The DCIT, Circle-1(1)(1), Vadodara V. M/s. Camphor & Allied Products Ltd., Vadodara

ITA 598/AHD/2017

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 7314 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 8 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-11-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Appeal Filed On: 08-03-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Revenue expenditure; Set aside
• Section: 143(3); 37(1)

Judgement Text

आयकर अपीलीय अिधकरण, अहमदाबाद ᭠यायपीठ IN THE INCOME TAX APPELLATE TRIBUNAL, ‘’ B’’ BENCH, AHMEDABAD (CONDUCTED THROUGH VIRTUAL COURT AT AHMEDABAD) BEFORE SHRI RAJPAL YADAV, VICE PRESIDENT, And SHRI WASEEM AHMED, ACCOUNTANT MEMBER आयकर अपील सं./ITA No. 598/AHD/2017 िनधाᭅरण वषᭅ/Asstt. Year: 2013-2014 D.C.I.T., Circle-1(1)(1), Vadodara. Vs. M/s Camphor & Allied Products Ltd., Plot No.3, GIDC Industrial Estate, Nandesari, vadodara-391340. PAN: AAACC9211E (Applicant) (Respondent) Revenue by : Shri R.R. Makwana, Sr. D.R Assessee by : Shri K.P. Singh, A.R सुनवाई कᳱ तारीख/Date of Hearing : 18/11/2021 घोषणा कᳱ तारीख /Date of Pronouncement: 30/11/2021 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned appeal has been filed at the instance of the Revenue against the order of the Learned Commissioner of Income Tax (Appeals)-1, Vadodara, dated 12/12/2016 arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2013-2014. ITA no.598/AHD/2017 Asstt. Year 2013-14 2 2. The Revenue has raised the following grounds of appeal: 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in law and on facts in allowing the appeal of the assessee, i.e. on the issue of depreciation @ 60% on license to use software, without appreciating the fact that the depreciation @ 60% is not allowable on purchase of license which was purchased at a premium, to run the software, which was rightly disallowed by the AO by restricting the said depreciation to 25%. 2. On the facts and in the circumstances of the case and in law, the Ld. C!T(A) erred in [aw and on fact in deleting the capitalization of preliminary expenses written off u/s 35D of the Act, without appreciating the fact that the preoperative expenses can be amortized only after the asset is capitalized and the same is required to be capitalized in five consequtive years starting the year in which the asset is capitalized, as mentioned in the sub section (2) of sec. 35D(1) of the I.T. Act. 3. On the facts and in circumstances of the case and in law, the Ld CIT(A) erred in law and on facts considering expenses claimed of salary expenses, travelling expenses incurred for expanding capacity of unit as revenue expenses without considering provision of residuary clause (d) of section 35D(2) of the I.T. Act. 4. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary. Relief claimed in appeal It is prayed that the order of the CIT (Appeals) be set aside and that of the Assessing Officer be restored. 3. The first issue raised by the Revenue is that the learned CIT (A) erred in deleting the disallowances of excess deprecation on software claimed by the assessee. 4. Brief facts of the case on hand are that the assessee is a public company and engaged in the business of manufacturing of fine chemicals. The assessee during the year under consideration made addition in the fixed assets classified under the head software for Rs. 7,19,897/- and claimed depreciation for Rs. 2,15,969 @ 60% for half year on such software license treating the same as part of computer. 4.1 However the AO was of the view that software license is not the computer. As such software license is part of intangible assets. Hence the AO restricted the ITA no.598/AHD/2017 Asstt. Year 2013-14 3 depreciation to the extent of 25%. Thus the AO disallowed the excess depreciation of Rs. 1,25,982/- and added the excess depreciation to the total income of the assessee. 5. Aggrieved assessee preferred to appeal before learned CIT (A), who allowed the appeal of the assessee by observing as under: 6.2. I have considered the appellant's submissions and the AO's observations. The Hon'ble Mumbai ITAT in the case of National Collateral Management Services Pvt. Ltd. in ITA No. 2237/Mum/2013 dated 28.09.2016 has held that the computer software are eligible for depreciation @60%. On verification, it is found that the New Appendix I of Income-tax Rules, 1962 clearly provides that computer softwares are eligible for depreciation @60%.Hence, the AO is directed to provide depreciation on such softwares @60%. Accordingly, this ground of appeal is allowed. 6. Being aggrieved by the order of the learned CIT (A) the Revenue is in appeal before us. 7. Both the DR and the AR before us vehemently supported the order of the authorities below as favorable to them. 8. We have heard the rival contentions of both the parties and perused the materials available on record. The issue on hand confined to the extent whether the software purchased by the assessee is part of computer for the purpose of depreciation or the same can be treated as intangible asset. At this juncture it is pertinent to refer the depreciation schedule as provided under Act. On perusal of the same we find that Part-A, block III sub block (5) of the Depreciation Schedule contain the rate of depreciation for computer including computer software which reads as under: III. MACHINERY AND PLANT *** (5) Computers including computer software [See note 7 below the Table] Notes: 7. "Computer software" means any computer programme recorded on any disc, tape, perforated media or other information storage device. ITA no.598/AHD/2017 Asstt. Year 2013-14 4 8.1 From reading of the above, it become clear that software is part of computer. Hence, the depreciation on the same is allowable at the rate applicable for computer. In this regard we also find support and guidance from the judgment of Hon’ble Madras High Court in case of CIT vs. Computer Age Management Services (P.) Ltd. reported in 109 taxmann.com 134 where in similar facts, the Hon’ble court held as under: 8. The question would be as to whether the software application, which was acquired by the assessee would fall under Entry 5 of Part A of New Appendix I, which states that computers including computer software are entitled to depreciation at 60%. Note 7 of the Appendix defines the expression 'computer software' to mean any programs recorded on CD or disc, tape, perforated media or other information storage devices. 9. The case of the Revenue is that software are licences and that they are intangible assets and would fall under Part B of New Appendix I, which deals with knowhow, patents, copyrights, trademarks, licenses, francises or any other business or commercial rights of similar nature. 10. We find that Part B of New Appendix I is a general entry whereas Entry 5 of Part A of New Appendix I is a specific entry read with Note 7. In the instant case, the Tribunal, in our considered view, rightly held that the assessee is eligible to claim depreciation at 60 8.2 In view of the above discussion and principles laid down by the Hon’ble Madras High Court as discussed above, we do not find any infirmity in the finding of the learned CIT (A). Hence the ground of Revenue’s appeal is dismissed. 9. The 2 nd issue raised by the Revenue in ground No. 2 and 3 is that the learned CIT (A) erred in deleting the addition made by the AO for Rs. 1,44,01,466/- under the provisions of section 35D of the Act. 10. The assessee in the year under consideration has capitalized certain expenses in its books of accounts which were incurred in connection with its plant located at Nandesari to increase the capacity to 3500 TPA. As per the assessee, it started its activities for the expansion plant at Nandeshar in March 2011 which came to be completed in March 2013, the year under consideration. The nature of expenses incurred were travelling expenses, legal and professional expenses, salary expenses for employees appointed especially for the project, insurance, electricity ITA no.598/AHD/2017 Asstt. Year 2013-14 5 charges, and security charges. The total expenditure was incurred for Rs. 5,06,40,582/- in two different financial years as detailed below: A.Y. 2012-13 Rs. 2,61,11,000/- A.Y. 2013-14 Rs. 2,45,29,582/- 10.1 However, the assessee claimed that these expenses were claimed as revenue expenses in the respective financial years under the provisions of section 37(1) of the Act. As per the assessee, these expenses were incurred after the commencement of business but before the commencement of the commercial production. Therefore, these expenses are outside the purview of the provisions of section 35D of the Act. 10.2 However, the AO was of the view that the preoperative expenses are governed under the provisions of 35D of the Act. As per the AO, the assets (plant) at Nandeshar were not capitalized. Therefore, the pre-operative expenses incurred can only be amortized over a period of 5 years after capitalization of the assets of the project. Thus, the AO worked out the amount eligible for deduction under section 35D of the Act for ₹ 1,01,28,116/- and disallowed the balance amount of ₹ 1,44,01,466/- in the manner as detailed below: In view of the same, the amount allowable to the assessee and amount disallowed is calculated as under: Particulars Amount Total Amount of Preoperative Expenses (As provided by the assessee) 5,06,40,582/- Amount allowable (as per section 35D) i.e one fifth of the above. 