DCIT 10(1), MUMBAI V. ROOP TECHNOLOGY P.LTD, MUMBAI

ITA 6278/MUM/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9106 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 04-12-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 09-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M MURALI
• Assessee Lawyers: V G GINDE
• Keywords: Capital asset; Depreciation; Business expenditure; Commercial expediency; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES D, MUMBAI BEFORE SHRI DINESH KUMAR AGARWAL (J.M.) AND SHRI P.M. JAGTAP (A.M.) ITA NO. 6278/MUM /2011 ASSESSMENT YEAR : 2008-09 ASSTT. COMMISSIONER OF INCOME- TAX 10(1), 455, AAYAKAR BHAVAN, 4 TH FLOOR, M.K. MARG, MUMBAI 400 020. VS. M/S ROOP TECHNOLOGY PVT. LTD., 15/120, ANAND NAGAR, VAKOLA POLICE STATION ROAD, SANTACRUZ (E), MUMBAI 400 055. PAN AABCR3971M (APPELLANT) (RESPONDENT) REVENUE BY : SHRI M. MURALI ASSESSEE BY : SHRI V.G. GINDE DATE OF HEARING 04-12-2012 DATE OF PRONOUNCEMENT 14.12.2012 O R D E R PER DINESH KUMAR AGARWAL, J.M. THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED AG AINST THE ORDER DTD. 16-6-2011 PASSED BY THE LD. CIT(A)- 21, MUMBAI FOR THE A.Y. 2008-09. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY IS ENGAGED IN THE BUSINESS AS AN IMPORTER AND DEALER IN COMPUTER HARDWARE AND PHERIPHERALS, FILED RETURN DECLARING TOTAL OF RS. 1 ,10,04,220/-. DURING THE COURSE OF ASSESSMENT PROCEEDING, THE ASSESSEE W AS REQUIRED TO EXPLAIN THE CLAIM OF SYSTEM EXPENSES OF RS. 13,72,2 04/- DEBITED TO THE ITA NO. 6278/MUM/2011 2 P&L ACCOUNT. IN RESPONSE, IT WAS STATED BY THE ASS ESSEE WHICH HAS BEEN EXTRACTED BY THE A.O. IN PARA 4.1 OF HIS ORDER AS U NDER:- YOUR GOOD SELF RAISED QUERY WHY IT SHOULD NOT BE TR EATED AS CAPITAL EXPENDITURE. WE SUBMIT THAT THE SAID EXPENSES WERE INCURRED FOR INSTALLING ERP (ENTERPRISE RESOURCE PROGRAMME). THI S PROGRAMME ASSIGNMENT TO THE SATISFACTION AND REQUIREMENT OF M ANAGEMENT OF THE ASSESSEE COMPANY. FURTHER TO COMPLETE THE ASSIGNME NT ESTIMATED OUTFLOW OF FUND AS BEYOND EXPECTATION OF MANAGEMENT . THEREFORE, THE SAID SYSTEM INSTALLATION PROCESS WAS DISCONTINUED. SINCE THE SAID AMOUNT WAS NON REFUNDABLE FROM THE PROGRAMMERS, SAM E IS DEBITED TO PROFIT & LOSS A/C. FROM THE SUBMISSION OF THE ASSESSEE, THE A.O. OBSER VED THAT THE EXPENSES CLAIMED ARE IN THE NATURE OF ADVANCES OR O N ACCOUNT OF PAYMENTS MADE TOWARDS ACQUISITION OF THE SAID ERP S OFTWARE. HE FURTHER OBSERVED THAT IT IS CLEAR THAT THE SOFTWARE WAS NOT ACTUALLY ACQUIRED AND PUT TO USE. HE FURTHER OBSERVED THAT THE SAID EXPE NSES WERE TOWARDS ACQUISITION OF A CAPITAL ASSET AND ARE CAPITAL IN N ATURE. THE A.O. FURTHER OBSERVED THAT SINCE THE ASSETS WERE NEVER ACQUIRED AND PUT TO USE FOR THE PURPOSE OF BUSINESS, THE SAID CAPITAL EXPENDITURE I S NOT ELIGIBLE FOR DEPRECIATION ALSO AND ACCORDINGLY HE TREATED THE CL AIM OF RS. 13,72,204/- AS CAPITAL EXPENDITURE AND ADDED THE SAME TO THE TO TAL INCOME OF THE ASSESSEE WITH THE REMARK THAT THE SAID LOSS IS A CA