAKH ON FOLLOWING HEADS: A. ITDS CERTIFICATE RECEIVABLE AT RS.12.19 LAKH. B. BOOKING OF EARNEST MONEY DEPOSIT WITH CLIENTS AT RS.40.62 LAKH. C.RS.25.19 LAKH FOR SOFTWARE EXPENSES. 2. THAT THE LD. COMMISSIONER OF INCOME-TAX, RANCHI HAS ERRED BY ALLOWING DISALLOWANCE OF CLAIM OF UNABSORBED DEPREC IATION TO THE 2 EXTENT OF RS.16,59,64,100/- WITHOUT TAKING INTO CON SIDERATION THE JUSTIFICATION OF ADDITION MADE BY THE ASSESSING OFF ICER. 3. BRIEF FACTS RELATING TO GROUND NO. 1 THAT THE AS SESSING OFFICER, WHILE COMPUTING ELIGIBLE BOOK PROFIT UNDER SECTION 115JB MADE THE ADJUSTMENT IN RESPECT OF DISALLOWANCE OF SOFTWARE E XPENSES AND PRIOR PERIOD EXPENSES AMOUNTING TO RS.78 LAKHS. THE ASSES SEE WENT IN APPEAL BEFORE THE CIT(A) AND CONTENDED THAT UNDER EXPLANAT ION 1 TO SECTION 115JB, THERE IS NO SCOPE OF MAKING ADDITION IN RESP ECT OF DISALLOWANCE ON ACCOUNT OF PRIOR PERIOD EXPENSES AND SOFTWARE EX PENSES. THE CIT(A) DELETED THE ADDITION. 4. WE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CON SIDERED THE SAME. IN OUR OPINION, THE ASSESSING OFFICER DOES NOT HAVE ANY POWER WHILE COMPUTING THE ELIGIBLE BOOK PROFIT UNDER SECTION 11 5JB TO INCREASE THE PROFIT OR LOSS, AS PER P&L A/C. EXCEPT BY MAKING TH E ADDITION IN RESPECT OF ITEMS AS ARE GIVEN IN THE EXPLANATION 1 TO CLAUS ES (A) TO (I). THE DISALLOWANCE OF THE SOFTWARE EXPENSES AND PRIOR PER IOD EXPENSES DOES NOT FALL WITHIN CLAUSES (A) TO (I) TO SECTION 115JB . IN VIEW OF THIS FACT, WE DO NOT FIND ANY ILLEGALITY AND INFIRMITY IN THE ORDER OF THE CIT(A) IN DELETING THE ADDITION SO MADE. 5. GROUND NO.2 RELATES TO THE DISALLOWANCE OF THE C LAIM OF UNABSORBED DEPRECIATION, WHILE COMPUTING THE ELIGIBLE BOOK PRO FIT UNDER SECTION 115JB. THE ASSESSING OFFICER, WHILE COMPUTING THE E LIGIBLE PROFIT UNDER SECTION 115JB AND ADDED THE SUM OF RS.16,59,64,64,1 00/- BEING UNABSORBED DEPRECIATION WHICH WAS CLAIMED BY THE AS SESSEE AS DEDUCTION. WHEN THE MATTER WENT BEFORE THE CIT(A), THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE. 3 6. WE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CON SIDERED THE SAME. WE NOTED THAT THE UNABSORBED DEPRECIATED HAS TO BE ALLOWED, WHILE COMPUTING THE ELIGIBLE PROFIT UNDER SECTION 115JB. THE ASSESSEE WAS HAVING A LOSS AMOUNTING TO RS.265,13,33,852/- AND A S UNABSORBED DEPRECIATION OF RS.16,59,64,000/-, LOWER OF THE TWO WAS THE UNABSORBED DEPRECIATION WHICH HAS BEEN CLAIMED BY THE ASSESSEE AS DEDUCTION. WE DO NOT FIND ANY ILLEGALITY AND INFIRMITY IN THE ORD ER OF THE CIT(A) IN DELETING THE SAID ADDITION. THUS, THE GROUND NO.2 O F THE REVENUE STANDS DISMISSED. AS A RESULT, THE APPEAL FILED BY THE REV ENUE STANDS DISMISSED. ITA NO.05/RAN/2013 7. GROUND NOS. 1 AND 2 TAKEN BY THE ASSESSEE IN ITS APPEAL RELATE TO THE DISALLOWANCE OF A SUM OF RS.12.19 LAKHS WRITTEN OFF BY THE ASSESSEE DURING THE YEAR DUE FROM THE ASSESSEES CLIENT ON A CCOUNT OF TDS CERTIFICATE. THIS AMOUNT HAS BEEN WRITTEN OFF BY TH E ASSESSEE UNDER THE HEAD PRIOR PERIOD EXPENSES IN ITS BOOKS OF ACCOUN TS. WHEN ENQUIRED BY THE ASSESSING OFFICER, THE ASSESSEE SUBMITTED THAT THIS EXPENDITURE