DCIT, CHENNAI V. Madras Engieering Industries (P) Ltd., CHENNAI

ITA 552/CHNY/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77369 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 2 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-06-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 27-05-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 01-04-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GURU BHASHYAM
• Assessee Lawyers: G SEETHARAMAN
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure
• Section: 10AA

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , C B ENCH, CHENNAI . , ! # $ , % & BEFORE SHRI A.MOHAN ALANKAMONY ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ITA NO. ASSESS -MENT YEAR APPELLANT RESPONDENT 5 52/MDS/2013 2009-10 DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-IV(1), CHENNAI-34. M/S. MADRAS ENGINEERING INDUSTRIES P.LTD. 17, SATYANARAYANAN AVENUE, R.A.PURAM CHENNAI-600 028. PAN: AAACM4509P 438/MDS/2013 2009-10 M/S. MADRAS ENGINEERING INDUSTRIES P.LTD. 17, SATYANARAYANAN AVENUE, R.A.PURAM CHENNAI-600 028. PAN: AAACM4509P ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE- IV(1), CHENNAI-34. / APPELLANT BY : MR. GURU BHASHYAM, JCIT /RESPONDENT BY : MR. G.SEETHARAMAN, C.A. / DATE OF HEARING : 27 TH MAY, 2014 /DATE OF PRONOUNCEMENT : 27 TH JUNE, 2014 / O R D E R PER CHALLA NAGENDRA PRASAD, JM: BOTH THESE APPEALS ARE FILED BY THE ASSESSEE AND TH E REVENUE AGAINST THE ORDER PASSED BY THE COMMISSIONE R OF INCOME TAX (APPEALS)-V, CHENNAI DATED 31.12.2012 FO R THE ASSESSMENT YEAR 2009-10. 2 ITA NOS.552 & 438/MDS/2013 2. THE FIRST ISSUE IN THE APPEAL OF THE ASSESSEE IS THAT COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFI RMING THE ACTION OF THE ASSESSING OFFICER IN TREATING APP LICATION COMPUTER SOFTWARE OF ` 23,41,614/- AS CAPITAL EXPENDITURE. THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSME NT NOTICED THAT ASSESSEE HAS PURCHASED VARIOUS SOFTW ARES WORTH ` 23,41,614/-. THE ASSESSING OFFICER WAS OF THE VIE W THAT ENTIRE EXPENSES WERE FOR THE PURCHASE OF SOFTW ARES ORACLE, AUTOCAD, PRO E, NI-DAQ, MX SOFTWARE ETC. TH EREFORE HE WAS OF THE VIEW THAT THESE SOFTWARES HAVE ENDURI NG NATURE AND PROVIDED BENEFITS FOR YEARS TOGETHER AND THEREF ORE TREATED AS CAPITAL EXPENDITURE. ON APPEAL COMMISSIONER OF I NCOME TAX (APPEALS) SUSTAINED THE ACTION OF THE ASSESSING OFFICER IN TREATING COST OF SOFTWARE AS CAPITAL EXPENDITURE. 3. COUNSEL FOR THE ASSESSEE SUBMITS THAT ALL THE S OFTWARE EXPENSES INCURRED FOR THE PURCHASE IS ONLY APPLICA TION SOFTWARE AND IT IS MOSTLY FOR UPGRADATION SOFTWARE AS DETAILED BY THE COMMISSIONER OF INCOME TAX (APPEALS) IN PARA 5.1 OF HIS ORDER. THE COUNSEL PLACING RELIANCE ON THE DECI SION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. SO UTHERN 3 ITA NOS.552 & 438/MDS/2013 ROADWAYS LTD. (288 ITR 15) SUBMITS THAT UPGRADATION OF SOFTWARE IS REVENUE EXPENDITURE. 4. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY SUPPORTS THE ORDER OF THE LOWER AUTHORITIES IN TREATING SOFTWARE EXPENSES AS CAPITAL EXPENDITURE AND ALLOWING DEPRECIATION TH EREON. 5. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHOR ITIES AND THE DECISION RELIED ON BY THE ASSESSEE. THE HO NBLE MADRAS HIGH COURT IN THE CASE OF SOUTHERN ROADWAYS LTD. (SUPRA) WHILE DECIDING THE ISSUE WHETHER EXPENDITUR E INCURRED ON THE UPGRADATION OF SOFTWARE IS REVENUE OR NOT HE LD HAS UNDER:- WITH REGARD TO THE SECOND QUESTION, VIZ., WHETHER THE EXPENDITURE INCURRED ON THE UPGRADATION OF SOFTWARE IS REVENUE EXPENDITURE, THE ASSESSEE DID NOT CLAIM ANY EXPENDITURE FOR INSTALLATION OF NEW COMPUTERS, BUT CLAIMED THE EXPENDITURE FOR UPGRADATION OF EXISTING COMPUTE RS. FURTHER, THE EXPENDITURE WAS INCURRED FOR IMPROVING THE EFFICIENCY OF THE EXISTING SYSTEM WITH A VIEW TO KE EP PACE WITH IMPROVEMENT OF TECHNOLOGY AND NO MACHINERY WAS BROUGHT INTO EXISTENCE. SUCH EXPENSES INCURRED BY THE ASSESSEE FOR ENHANCEMENT OF EFFICIENCY, IN OUR CONS IDERED OPINION, IS NOTHING BUT AN UPGRADATION OF COMPUTERS FOR ACHIEVING THE DESIRED RESULT AND, THEREFORE, THE SA ME HAS TO BE TREATED AS REVENUE EXPENDITURE. 4 ITA NOS.552 & 438/MDS/2013 6. AS COULD BE SEEN FROM THE ABOVE OBSERVATION OF T HE HIGH COURT THAT THE EXPENDITURE INCURRED ON UPGRAD ATION OF SOFTWARE IS REVENUE EXPENDITURE. RESPECTFULLY FOLLO WING THE SAID DECISION, WE ALLOW THE GROUND OF APPEAL OF THE ASSESSEE ON THIS ISSUE. 7. THE NEXT ISSUE IN THE APPEAL OF THE ASSESSEE IS THAT COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFI RMING THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING LOSS OF TRANSLATION OF FOREIGN CURRENCY LOAN. 8. THE ASSESSING OFFICER WHILE COMPLETING THE ASSES SMENT NOTICED THAT ASSESSEE CLAIMED LOSS OF ` 1,31,24,387 AS LOSS ON FOREIGN EXCHANGE FLUCTUATION . THE ASSESSEE CLA IMED THIS LOSS AS BUSINESS LOSS. THE ASSESSEE ALSO CONTENDED THAT SECTION 43A HAS NO APPLICATION AS FOREIGN CURRENCY TERM LOAN WAS UTILIZED FOR ACQUIRING ASSETS WITHIN INDIA A ND THE PROVISIONS OF SECTION 43A IS APPLICABLE FOR THE ASS ETS ACQUIRED OUTSIDE INDIA FROM THE FOREIGN CURRENCY TERM LOAN. THE ASSESSING OFFICER REJECTED THE CONTENTION OF THE AS SESSEE AND DISALLOWED THE SAID LOAN AS IT IS CONTINGENT AN D NOTIONAL 5 ITA NOS.552 & 438/MDS/2013 LOSS. ON APPEAL, COMMISSIONER OF INCOME TAX (APPEAL S) SUSTAINED THE DISALLOWANCE MADE BY THE ASSESSING O FFICER REJECTING THE CONTENTIONS OF THE ASSESSEE THAT FORE IGN EXCHANGE FLUCTUATION ON ACCOUNT OF FOREIGN CURRENCY TERM LOAN IS NOT A BUSINESS LOSS. THE COMMISSIONER OF I NCOME TAX (APPEALS) ALSO REJECTED THE CONTENTION OF THE A SSESSEE THAT PROVISIONS OF SECTION 43A HAVE NO APPLICATION IN RESPECT OF FOREIGN CURRENCY TERM LOAN UTILIZING FOR PURCHAS ING ASSETS WITHIN INDIA. 9. COUNSEL FOR THE ASSESSEE REITERATES THE SUBMISS IONS MADE BEFORE THE LOWER AUTHORITIES AND SUBMITS THAT FOREIGN EXCHANGE FLUCTUATION ON ACCOUNT OF RESTATEMENT OF F OREIGN CURRENCY TERM LOAN IS BUSINESS LOSS AND IN THE ALTE RNATIVE HE SUBMITS THAT SUCH FOREIGN EXCHANGE FLUCTUATION SHOU LD BE ADDED TO THE COST OF ASSET UNDER SECTION 43A OF THE ACT WHICH ASPECT WAS NOT CONSIDERED BY THE AUTHORITIES. COU NSEL REFERRING TO PAGE 2 OF THE ASSESSMENT ORDER SUBMITS THAT ASSESSEE HAS IN FACT FILED LETTER DATED 29.11.2011 STATING THAT LOAN WAS ACQUIRED FOR THE PURCHASE OF CAPITAL ASSET ALONG WITH LIST OF ASSETS PURCHASED. REFERRING TO PAGE 4 OF THE 6 ITA NOS.552 & 438/MDS/2013 ASSESSMENT ORDER, COUNSEL SUBMITS THAT ASSESSING OF FICER HAD IN FACT OBSERVED THAT IF BORROWING IS FOR CAPIT AL ASSET, EXCHANGE LOSS ACTUALLY SUFFERED WOULD REQUIRE TO BE CAPITALIZED IN THE CONTEXT OF THE PRESENT LAW AFTER SUBSTITUTION OF SECTION 43A WITH EFFECT FROM THE ASSESSMENT YEAR 2003-04. COUNSEL FOR THE ASSESSEE REFERRING TO PAGE 5 OF T HE ASSESSMENT ORDER SUBMITS THAT ASSESSING OFFICER DIS ALLOWED THE SAID FOREIGN EXCHANGE LOSS ON FCNR, THE ASSESSE E IS ENTITLED FOR DEDUCTION ONLY ON ACTUAL PAYMENT AND THE LOSS IS UNTIL THEN ONLY A CONTINGENT LIABILITY. COUNSEL SUB MITS THAT PROVISIONS OF SECTION 43A HAVE NOT APPLIED IN ITS C ASE. COUNSEL SUBMITS THAT ASSESSEE HAS IN FACT REPAID T HE LOAN ACQUIRED THE ENTIRE FOREIGN EXCHANGE LOAN AND IT I S NOT A CONTINGENT LIABILITY, THE ASSESSING OFFICER SHOULD HAVE APPLIED SECTION 43A AND ADDED THE COST OF FOREIGN EXCHANGE FLUCTUATION TO THE ASSETS AS PROVIDED UNDER SECTION 43A OF THE ACT. 10. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY SUPPORT S THE ORDERS OF LOWER AUTHORITIES IN DISALLOWING FOREIGN EXCHANGE FLUCTUATION OF FCNR LOAN. 7 ITA NOS.552 & 438/MDS/2013 11. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHO RITIES. THE ASSESSING OFFICER THOUGH STATED IN THE ASSESSME NT ORDER THAT IF BORROWING IS FOR CAPITAL ASSET, THE EXCHAN GE LOSS ALREADY SUFFERED WOULD REQUIRE TO BE CAPITALIZED IN THE CONTEXT OF THE PRESENT LAW AFTER THE SUBSTITUTION OF SECTIO N 43A WITH EFFECT FROM THE ASSESSMENT YEAR 2003-04, HE HAS NOT DEALT WITH THE ISSUE ON THOSE LINES. THE ASSESSING OFFICE R ALSO DID NOT EXAMINE AS TO WHETHER THE ASSESSEE HAS REPAID T HE LOAN ETC. OR IT IS STILL OUTSTANDING. IN THE CIRCUMSTAN CES, WE ARE OF THE VIEW THAT THIS ISSUE HAS TO BE EXAMINED AFRESH IN ACCORDANCE WITH LAW WITH REFERENCE TO THE PROVISION S OF SECTION 43A OF THE ACT AFTER ASCERTAINING THE FACT S FROM THE ASSESSEE AS TO WHETHER THE ENTIRE LOAN WAS REPAID O R OUTSTANDING OR PARTLY REPAID OR OUTSTANDING, AS THE SUBMISSION OF THE ASSESSEE WAS THAT LOAN WAS REPAID AND THE LO SSES INCURRED BY THE ASSESSEE ON FOREIGN EXCHANGE FLUCTU ATION OF FCNR, THE LOAN IS NOT A CONTINGENT LIABILITY. THER EFORE, IN THE LIGHT OF THE SUBMISSIONS OF THE ASSESSEE AND ALSO SINCE THE LOWER AUTHORITIES HAVE NOT EXAMINED THIS ISSUE, WE REMIT THIS ISSUE BACK TO THE ASSESSING OFFICER WITH A DIRECTIO N TO APPLY PROVISIONS OF SECTION 43A OF ACT AND DECIDE THIS IS SUE IN 8 ITA NOS.552 & 438/MDS/2013 ACCORDANCE WITH LAW AFTER PROVIDING ADEQUATE OPPORT UNITY TO THE ASSESSEE. 