PITAL LOSS AND THE ASSESSEE COMPANY IS FREE TO CLAIM SET OFF OF THE SA ID CAPITAL LOSS AGAINST ANY FUTURE CAPITAL GAIN. 3. ON APPEAL, THE LD. CIT(A), HOWEVER, HELD THAT TH E EXPENDITURE INCURRED BY THE APPELLANT WAS DEFINITELY ON REVENUE FIELD. HE FURTHER HELD ITA NO. 6278/MUM/2011 3 THAT THE LOSS SUFFERED BY THE APPELLANT ON ACCOUNT OF UNSUCCESSFUL IMPLEMENTATION OF ERP SYSTEM WAS ALLOWABLE AS BUSIN ESS LOSS AND ACCORDINGLY DIRECTED THE A.O. TO ALLOW THE CLAIM OF SOFTWARE EXPENSES OF RS. 13,72,204/-. 4. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE REVENUE IS IN APPEAL BEFORE US TAKING FOLLOWING GROUNDS OF APPEAL :- I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AS WELL AS IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWA NCE OF RS. 13,72,204/- MADE ON ACCOUNT OF SOFTWARE EXPENSES WITHOUT APPREC IATING THE FACT THAT THE EXPENSES INCURRED WERE TOWARDS THE ACQUISITION OF CAPITAL ASSETS COVERED BY APPENDIX 1 OF THE INCOME-TAX RULES, 1962 AND THE SOFTWARE WAS NEVER ACQUIRED AND PUT TO USE. II) THE APPELLANT PRAYS THAT THE ORDER OF CIT(A) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE R ESTORED. 5. AT THE TIME OF HEARING THE LD. D.R. SUBMITS THAT FOR THE REASONS AS MENTIONED IN THE ASSESSMENT ORDER, THE LD. CIT(A) W AS NOT JUSTIFIED IN TREATING THE SOFTWARE EXPENSES AS REVENUE EXPENDITU RE. HE, THEREFORE, SUBMITS THAT THE ADDITION MADE BY THE A.O. BE RESTO RED. 6. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSES SEE WHILE RELYING ON THE ORDER OF THE LD. CIT(A) SUBMITS THAT ON BOTH THE COUNTS, THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE FOLLOWI NG DECISIONS:- 1. CIT VS. RAYCHEM RPG LTD. (2012) 346 ITR 138 (BO M) 2. CIT VS. ANJANI KUMAR & CO. (2003) 259 ITR 114 ( RAJ.) 3. DY. CIT VS. ASSAM ASBESTOS LTD. (2003) 263 ITR 357 (GAU.) ITA NO. 6278/MUM/2011 4 4. INDO RAMA SYNTHETICS INDIA LTD. VS. CIT (2011 ) 333 ITR 18 (DEL) HE, THEREFORE, SUBMITS THAT THE ORDER PASSED BY THE LD. CIT(A) IN DELETING THE DISALLOWANCE BE UPHELD. 7. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE RIVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FI ND THAT THE FACTS ARE NOT IN DISPUTE INASMUCH AS IT IS ALSO NOT IN DISPUT E THAT THAT THE ASSESSEE HAS CLAIMED THE EXPENSES OF ENTERPRISE RES OLUTION PROGRAMME (ERP) SOFTWARE AS PER REQUIREMENT OF THE BUSINESS. SINCE THE PROGRAMMERS TEAM DID NOT COMPLETE THE ASSIGNMENT TO THE SATISFACTION OF THE ASSESSEE AND TO AVOID FURTHER COST ON SUCH INST ALLATION, THE ASSESSEE DISCONTINUED THE SAME. ACCORDING TO THE A.O., THE ASSETS WAS NEVER PUT TO USE FOR THE PURPOSE OF BUSINESS, HENCE, CAPITAL IN NATURE NOT ELIGIBLE FOR DEPRECIATION. ON APPEAL, THE LD. CIT(A), HOWEV ER, DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE VIDE FINDING RECORDED IN PAR A 2.3 OF HIS ORDER WHICH IS REPRODUCED AS UNDER:- 2.3 I HAVE CONSIDERED THE FACTS OF THE CASE. THE F IRST QUESTION WHETHER THE EXPENDITURE COULD HAVE BEEN REVENUE OR CAPITAL, HAD THE ARP SYSTEM WOULD HAVE BEEN INSTALLED