WAS INCURRED DURING THE YEAR AND HAS BEEN WRITTEN OFF D URING THE YEAR. THEREFORE, THESE EXPENSES MUST BE ALLOWED DURING TH E YEAR. THE ASSESSING OFFICER DID NOT AGREE THAT THE SAID EXPEN DITURE RELATES TO THE EARLIER FINANCIAL YEAR. THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). THE CIT(A) CONFIRMED THE ORDER OF THE ASSESSING OFF ICER. 8. WE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CON SIDERED THE SAME. IT IS NOT DENIED THAT THIS AMOUNT RELATES TO THE PR IOR PERIOD. AS PER THE ACCOUNTING STANDARD NO.1 AS NOTIFIED UNDER SECTION 145(2), IT IS MANDATORY FOR THE ASSESSEE TO BE FOLLOWED. THE ACCR UAL HAS BEEN DEFINED UNDER CLAUSE 6(B) TO THE ASSUMPTION THAT REVENUES A ND COSTS ARE ACCRUED 4 THAT IS, RECOGNISED AS THEY ARE EARNED OR INCURRED AND ARE RECORDED IN THE FINANCIAL STATEMENT OF THE PERIOD TO WHICH THEY REL ATE. CLAUSE 5 OF THE SAID ACCOUNTING STANDARD CLEARLY STATES THAT FUNDAM ENTAL ACCOUNTING ASSUMPTION RELATING TO THE GOING CONCERN, CONSISTEN CY AND ACCRUED ARE TO BE FOLLOWED. IT IS NOT DENIED THAT THE ASSESSEE WAS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING. IN VIEW OF MERCANT ILE ACCOUNTING AS WELL AS DEFINITION OF THE ACCRUAL GIVEN UNDER CLAUS E 6, WE ARE OF THE VIEW THAT SINCE THE TDS CERTIFICATE WRITTEN OFF DID NOT RELATE TO THE PERIOD I.E. ACCOUNTING YEAR 2006-07, THEREFORE, WE DO NOT FIND ANY ILLEGALITY OR INFIRMITY IN THE ORDER OF THE CIT(A) IN SUSTAINING THE DISALLOWANCE. THUS, THE GROUND NOS. 1 AND 2 STAND D ISMISSED. 9. GROUND NOS. 3 AND 4 TAKEN BY THE ASSESSEE IN ITS APPEAL RELATE TO THE DISALLOWANCE OF THE EARNEST MONEY DEPOSITS WITH THE CLIENT AMOUNTING TO RS.40.62 LAKHS WRITTEN OFF DURING THE YEAR. THE ASSESSING OFFICER DISALLOWED THE SAID AMOUNT AS IT HAS BEEN B OOKED BY THE ASSESSEE UNDER THE HEAD PRIOR PERIOD EXPENSES. WH EN THE MATTER WENT BEFORE THE CIT(A), THE CIT(A) CONFIRMED THE DISALLO WANCE AS ACCORDING TO HIM, EXPENDITURE RELATES TO THE EARLIER YEAR. 10. WE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CO NSIDERED THE SAME. IN OUR VIEW, EARNEST MONEY DEPOSITED WITH THE CLIEN T DOES NOT REPRESENT THE EXPENDITURE BEING INCURRED BY THE ASSESSEE. THI S IN FACT REPRESENTS THE MONEY DEPOSITED BY THE ASSESSEE IN THE EARLIER YEAR AS EARNEST MONEY FOR THE PURPOSE OF BUSINESS AND DURING THE COURSE O F THE BUSINESS, THE ASSESSEE FAILED TO RECOVER THE SAID AMOUNT. IN VIEW OF THIS, THE ASSESSEE HAD WRITTEN OFF THIS AMOUNT DURING THE YEAR AS THE RECOVERY OF THE AMOUNT HAS BECOME BAD DURING THE YEAR AND ACCORDING LY THE ASSESSEE HS WRITTEN OFF THE AMOUNT DURING THE YEAR. THE ASSESSE E HAS TO SHOW THIS 5 AMOUNT UNDER THE HEAD PRIOR PERIOD ITEMS. IN VIEW OF THE ACCOUNTING STANDARD AS ISSUED BY THE INSTITUTE OF THE CHARTERE D ACCOUNTANTS, THE AMOUNT HAS BEEN WRITTEN OFF DURING THE YEAR. THEREF ORE, IN OUR VIEW, A LOSS INCIDENTAL TO THE BUSINESS HAS ARISEN DURING T HE YEAR. WE, THEREFORE, DELETE THE DISALLOWANCE OF RS.40.62 LAKHS. THUS, TH E GROUND NOS.3 AND 4 ARE ALLOWED. 