Vijayeswari Textiles Ltd., Coimbatore V. ACIT, Coimbatore

ITA 963/CHNY/2011

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51751 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 27-05-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K E B RENGARAJAN JR STAND ING
• Assessee Lawyers: R MEENAKSHISUNDARAM
• Keywords: Revenue expenditure; Capital expenditure
• Section: 143(3); 37; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI B E F O R E DR. O.K.NARAYANAN, VICE PRESIDENT AND SHRI HARI OM MARATHA, JUDICIAL MEMBER .. ITA NO.963(MDS)/2011 ASSESSMENT YEAR: 2006-07 M/S.VIJAYESWARI TEXTILES LTD., 10/400, PALGHAT ROAD, KUNIAMUTHUR, COIMBATORE-641 008. PAN AAACV6388F. VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX, SALARY CIRCLE I, COIMBATORE. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI R.MEENAKSHISUNDARAM , ADVOCATE. RESPONDENT BY: SHRI KEB RENGARAJAN, JR.STAN DING COUNSEL DATE OF HEARING : 9 TH AUGUST, 2011 DATE OF PRONOUNCEMENT : 23 RD AUGUST, 2011 O R D E R PER DR.O.K.NARAYANAN, VICE-PRESIDENT: THIS APPEAL IS FILED BY THE ASSESSEE. THE RELEVA NT ASSESSMENT YEAR IS 2006-07. THE APPEAL IS DIRECTED AGAINST THE - - ITA NO.963 OF 2011 2 ORDER OF THE COMMISSIONER OF INCOME-TAX(APPEALS)-II AT COIMBATORE DATED 2-2-2011. THE APPEAL ARISES OUT O F THE ASSESSMENT COMPLETED UNDER SECTION 143(3) OF THE IN COME-TAX ACT, 1961. 2. THE FIRST GROUND RAISED BY THE ASSESSEE IN THE PRESENT APPEAL IS THAT THE COMMISSIONER OF INCOME-T AX(APPEALS) HAS ERRED IN DENYING THE EXPENDITURE ON REPLACEMENT COST OF YARN CLEARERS OF ` 99,33,995/- AS NOT IN THE NATURE OF REVENUE EXPENDITURE UNDER SECTION 37(1), HOLDING IT AS IN T HE NATURE OF CAPITAL EXPENDITURE, AS DISCUSSED AT PARA 6 OF HIS ORDER. IT IS THE CASE OF THE ASSESSEE THAT THE COMMISSIONER OF INCOM E- TAX(APPEALS) HAS FAILED TO APPRECIATE THAT THE EXPE NDITURE OF ` 99,33,995/- ON ELECTRONIC YARN CLEARERS CANNOT BE HELD TO BE A CAPITAL EXPENDITURE, 3. THE ASSESSEE IS RUNNING A COMPOSITE TEXTILE MIL L. IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR U NDER APPEAL, THE ASSESSEE HAS REPLACED THE OLD MECHANICAL YARN C LEARERS BY ELECTRONIC YARN CLEARERS. THE ASSESSING OFFICER FO UND THAT THE OLD MECHANICAL YARN CLEARERS WERE IN TURN REFITTED INTO OTHER MACHINES, WHICH DOES NOT REQUIRE BETTER FINISHING O F THE PRODUCTS - - ITA NO.963 OF 2011 3 WHERE THE PRODUCTS ARE MEANT FOR NON EXPORT SALES. ELECTRONIC YARN CLEARERS HAVE BEEN PUT IN THOSE MACHINES PRODU CING EXPORT ORIENTED PRODUCTS. THE ASSESSING OFFICER HELD THAT BY REPLACING THE MECHANICAL DEVICE WITH THE ELECTRONIC DEVICE, T HE ASSESSEE HAS INCREASED ITS EFFICIENCY IN PRODUCTION AND THE REPLACEMENT HAS GENERATED AN ENDURING BENEFIT TO THE ASSESSEE C OMPANY. ON THE BASIS OF THE ABOVE FINDING, THE ASSESSING AU THORITY TREATED THE REPLACEMENT COST AS CAPITAL EXPENDITURE. 