1,01,28,116/- Amount allowed for further four future years 4,05,12,466 (1,01,28,116 per year) Amount Claimed by the assessee on account of preoperative Expenses 2,45,29,582/- Amount Disallowed 1,44,01,466 11. Aggrieved assessee preferred an appeal to the learned CIT (A) who deleted the addition made by the AO by observing as under: ITA no.598/AHD/2017 Asstt. Year 2013-14 6 7.2.2. The AO has reached this conclusion without examining as to whether the expenses being claimed by the appellant were in the nature of expenses specified in the clause of sub section (2) of Section 35D'or not. From the details furnished by the appellant, it is seen that such expenses are not in the nature of expenditure in connection with preparation of feasibility report, preparation of project report, conducting market survey or any other survey necessary for the business of the assessee, engineering services relating to the business of the assessee, legal charges for drafting any agreement between the assessee and any other person for any purpose relating to the setting up or conduct of the business of the assessee or the expenses incurred for setting up the new company. The expenses claimed by the appellant in the nature of revenue expenditure are in the form of travelling expenses, salary expenses etc. as mentioned in the appellant's submission. Besides, this is not the case where the appellant is setting up a new unit. But, it is a case where the appellant is expanding capacity of already set up unit and hence, the expenditure incurred in the nature of revenue expenditure are allowable as deduction in the computation of tots! income of the appellant. As already explained, the provision of section 35D are not at all applicable to such expenses. On the contrary, as per the Judicial Pronouncements relied upon by the appellant in its submission reproduced above, such expenses are liable to be allowed as deduction in computation of its income. It may be mentioned here that the appellant has on its own capitalized the interest expenses incurred on borrowed capital for the expansion of its unit as per the provisions of Section 36(l)(iii) of the Act, as the new unit has not been put to use during this year. Hence, the amortization of such expenses by the AO by invoking the provisions of Section 35D of the Act is not correct and accordingly, is directed to be deleted. 12. Being aggrieved by the order of the learned CIT (A), the revenue is in appeal before us. 13. Both the learned DR and the AR before us vehemently supported the order of the authorities below as favourable to them. 14. We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, the assessee has incurred expenses in connection with the plant established by the assessee at Nandesari. Besides the direct expenses incurred by the assessee on such plant, there were certain expenditures which were in connection to such plant, though capitalised in the books of accounts but were claimed as revenue in the computation of income. However, the AO treated such connected expenses as preliminary expenses which were to be amortized over a period of 5 years. 14.1 First of all, we note that the provisions of section 35D are applicable for the expenditures incurred before the commencement of the business or after the ITA no.598/AHD/2017 Asstt. Year 2013-14 7 commencement of the business in connection with the extension of the undertaking/setting up of new unit. There is no allegation of the AO whether the expenditure were incurred by the assessee were before the commencement of the business or after the commencement of the business in connection with the extension of undertaking/setting up of a new unit. Thus in the absence of such finding of the AO, we are of the view that the provisions of section 35D cannot be invoked in the given facts and circumstances. 14.2 Be that as it may be, there are certain categories of expenses for which the provisions of section 35D of the Act can be applied. These expenses have been specified under subsection 2 of section 35D of the Act. But in the present case, we note that none of the expenses claimed by the assessee was in the category of such expenses. Likewise, the AO has also not brought anything on record suggesting that the nature of the expenses claimed by the assessee are those expenses mention under section 35D(2) of the Act. On this count only, the order of the AO is not sustainable. 14.3 Moving further, we also note that the learned CIT (A) has given very clear finding that the expenses were incurred by the assessee to increase the capacity of the plant. The learned DR at the time of hearing has not controverted the finding of the learned CIT (A). 14.4 We also find that, the assessee has also claimed identical expenses in the return of income in the immediate preceding assessment year i.e. assessment year 2012-13 which seems to have been allowed by the revenue. Our view is based on the fact that the learned DR at the time of hearing has not brought anything on record suggesting that the impugned expenses were disallowed by the revenue in the earlier year as well. Thus we are of the view that, the principles of consistency can also be adopted in the given facts and circumstances. In view of the above ITA no.598/AHD/2017 Asstt. Year 2013-14 8 discussion we do not find any infirmity in the finding of the learned CIT (A). Hence the ground of Revenue’s appeal is dismissed. 15. In the result, the appeal filed by the Revenue is dismissed. Order pronounced in the Court on 30/11/2021 at Ahmedabad. Sd/- Sd/ (RAJPAL YADAV) (WASEEM AHMED) VICE PRESIDENT ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 30/11/2021 Manish