12. THE ONLY GROUND IN THE APPEAL OF THE REVENUE IS THAT COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN DIREC TING THE ASSESSING OFFICER TO EXCLUDE EXCHANGE FLUCTUATION ON SALES BOTH FROM EXPORT TURNOVER AND TOTAL TURNOVER FOR TH E PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 10AA OF THE AC T. THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT R EDUCED EXCHANGE GAIN ON ACCOUNT OF EXPORT SALES SINCE THE EXCHANGE GAIN IS ON ACCOUNT OF REALIZATION OF FOREI GN CURRENCY ON THE DATE LATER THAN THE INVOICE DATE. THE ASSESS ING OFFICER WAS OF THE VIEW THAT SUCH GAIN HAS NO RELEVANCE TO THE SALE PROCEED AND THEREFORE EXCLUDED FROM THE EXPORT TURN OVER. ON APPEAL, COMMISSIONER OF INCOME TAX (APPEALS) CONSID ERING THE SUBMISSIONS OF THE ASSESSEE AND THE DECISION OF THE SPECIAL BENCH IN THE CASE OF ITO VS. SAK SOFT LTD. (313 ITR 353) DIRECTED THE ASSESSING OFFICER TO EXCLUDE THE EXCHANGE FLUCTUATION ON ACCOUNT OF EXPORT SALES BOTH FROM EX PORT TURNOVER AS WELL AS TOTAL TURNOVER. NOW THE REVENUE IS IN APPEAL BEFORE US. 9 ITA NOS.552 & 438/MDS/2013 13. DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDE R OF THE ASSESSING OFFICER. 14. COUNSEL FOR THE ASSESSEE PLACES RELIANCE ON TH E DECISION OF THE SPECIAL BENCH AND SUPPORTS THE ORD ER OF THE COMMISSIONER OF INCOME TAX (APPEALS). 15. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHO RITIES. ON GOING THROUGH THE ORDER OF THE COMMISSIONER OF I NCOME TAX (APPEALS) AND THE DECISION OF THE SPECIAL BENCH IN THE CASE OF SAK SOFT LTD. (SUPRA), WE FIND THAT THE ISS UE HAS BEEN DECIDED BY THE COMMISSIONER OF INCOME TAX (APPEALS) BY FOLLOWING THE SAID DECISION OF THE SPECIAL BENCH O F THIS TRIBUNAL OBSERVING AS UNDER:- 7.2 I HAVE CONSIDERED THE SUBMISSION OF THE APPELL ANT AND HAVE ALSO GONE THROUGH THE ASSESSMENT ORDER. I FIND THE ISSUE TO BE SQUARELY COVERED BY THE DECISION OF THE SPECIAL BEN CH OF THE JURISDICTIONAL TRIBUNAL IN THE CASE OF ITO VS. SAK SOFT LTD., 121 TTJ 865. RESPECTFULLY FOLLOWING THE DECISION OF THE JURISDICTIONAL ITAT SPECIAL BENCH IN THE CASE OF SAK SOFT LTD. (SU PRA) I DIRECT THE ASSESSING OFFICER TO EXCLUDE THE FOREIGN EXCHAN GE FLUCTUATION INCOME BOTH FROM EXPORT TURNOVER AND FROM TOTAL TUR NOVER FOR THE PURPOSE OF COMPUTING UNDER SECTION 10AA. THE GROUN DS OF APPEAL AS REGARDS THIS ISSUE ARE CONSIDERED PARTLY ALLOWED FOR STATISTICAL PURPOSES. 16. AS THE COMMISSIONER OF INCOME TAX (APPEALS) BY FOLLOWING THE DECISION OF THE SPECIAL BENCH OF THIS TRIBUNAL 10 ITA NOS.552 & 438/MDS/2013 AND DIRECTED TO EXCLUDE FOREIGN EXCHANGE FLUCTUATIO N FROM BOTH EXPORT TURNOVER AND TOTAL TURNOVER FOR THE PUR POSE OF COMPUTING DEDUCTION UNDER SECTION 10AA OF THE ACT, WE DO NOT FIND ANY INFIRMITY IN THE IMPUGNED ORDER AND UP HOLD THE SAME. THE GROUNDS OF APPEAL RAISED BY THE REVENUE O N THIS ISSUE ARE REJECTED. 17. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THAT OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON FRIDAY THE 27 TH DAY OF JUNE, 2014 AT CHENNAI. SD/- SD/- ( A.MOHAN ALANKAMONY ) ( CHALLA NAGENDR A PRASAD ) . ( # %& ) ACCOUNTANT MEMBER / ( JUDICIAL MEMBER/ %) ( % /CHENNAI, * /DATED, 27 TH JUNE, 2014 SOMU )-. /. /COPY TO: 1. ASSESSEE 2. ASSESSING OFFI CER 3. 0 () /CIT(A) 4. 0 /CIT 5. . ))4 /DR 6. 7 /GF .