4. THE COMMISSIONER OF INCOME-TAX(APPEALS) HELD TH AT THE ASSESSEE HAS SUBMITTED THAT THE REPLACEMENT WAS MADE IN RESPECT OF OLD INEFFICIENT YARN CLEARERS BY MORE EF FICIENT MODERN YARN CLEARERS. ON THE ABOVE SUBMISSION, THE COMMIS SIONER OF INCOME-TAX(APPEALS) HELD THAT THE REPLACEMENT WAS N OT OF WORN OUT OLD YARN CLEARERS. ON THE BASIS OF THE ABOVE P ROPOSITION HE UPHELD THE FINDING OF THE ASSESSING AUTHORITY THAT THE REPLACEMENT DOES NOT AMOUNT TO CURRENT REPAIRS AS E NVISAGED IN SECTION 31(I). THE COMMISSIONER OF INCOME-TAX(APPE ALS) FURTHER RELIED ON THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SARAVANA SPINNING MILLS P. LTD., 293 ITR 201, WHEREIN THE COURT HAS DISCUSSED THE SITUATION WHERE REPLACE MENT COULD - - ITA NO.963 OF 2011 4 AMOUNT TO CURRENT REPAIRS. HE OBSERVED THAT THE HO NBLE SUPREME COURT HAS HELD THAT WHEN OLD PARTS HAVE WOR KED FOR MORE THAN 50-60 YEARS, REPLACEMENT OF PARTS COULD B E CONSIDERED AS CURRENT REPAIRS, I.E., WHEN PARTS ARE NOT AVAILABLE FOR REPLACEMENT OF THE PARTS IN OLD MACHINES, REPLA CEMENT COULD BE CONSIDERED AS CURRENT REPAIRS. ACCORDING TO THE COMMISSIONER OF INCOME-TAX(APPEALS), THE PRESENT CA SE OF THE ASSESSEE DOES NOT FALL UNDER THE PROPOSITION LAID D OWN BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SARAVA NA SPINNING MILLS P. LTD., 293 ITR 201. ACCORDINGLY H E CONFIRMED THE DISALLOWANCE OF REPLACEMENT COST OF YARN CLEARE RS OF ` 99,33,995/-. 5. THIS DISALLOWANCE IS THE FIRST ISSUE RAISED BY THE REVENUE IN THE PRESENT APPEAL BEFORE US. SHRI R.MEENAKSHISUNDARAM, THE LEARNED COUNSEL APPEARING FOR THE ASSESSEE, EXPLAINED THAT THE REPLACEMENT OF YARN CL EARERS MADE BY THE ASSESSEE COMPANY IN THE RELEVANT PREVIOUS YE AR WAS NOTHING SHORT OF CURRENT REPAIRS. THE ASSESSEE COM PANY WAS USING THE MECHANICAL YARN CLEARERS FOR A LONG TIME IN THE PAST AND ITS EFFICIENCY HAS COME DOWN SO THAT THE ASSESS EE WAS NOT - - ITA NO.963 OF 2011 5 GETTING THE DESIRED QUALITY PRODUCTS WHICH IT USED TO GET IN THE PAST. THEREFORE IT WAS ESSENTIAL FOR THE ASSESSEE COMPANY TO CHANGE THE MECHANICAL YARN CLEARERS AT THE EARLIEST . WHEN THE REPLACEMENT WAS UNDERTAKEN, BETTER QUALITY ELECTRON IC YARN CLEARERS WERE AVAILABLE IN THE MARKET AND AS A PRUD ENT BUSINESS POLICY THE ASSESSEE COMPANY REPLACED THE OLD YARN C LEARERS WITH ELECTRONIC YARN CLEARERS. ONLY FOR THE REASON THAT MECHANICAL YARN CLEARERS WERE REPLACED WITH ELECTRONIC YARN CL EARERS, IT IS NOT PROPER TO SAY THAT THE REPLACEMENT DID NOT AMOUNT T O CURRENT REPAIRS. AS THE OLD YARN CLEARERS WERE NOT PERFORM ING WELL, IT WAS TO SUSTAIN THE EXISTING LEVEL OF PRODUCTION AND QUA LITY THAT THE ASSESSEE HAD TO OPT FOR REPLACEMENT. THE INSTALLAT ION OF ELECTRONIC YARN CLEARERS INCIDENTALLY IMPROVED THE QUALITY OF THE PRODUCT, BUT THAT DOES NOT MEAN THAT THE REPLACEMEN T WAS MADE FOR IMPROVING THE QUALITY AND QUANTUM OF THE OUT-PU T. HE ALSO REBUTTED THE FINDINGS OF THE LOWER AUTHORITIES THAT THE REMOVED MECHANICAL CLEARERS WERE USED BY THE ASSESSEE COMPA NY TO FIT IN OTHER OLD MACHINES OF THE ASSESSEE COMPANY. THE RE WAS NO SUCH ORDERLY REPLACEMENT. CERTAIN PIECES WERE USED TO REPLACE SOME OF THE EXISTING MECHANICAL CLEARERS OF SOME UN ITS AND THIS - - ITA NO.963 OF 2011 6 WAS DONE AS A MATTER OF CONVENIENCE AND NOT AS A MA TTER OF MODIFICATION OR IMPROVEMENT. 6. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE PRINCIPLES PRONOUNCED BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SARAVANA SPINNING MILLS P. LYD., 293 ITR 20; IN THE CASE OF SHREYANS INDUSTRIES LTD. VS. CIT, 314 ITR 3 02; IN THE CASE OF CIT VS. SRI MANGAYARKARASI MILLS P. LTD., 3 15 ITR 114 AND THE HONBLE KERALA HIGH COURT IN THE CASE OF VA NAJA TEXTILES LTD. VS. CIT, 208 ITR 161. 7. SHRI K.E.B.RENGARAJAN, THE LEARNED STANDING COUNSEL APPEARING FOR THE REVENUE, ON THE OTHER HAN D, CONTENDED THAT THE SUBSTANTIAL REPLACEMENT OF MECHA NICAL YARN CLEARERS WITH ELECTRONIC YARN CLEARERS HAS DEFINITE LY CHANGED THE MANUFACTURING CAPACITY OF THE ASSESSEE COMPANY IN I NCREASING THE QUALITY OF THE OUT-PUT SO THAT ITS EXPORT BUSIN ESS IS MORE SUPPORTED. HE EXPLAINED THAT THE REPLACEMENT HAS R ESULTED IN AN ENDURING BENEFIT TO THE ASSESSEE COMPANY SO THAT IT IS NOT POSSIBLE TO CLASSIFY THE REPLACEMENT COST AS AN ITE M OF CURRENT REPAIRS. HE EXPLAINED THAT IT WAS NOT A REPAIR AT ALL. THE ASSESSEE HAS NOT REPLACED BROKEN DOWN PARTS OF THE MACHINERY. - - ITA NO.963 OF 2011 7 THE ASSESSEE HAS REPLACED WORKING PARTS OF THE MACH INERY WITH MORE CONTEMPORARY ITEMS WHICH WOULD DEFINITELY PROM OTE THE QUALITY AND OUT-PUT OF THE ASSESSEES PRODUCTS. TH EREFORE, HE CONTENDED THAT THE LOWER AUTHORITIES WERE JUSTIFIED IN TREATING THE EXPENDITURE AS CAPITAL IN NATURE. 8. WE CONSIDERED THE ISSUE IN DETAIL. THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SARAVANA SPINN ING MILLS P. LTD., 293 ITR 201, HAS CONSIDERED THE TESTS NECESSA RY TO QUALIFY AN EXPENDITURE AS CURRENT REPAIRS. THE COURT HELD THAT TO DECIDE THE APPLICABILITY OF CURRENT REPAIRS UNDER SECTION 31(I), THE TEST WAS NOT WHETHER THE EXPENDITURE WAS REVENUE OR CAPI TAL IN NATURE, BUT WHETHER THE EXPENDITURE WAS CURRENT REP AIRS. THE BASIC TEST WAS TO FIND OUT WHETHER EXPENDITURE WAS INCURRED TO PRESERVE AND MAINTAIN AN ALREADY EXISTING ASSET A ND THE EXPENDITURE MUST NOT BE TO BRING A NEW ASSET INTO E XISTENCE OR TO OBTAIN NEW ADVANTAGE. THE COURT FURTHER HELD THAT IN THE CASE OF A TEXTILE MILL EACH MACHINE INCLUDING THE RING FRAM E WAS AN INDEPENDENT AND SEPARATE MACHINE CAPABLE OF INDEPEN DENT AND SPECIFIC FUNCTION AND, THEREFORE, THE EXPENDITURE I NCURRED FOR REPLACEMENT THEREOF WOULD NOT COME WITHIN THE MEANI NG OF - - ITA NO.963 OF 2011 8 CURRENT REPAIRS. THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SRI MANGAYARKARASI MILLS P. LTD., 315 ITR114, H AS HELD THAT IN THE CASE OF TEXTILE MACHINERY REPAIR OF A MACHINE C AN AT BEST AMOUNT TO A REPAIR MADE TO THE PROCESS OF MANUFACTU RE OF YARN AND CANNOT BE SAID TO BE CURRENT REPAIRS WITHIN THE MEANING OF SECTION 31 OF THE INCOME-TAX ACT, 1961. THE COURT ALSO HELD THAT THE EXPENDITURE OF AN ASSESSEE FOR REPLACEMENT OF P ARTS OF A TEXTILE MILL FOR SPINNING YARN IS NOT REVENUE EXPEN DITURE UNDER SECTION 37 OF THE ACT. THE HONBLE KERALA HIGH COU RT IN THE CASE OF VANAJA TEXTILES LTD. VS. CIT, 208 ITR 161, HAS H ELD THAT EXPENDITURE ON MODERNIZATION OF MACHINERY OF A TEXT ILE MILL WAS DEDUCTIBLE AS REVENUE EXPENDITURE. 9. KEEPING IN MIND THE PROPOSITIONS LAID DOWN BY T HE COURTS IN THE ABOVE MENTIONED JUDGMENTS, WE HAVE TO SEE THAT WHETHER AN EXPENDITURE AMOUNTED TO CURRENT REPAIR O R AN EXPENDITURE AMOUNTED TO A REVENUE EXPENDITURE DEPEN DS UPON THE FACTS OF EACH CASE AND HAS TO BE ASCERTAINED AF TER EXAMINING WHETHER THE EXPENDITURE WAS INCURRED TO PRESERVE AN D MAINTAIN AN ALREADY EXISTING ASSET AND THE EXPENDITURE MUST NOT BE TO BRING A NEW ASSET INTO EXISTENCE OR TO OBTAIN A NEW ADVANTAGE. - - ITA NO.963 OF 2011 9 10. IN THE PRESENT CASE THE ASSESSEE HAS REPLACED THE MECHANICAL YARN CLEARERS WITH THE ELECTRONIC YARN C LEARERS. THE REPLACEMENT WAS NOT MADE FOR THE PURPOSE OF OPTING ELECTRONIC DEVICE AGAINST THE EXISTING MECHANICAL DEVICE. THE EXISTING MECHANICAL YARN CLEARERS WERE ALMOST WORN OUT AFTER WORKING FOR SO MANY YEARS IN THE PAST AND IT HAD BECOME VERY ES SENTIAL FOR THE ASSESSEE COMPANY TO GO FOR REPLACING THOSE WORN OUT YARN CLEARERS. IN THE OLD TIME TECHNOLOGY WHAT WAS AVAI LABLE FOR THE ASSESSEE IN THE PAST WAS ONLY MECHANICAL YARN CLEAR ERS. WHEN THE ASSESSEE COMPANY THOUGHT OF REPLACEMENT OF OLD AND WORN OUT MECHANICAL YARN CLEARERS, A BETTER OPTION WAS A VAILABLE BEFORE IT IN THE FORM OF ELECTRONIC YARN CLEARERS. THEREFORE, THERE SHOULD NOT BE A MISUNDERSTANDING THAT THE REPLACEME NT WAS MADE BY THE ASSESSEE TO SUBSTITUTE THE ELECTRONIC D EVICE FOR THE MECHANICAL DEVICE. ON THE OTHER HAND, THE REPLACEM ENT WAS MADE TO REMOVE THE WORN OUT EXISTING MECHANICAL YAR N CLEARERS AND TO MAKE IT FUNCTIONAL SO THAT THE EXISTING MANU FACTURING SYSTEM OF THE ASSESSEE COMPANY IS PRESERVED AND MAI NTAINED. WHEN SUCH A REPLACEMENT WAS NECESSITATED, IT BECAME HANDY FOR THE ASSESSEE TO OPT FOR A BETTER PROPOSAL AND B RING IN - - ITA NO.963 OF 2011 10 ELECTRONIC YARN CLEARERS. THEREFORE, IT IS TO BE S EEN THAT THE REPLACEMENT HAS NOT BROUGHT INTO EXISTENCE ANY NEW ASSET OR THE EXPENDITURE HAS NOT BROUGHT IN ANY NEW ADVANTAGE TO THE ASSESSEE, BETTER NOT TO SPEAK ABOUT ANY ENDURING BE NEFIT. BY REPLACING THE OLD WORN OUT MECHANICAL YARN CLEARERS WITH ELECTRONIC YARN CLEARERS, THE ASSESSEE COMPANY HAS JUST PRESERVED AND MAINTAINED ITS EXISTING STATUS OF MAN UFACTURE. THE SO CALLED IMPROVEMENT IN THE QUALITY POINTED OU T BY THE LOWER AUTHORITIES IS ONLY AN INCIDENTAL CONSEQUENCE OF BE TTER CLEANING WHEN COMPARED TO THE OLD AND WORN OUT MECHANICAL DE VICE. THE REPLACEMENT HAS NOT INCREASED THE VOLUME OF PRODUCT ION OF THE ASSESSEE COMPANY. STRICTLY SPEAKING, THE YARN CLEA RERS DO NOT DIRECTLY TAKE PART IN DECIDING THE QUANTUM OF PRODU CTION. THE YARN CLEARERS MAKE THE YARN COMBATIBLE FOR FURTHER TREATMENT. THEREFORE, YARN CLEARER IS A SERVICING SYSTEM WITHI N THE MANUFACTURING OPERATION CARRIED OUT BY THE ASSESSEE COMPANY. THEREFORE, IT BECOMES UNDER THE CATEGORY OF CURRENT REPAIRS, AS IF A FUSED BULB IS REPLACED BY A NEW ELECTRIC BULB. T HE EXISTING SITUATION IS PROTECTED AND NO NEW BENEFIT IS CREATE D. - - ITA NO.963 OF 2011 11 11. THEREFORE, WE FIND THAT THE DECISIONS RENDERED BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SA RAVANA SPINNING MILLS P. LTD., 293 ITR 201 AND IN THE CASE OF CIT VS. SRI MANGAYARKARASI MILLS P. LTD., 315 ITR 114 DO NOT GO AGAINST THE CASE OF THE ASSESSEE. 12. THE HONBLE KERALA HIGH COURT IN THE CASE OF VANAJA TEXTILES LTD. VS CIT, 208 ITR 161, HAS CONSI DERED AN ANALOGOUS SITUATION. IN THAT CASE THE ASSESSEE COM PANY WAS CARRYING ON BUSINESS IN THE MANUFACTURE OF YARN. I T UNDERTOOK A COMPREHENSIVE SCHEME OF MODERNIZATION AND REHABILIT ATION OF OLD MACHINERY IN ITS MILLS IN LINE WITH MODERN MILL S. THE ASSESSEE HAD AS A FIRST STEP CONVERTED 14 CARVING ENGINES TO METALLIC CARD CLOTHING. THE TRIBUNAL FOUND THAT ONLY UNSERVICEAB LE PARTS WERE REPLACED AND THE WHOLE SYSTEM HAD NOT BEEN CHANGED AND THAT NO NEW ASSET WAS BROUGHT INTO EXISTENCE. THE COURT HELD THAT THE EXPENDITURE INCURRED BY THE ASSESSEE WAS FOR BE TTER CONDUCT AND IMPROVEMENT OF THE EXISTING BUSINESS ON A SCHEM E OF MODERNIZATION AND NOT FOR A FRESH AND NEW VENTURE A ND THE OBJECT OF MODERNIZATION WAS FOR FACILITATING THE AS SESSEES TRADING OPERATIONS AND FOR THE CONDUCT OF THE ASSESSEES BU SINESS TO BE - - ITA NO.963 OF 2011 12 CARRIED ON MORE EFFECTIVELY AND TO UPDATE THE FACIL ITIES ON THE LINES OF MODERN TRENDS IN BUSINESS. THE COURT HELD THEREFORE THAT THE EXPENDITURE WAS REVENUE IN NATURE. 13. WHEN COMPARED TO THE ABOVE CASE, THE PRESENT CASE IS ABSOLUTELY NON CONSEQUENTIAL. HERE IT IS N OT THE CASE OF MODERNIZATION OF THE TEXTILE MILL OF THE ASSESSEE C OMPANY. THE ASSESSEE COMPANY ONLY CHANGED THE OLD AND WORN OUT MECHANICAL YARN CLEARERS AND INSTALLED NEW ELECTRON IC YARN CLEARERS. THEREFORE, DEFINITELY THE EXPENDITURE IN CURRED BY THE ASSESSEE COMPANY TAKES THE CHARACTER OF REVENUE EXP ENDITURE. 14. THEREFORE, IN THE FACTS AND CIRCUMSTANCES OF T HE CASE WE FIND THAT THE EXPENDITURE OF ` 99,33,995/- INCURRED BY THE ASSESSEE AS REPLACEMENT COST OF YARN CLEARERS C AN BE ALLOWED AS A DEDUCTION AS IN THE NATURE OF REVENUE EXPENDITURE AND ATLEAST BY GIVING THE BENEFIT OF DOUBT THE EXPE NDITURE CAN BE ALLOWED ALSO AS CURRENT REPAIRS UNDER SECTION 31. 15. IN EITHER CASE THE SAID AMOUNT OF EXPENDITURE IS DEDUCTIBLE IN COMPUTING THE INCOME OF THE ASSESSEE. THIS ISSUE IS, THEREFORE, DECIDED IN FAVOUR OF THE ASSESSEE. - - ITA NO.963 OF 2011 13 16. THE SECOND ISSUE RAISED BY THE ASSESSEE IS THA T THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN DI RECTING THE DISALLOWANCE OF ` 35,00,000/- AS PER SECTION 40(A)(IA) BY HOLDING THAT THE PAYMENT MADE TO M/S.INFINITE INDIA (P) LTD . WAS SUBJECT TO TDS, BEING TECHNICAL SERVICES. 17. IT IS THE CASE OF THE ASSESSEE THAT THE NATURE OF PAYMENT OF ` 35 LAKHS DID NOT SATISFY THE REQUIREMENTS OF TECHNICAL SERVICES REQUIRING DEDUCTION OF TAX UNDER SECTION 194J. 18. THE ASSESSEE HAD CLAIMED AN EXPENDITURE OF ` 50,50,000/- TOWARDS IMPLEMENTATION OF ERP SOFTWARE . THE DEDUCTION WAS CLAIMED UNDER SECTION 37. THE ASSESS EE IMPLEMENTED THE ERP SOLUTION ON A TURNKEY BASIS. A S PER THE AGREEMENT, THE COST OF SOFTWARE ALONGWITH THE MODUL ES FOR 75 USERS AMOUNTED TO ` 27,50,000/- AND THE COST OF IMPLEMENTATION DELIVERABLE AMOUNTED TO ` 35 LAKHS. THE ASSESSING AUTHORITY HELD THAT BOTH THE AMOUNTS TOTALING TO ` 50,50,000/- AMOUNTED TO PAYMENT TOWARDS TECHNICAL SERVICES AND, THEREFORE, THE ASSESSEE OUGHT TO HAVE DEDUCTED TAX AT SOURCE AS PROVIDED IN SECTION 194J. TDS WAS NOT MADE. ACCORDINGLY THE ASSESSING OFFICER - - ITA NO.963 OF 2011 14 INVOKED THE PROVISIONS OF LAW STATED IN SECTION 40( A)(IA) AND DISALLOWED THE ENTIRE EXPENDITURE. 19. IN FIRST APPEAL THE COMMISSIONER OF INCOME- TAX(APPEALS) HELD THAT THE COST OF SOFTWARE, AS HEL D BY THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. SO UTHERN ROADWAYS LTD., 304 ITR 84, IS TO BE TREATED AS REVE NUE EXPENDITURE. AS THE ASSESSEE HAS PURCHASED OPERATIO NAL SOFTWARE, WHICH REQUIRES PERIODICAL PAYMENTS FOR LI CENCE, HE HELD THAT THE COST SHOULD BE ALLOWED AS DEDUCTION UNDER SECTION 37(I). HE ACCORDINGLY DELETED THE DISALLOWANCE OF ` 27,50,000/-. HE CONFIRMED THE DISALLOWANCE OF ` . 