SUCCESSFULLY. THE SECOND QUESTION FOR CONSIDERATION IS AS TO WHETHER THE EXPENDITURE INCU RRED IS ALLOWABLE AS BUSINESS LOSS SINCE THE INSTALLATION SYSTEM WAS ABO RTED. ON THESE TWO ISSUES I HAVE CAREFULLY CONSIDERED THE APPELLANTS SUBMISSIONS. IN MY CONSIDERED VIEW THE ARP SYSTEM BEING INSTALLED BY T HE APPELLANT WAS NOT FOR THE PURPOSE OF CONDUCTING BUSINESS BUT WAS ONLY FOR THE PURPOSE OF CONDUCTING THE EXISTING BUSINESS ACTIVITIES IN A MO RE EFFICIENT WAY. THE ERP SYSTEM WOULD HAVE ALLOWED THE APPELLANT TO CONT ROL OVER ITS INVENTORIES, ALL OVER INDIA WHICH COULD HAVE FURTHE R HELPED THE APPELLANT IN CONDUCTING OF BUSINESS EFFICIENTLY. THE ERP SYST EM BEING INSTALLED BY THE APPELLANT WAS ITSELF NOT AN INDEPENDENT AND SEP ARATE BUSINESS TOOL WITHOUT WHICH THE BUSINESS COULD NOT HAVE BEEN COND UCTED. IN THE FACTS AND CIRCUMSTANCES, I AM IN AGREEMENT WITH THE APPEL LANT THAT ITA NO. 6278/MUM/2011 5 EXPENDITURE INCURRED ON ERP SYSTEM BEING IMPLEMENTE D WAS REVENUE EXPENDITURE IN NATURE. THE SYSTEM BEING INSTALLED C OULD HAVE GIVEN AN ENDURING BENEFIT TO THE APPELLANT IN EXERCISING CON TROL OVER ITS INVENTORY LYING IN DIFFERENT BRANCHES. HOWEVER, IT IS NOT NEC ESSARY THAT EVERY EXPENDITURE GIVING ENDURING BENEFIT IS ALWAYS OF A CAPITAL NATURE. THIS EXPENDITURE INCURRED BY APPELLANT WAS DEFINITELY ON REVENUE FIELD. THE NEXT QUESTION FOR CONSIDERATION IS AS TO WHETHE R THE LOSS INCURRED ON ACCOUNT OF ERP SYSTEM SINCE ABORTED WAS ALLOWABLE AS BUSINESS EXPENDITURE. IN MY CONSIDERED VIEW THE EXP ENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND ALSO DURING THE COURSE OF BUSINESS. IT IS NOT NECESSARY THAT EVERY EXPENDITURE SHOULD BRING REVENUE TO THE APPELLANT. THE INCURRIN G OF EXPENDITURE IS A STAGE PRIOR TO THE EARNING OF INCOME. BUT EVERY EXP ENDITURE MAY NOT RESULT IN BRINGING INCOME TO THE APPELLANT. THEREF ORE, THE LOSS SUFFERED BY APPELLANT ON ACCOUNT OF UNSUCCESSFUL IMPLEMENTAT ION OF ERP SYSTEM WAS ALLOWABLE TO THE APPELLANT AS BUSINESS LOSS. 8. IN CIT VS. M/S ASAHI INDIA SAFETY GLASS LTD. IN ITA NO. 1110/2006 DTD. 4-11-2011 (DELHI H.C.), THE ISSUE WAS AS TO WH ETHER THE EXPENDITURE INCURRED BY THE ASSESSEE ON ACCOUNT OF SOFTWARE AND PROFESSIONAL EXPENSES WAS A REVENUE EXPENDITURE. THEIR LORDSHIPS WHILE OBSERVING THAT THE EXPENSES OUGHT NOT GIVE A COLOUR TO THE EX PENDITURE INCURRED AS ONE EXPENDED ON CAPITAL ACCOUNT, DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. 9. IN M/S RAYCHEM RPG LTD. (SUPRA), IT HAS BEEN HE LD THAT THE SOFTWARE EXPENDITURES ARE ALLOWABLE AS REVENUE EXPE NDITURE. 10. IN CIT VS. AMWAY INDIA ENTERPRISES (2008) 114 TTJ ( DEL)[SB] 476 APPROVED BY THE HONBLE DELHI HIGH COURT IN ITA NO. 1344/1363 OF 2009 DTD. 4-11-2011, THEIR LORDSHIPS FOLLOWING THE DECIS ION IN M/S ASAHI INDIA SAFETY GLASS LTD. (SUPRA), DECIDED THE ISSUE AGAINST THE REVENUE. ITA NO. 6278/MUM/2011 6 11. IN THE CASE OF M/S CISCO SYSTEMS (INDIA) PVT. L TD. VS. ACIT IN ITA NO. 431/BANG/2010 (A.Y. 2002-03) ORDER DTD. 28-4-20 11, ON THE ISSUE THAT THE LD. CIT(A) HAS ERRED IN LAW BY HOLDING THA T THE LOSS ON CAMPUS PROJECT WAS IN THE NATURE OF CAPITAL LOSS, IT HAS B EEN HELD THAT SUCH LOSS IS NOT A CAPITAL IN NATURE. 