11. GROUND NO.5 IS RELATING TO DISALLOWANCE OF EXPE NSES OF RS.25.19 LAKHS INCURRED BY THE ASSESSEE IN ACQUIRING CERTAIN READYMADE SOFTWARE. THE ASSESSING OFFICER TREATED THE SAID EXPENDITURE TO BE THE CAPITAL EXPENDITURE AND THEREFORE DISALLOWED THE SAME. THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A). THE CIT(A) CONFIRMED THE DISALLOWANCE BUT DIRECTED THE ASSESSING OFFICER TO ALLOW THE DEPRECI ATION TO THE ASSESSEE. 12. BEFORE US, THE LD. A.R. VEHEMENTLY CONTENDED TH AT THE EXPENSES INCURRED RELATES TO THE UPGRADATION OF THE SOFTWARE LIKE NSPAM FORWARD MS WINDOWS XP PROFESSIONAL OEM CAD WORK X PLANT PRO FESSION 2006 PC ELITA VERSION 2006 SOFTWARE ETC. THIS IS NOT AN EXPENDITURE WHICH RELATES TO THE SOFTWARE BEING BOUGHT FOR THE FIRST TIME. THIS IS BASICALLY AN EXPENDITURE FOR UPGRADATION OF THE SOFTWARE. THE EXPENDITURE FOR THE UPGRADATION OF THE COMPUTER SOFTWARE CANNOT BE REGA RDED TO BE THE CAPITAL EXPENDITURE. IN THIS REGARD, DUE TO TECHNIC AL CHANGES, THE LIFE OF THE SOFTWARE IS NOT CERTAIN AND WHATEVER AN INDIVID UAL SOFTWARE CREATES, OLD SOFTWARE HAS TO BE UPGRADED. THE LD. D.R., ON T HE OTHER HAND, RELIED ON THE ORDER OF THE CIT(A). 13. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD ALONG WITH THE OR DERS OF THE AUTHORITIES BELOW. IN OUR OPINION, IF THE EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE FOR THE UPGRADATION OF THE SOFTWARE, THE E XPENDITURE HAS TO BE 6 ALLOWED AS A REVENUE EXPENDITURE. IF THE EXPENDITUR E HAS BEEN INCURRED FOR THE FIRST TIME FOR ACQUIRING THIS SOFTWARE, THE SOFTWARE IS TO BE TREATED AS CAPITAL EXPENDITURE AND THE ASSESSEE IS ENTITLED FOR THE DEPRECIATION @60% UNDER SECTION 32 OF THE INCOME-TA X ACT. IN VIEW OF THIS, WE SET ASIDE THE ORDER OF THE CIT(A) AND DELE TE THE DISALLOWANCE. HENCE, THIS GROUND NO.5 STANDS ALLOWED. 14. GROUND NO.6 TAKEN BY THE ASSESSEE IN ITS APPEAL RELATES TO THE TAX DEDUCTED AT SOURCE AMOUNTING TO RS.3,74,778/-. BRIE F FACTS RELATING TO THIS GROUND ARE THAT THE ASSESSEE CLAIMED TDS AMOUN TING TO RS.10,14,579/- BUT THE ASSESSING OFFICER ALLOWED TH E CREDIT FOR TDS AT RS.6,39,801/-. THE ASSESSEE WENT IN APPEAL BEFORE T HE CIT(A). THE CIT(A) TOOK THE VIEW THAT THE GROUND IS NOT MAINTAI NABLE UNDER SECTION 246A. 15. WE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY CO NSIDERED THE SAME. IN OUR OPINION, THE CIT(A) WAS NOT CORRECT IN LAW I N NOT ENTERTAINING THE GROUND. WE, IN THE INTEREST OF JUSTICE AND FAIR PLA Y TO BOTH THE PARTIES, SET ASIDE THE ORDER OF THE CIT(A) AND DIRECT THE AS SESSING OFFICER TO VERIFY THE TDS CERTIFICATE OF THE ASSESSEE AND AFTE R VERIFICATION OF THE TDS CERTIFICATE, HE SHOULD ALLOW CREDIT TO THE ASSE SSEE FOR THE TDS. 16. IN THE RESULT, THE APPEAL FILED BY THE REVENUE STANDS DISMISSED, WHILE THE APPEAL FILED BY THE ASSESSEE I S PARTLY ALLOWED. ORDER PRONOUNCED IN THE COURT ON 7 TH MAY, 2013. SD.- SD/- [D.T.GARASIA] [P.K.BANSAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 7 TH MAY, 2013 7 COPY OF ORDER FORWARDED TO : 1. M/S. MECON LIMITED, RANCHI 2. ACIT, CIRCLE-2, RANCHI 3. C.I.T.(A), 4. THE C.I.T., 5. THE D.R., I.T.A.T., TRUE COPY, BY ORDER, [MST, SR.PS] SR. PRIVATE SECRETARY (ON T OUR) ITAT, RANCHI