35 LAKHS. 20. ON GOING THROUGH THE TERMS OF THE TURNKEY PROJ ECT TO IMPLEMENT THE ERP SOFTWARE, AS EXTRACTED IN THE ORD ERS OF THE LOWER AUTHORITIES, AND THE DISCUSSIONS AVAILABLE IN THEIR ORDERS, WE FIND THAT THE SUPPLY OF SOFTWARE AND THE IMPLEME NTATION DELIVERABLES ARE PART AND PARCEL OF AN INDIVISIBLE PURCHASE CONTRACT. IT IS NOT POSSIBLE TO DIVIDE THE TURNKEY PROJECT INTO TWO, ONE TOWARDS THE COST OF THE SOFTWARE AND THE OTHER TOWARDS THE COST OF IMPLEMENTATION DELIVERABLES. IN SUBSTANCE AND SPIRIT BOTH THE PARTS ARE INTEGRAL LIMBS OF THE SINGLE TURNKEY PROJECT. - - ITA NO.963 OF 2011 15 THEREFORE, THE ENTIRE PAYMENT WAS TOWARDS PURCHASE OF SOFTWARE. THE COMMISSIONER OF INCOME-TAX(APPEALS) IS NOT JUSTIFIED IN TREATING THE IMPLEMENTATION COST AS PA YMENT FOR TECHNICAL SERVICES. THEREFORE, WE FIND THAT THE EN TIRE PAYMENT OF ` 50,50,000/- MADE BY THE ASSESSEE FOR INSTALLING THE SOFTWARE IS INCURRED FOR THE OUTRIGHT PURCHASE OF THE SOFTWARE AND THERE IS NO PROVISION FOR RENDERING ANY PROFESSIONAL SERVICES. THEREFORE SECTION 194 IS NOT ATTRACTED IN THIS CASE. CONSEQU ENTLY SECTION 40(A)(IA) DOES NOT APPLY TO THE PRESENT CASE. THER EFORE WE DELETE THE DISALLOWANCE OF ` 35 LAKHS SUSTAINED BY THE COMMISSIONER OF INCOME-TAX(APPEALS). THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. 21. THE THIRD ISSUE RAISED BY THE ASSESSEE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN HO LDING THAT THE REQUIREMENTS OF PROVISIONS OF SECTION 36(1)(VII ) WERE NOT SATISFIED IN THE FACTS OF THE ASSESSEES CASE TO AL LOW THE DEDUCTION OF ` 3,90,64,745/- AS CLAIMED BY THE ASSESSEE. IT IS ALSO THE CASE OF THE ASSESSEE THAT THE AMOUNT SHOUL D HAVE BEEN ALTERNATIVELY ALLOWED AS A BUSINESS LOSS UNDER SECT ION 28 OF THE INCOME-TAX ACT, 1961. - - ITA NO.963 OF 2011 16 22. THE ASSESSEE COMPANY, EVEN THOUGH A TEXTILE COMPANY, IS ALSO AUTHORIZED BY ITS MEMORANDUM OF AS SOCIATION TO CARRY ON THE BUSINESS OF REFINANCING, SECURITIZA TION OF FINANCIAL ASSETS, ETC. ON THE BASIS OF THE ABOVE ENABLING CL AUSE, THE ASSESSEE COMPANY TOOK OVER ON ASSIGNMENT OVERDUE FI NANCE RECEIVABLES FROM A LISTED NON BANKING FINANCE COMPA NY CALLED CLIF AT A DISCOUNT TO THEIR BOOK VALUES. ON THE BA SIS OF THE ASSIGNMENT, THE ASSESSEE PURSUED THE RECOVERY OF OV ERDUE FINANCE. THE ASSESSEE HAD TAKEN OVER A TOTAL OF ` 7,96,36,919/- AS FINANCE RECEIVABLES AS ON 3-6-2002 AND AS ON 13- 3-2005. IN FACT, THE ASSESSEE HAS RECOVERED A SUM OF ` 3,17,88,058/- DURING THE PERIOD 2004 TO 2009. OUT OF THE BALANCE AMOUNT , THE ASSESSEE WRITTEN OFF A SUM OF ` 3,90,64,745/- AS UNREALIZABLE. 23. WE CONSIDERED THE ISSUE. THE ASSESSING AUTHOR ITY HAS NOT QUESTIONED THE GENUINENESS OF THE ASSIGNMEN T AGREEMENTS ENTERED INTO BETWEEN THE ASSESSEE AND CL IF. IT IS A REGULAR BUSINESS PRACTICE. ON THE BASIS OF THE ASS IGNMENT THE ASSESSEE WAS SUCCESSFUL IN RECOVERING AN AMOUNT OF ` 3,17,88,058/-. EVEN AFTER WRITING OFF OF THE UNRE ALIZABLE AMOUNT THE ASSESSEE COULD RECOVER A SUM OF ` 29.55 LAKHS AND - - ITA NO.963 OF 2011 17 SUBSEQUENTLY THE SAME WAS OFFERED FOR TAXATION FOR THE ASSESSMENT YEAR 2009-10. THE ASSESSEE COULD NOT CO LLECT THE BALANCE AMOUNT. THEREFORE, NATURALLY THE IRRECOVER ABLE AMOUNT SHOULD BE TREATED AS LOSS ARISING TO THE ASSESSEE I N THE COURSE OF CARRYING ON ITS BUSINESS, WITH PARTICULAR REFERENCE TO THE ASSIGNMENT OF RECEIVABLES. THEREFORE, THIS AMOUNT TAKEN OVER BY THE ASSESSEE COMPANY, BUT COULD NOT BE RECOVERED, I S CLEARLY IN THE NATURE OF A BUSINESS LOSS. WHETHER SOME OF THE AMOUNTS COULD HAVE BEEN COLLECTED IN FUTURE OR NOT IS A MAT TER OF POSTERITY. THE NATURE OF AN EXPENDITURE CANNOT BE EVALUATED ON THE BASIS OF THE HAPPENING OR NOT HAPPENING OF A FUTURE EVENT . THE POSITION IS TO BE LOOKED AND EVALUATED ON THE LAST DAY OF THE CONCERNED PREVIOUS YEAR. AS FAR AS THIS CASE IS CO NCERNED, WHAT IS TO BE LOOKED INTO IS THE POSITION OF THE RECEIVA BLES AS ON 31-3- 2006. IT IS TO BE SEEN THAT THE ASSIGNMENT AGREEME NT WAS ENTERED INTO WAY BACK ON 3-6-2002. WHEN A PORTION OF THE RECEIVABLES IS STILL RECOVERABLE, EVEN AFTER FOUR Y EARS, IT IS GENERALLY WITHIN THE PRUDENCE OF A BUSINESS-MAN TO TREAT IT AS IRRECOVERABLE. THEREFORE, THE CLAIM OF THE ASSESSE E IS LEGITIMATE AND TO BE ALLOWED AS A DEDUCTION IN THE NATURE OF B USINESS LOSS. - - ITA NO.963 OF 2011 18 WE ACCEPT THE CONTENTION OF THE ASSESSEE COMPANY AN D DIRECT THE ASSESSING OFFICER TO ALLOW THE DEDUCTION OF ` 3,90,64,745/-. THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. 24. THE FOURTH ISSUE RAISED BY THE ASSESSEE COMPAN Y IS THE TREATMENT OF THE UNREALIZABLE AMOUNT OF ` 3,90,64,745/- IN THE COMPUTATION OF BOOK PROFIT UNDER SECTION 115JB.. A S THE DISALLOWANCE HAS ALREADY BEEN DELETED BY US, THIS I SSUE DOES NOT ARISE ANY MORE. ACCORDINGLY THIS GROUND IS REJECTE D AS INFRUCTUOUS. 25. THE LAST GROUND RAISED BY THE ASSESSEE IS WITH REFERENCE TO THE LEVY OF INTEREST UNDER SECTION 234 B. THIS ISSUE IS CONSEQUENTIAL TO THE PRINCIPAL GROUND RAISED IN THIS APPEAL. THEREFORE THIS GROUND DOES NOT CALL FOR ANY SPECIFI C ADJUDICATION. 26. IN RESULT THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. - - ITA NO.963 OF 2011 19 ORDER PRONOUNCED ON TUESDAY, THE 23 RD DAY OF AUGUST, 2011 AT CHENNAI. SD/- SD/- (HARI OM MARATHA) (DR. O.K.NARAYANAN) JUDICIAL MEMBER VICE-PRESIDENT CHENNAI, DATED THE 23 RD AUGUST, 2011. V.A.P. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT (4) CIT(A) (5) D.R. (6) G.F.