12. IN B. NAGI REDDY V/S CIT (1993) 199 ITR 451 (M AD), IT HAS BEEN HELD THAT ANY SUM INCURRED BY THE ASSESSEE IN PRODU CTION OF FILMS WHICH WERE SUBSEQUENTLY ABANDONED WAS TO BE ALLOWED AS DE DUCTION. 13. IN R.R. KABEL LTD. VS. ADDL. CIT (2012) 25 TAXM ANN.COM 559 (MUM) THE SIMILAR ISSUE WAS DECIDED IN FAVOUR OF THE ASSE SSEE VIDE FINDING RECORDED IN PARAS 31, 32 AND 35 OF THE ORDER AS UND ER:- 31 . RESPECTFULLY FOLLOWING THE ABOVE DECISIONS WE ARE OF THE VIEW THAT THE SOFTWARE EXPENDITURE INCURRED BY THE ASSESSEE ARE R EVENUE IN NATURE AND HENCE THE SAME ARE ALLOWABLE AS BUSINESS EXPENDITUR E AND THE LD. CIT(A) WAS NOT JUSTIFIED IN SUSTAINING THE DISALLOWANCE MA DE BY THE AO. 32 . AS REGARD THE SUSTENANCE OF DISALLOWANCE OF BUSINE SS LOSS OF RS. 5,00,000/- WE FIND THAT THE CLAIM OF THE ASSESSEE T HAT THE PAYMENT OF RS. 5,00,000/- WAS MADE TO TECHSOL INFORMATION TECHNOLO GY PVT. LTD FOR INSTALLATION OF SOFTWARE SYSTEM (ERP). AFTER INITIA L STUDY REPORT, THE ASSESSEE THOUGHT TO DISCONTINUE THE SAID ASSIGNMENT AS THE SAME MAY NOT BE IN LINE WITH THE COMPANY'S REQUIREMENT AND T ECHNICALLY FIT, HENCE THE SAID LOSS WAS INCURRED IN THE COURSE OF CARRYIN G OF BUSINESS AND THE SAME IS ALLOWABLE AS BUSINESS DEDUCTION OR IN THE A LTERNATIVE, AS BUSINESS LOSS. SINCE THE ABOVE EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE FOR INSTALLATION OF SOFTWARE SYSTEM (ERP) WHICH WAS DISCONTINUED DUE TO COMMERCIAL EXPEDIENCY AS GOING ON AHEAD WITH SUCH SYSTEM MAY NOT BE IN LINE WITH THE COMPANY'S REQUIR EMENT, THEREFORE, THE LOSS INCURRED BY THE ASSESSEE IS ALLOWABLE AS A BUS INESS LOSS. OOO OOO OOO ITA NO. 6278/MUM/2011 7 35. IN THE LIGHT OF THE AFORESAID JUDGMENT IT IS CL EAR THAT THE AMOUNT IN QUESTION CANNOT BE CONSIDERED AS CAPITAL LOSS BUT H AS TO BE ALLOWED AS DEDUCTION AS REVENUE LOSS AND ACCORDINGLY WE ALLOW THE SAME. 14. IN THE ABSENCE OF ANY CONTRARY MATERIAL PLACED ON RECORD BY THE REVENUE AGAINST THE FINDING OF THE LD. CIT(A), WE R ESPECTFULLY FOLLOWING THE RATIO OF THE ABOVE DECISIONS, HOLD THAT THE LD. CIT (A) WAS FULLY JUSTIFIED IN HOLDING THAT THE EXPENDITURE INCURRED BY THE ASSESS EE WAS DEFINITELY ON REVENUE FIELD AND, IN CASE, THE LOSS SUFFERED BY TH E ASSESSEE ON ACCOUNT OF UNSUCCESSFUL IMPLEMENTATION OF ESP SYSTEM IS ALL OWABLE AS BUSINESS LOSS. THE GROUNDS TAKEN BY THE REVENUE ARE, THEREF ORE, REJECTED. 15. IN THE RESULT, REVENUES APPEAL STANDS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON 14.12.2012 SD/- (P.M. JAGTAP ) ACCOUNTANT MEMBER SD/- (DINESH KUMAR AGARWAL) JUDICIAL MEMBER MUMBAI, DATED : 14 TH DECEMBER, 2012 RK COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS)- II, THANE 4. DIT (INTERNATIONAL TAXATION) III, THANE. 5. DEPARTMENTAL REPRESENTATIVE, BENCH D, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI