THE issue before the Bench is - Whether system software forms part of the profit-making apparatus of the assessee where the business of the assessee was that of manufacturing of piston ring, casting ring etc. and the Software was an enterprise resource and it facilitated the assessee's trading operations or enabled the management to conduct the assessee`s business
more efficiently or more profitably. NO is the answer of the Tribunal.
Facts of the case
A) The Assessee company, engaged in the business of manufacturing of piston ring, casting ring, gaskets and semi finished plastics, furnished its return of income disclosing income. During the assessment proceedings, on a perusal of the Tax Audit Report, the AO found that an amount was shown as expenditure of capital nature, that out of the said expenditure a certain sum was added back to the total income of the assessee by itself and the remaining sum was claimed by it as revenue expenditure. After considering the explanation of the assessee in this regard, the AO held that the balance amount was capital in nature and could not be allowed as revenue expenses.
In appeal, FAA held that the ERP Software was a capital asset. It was held that computer, a tangible asset, alone could not function without the help of software and ERP had enabled the assessee to carry out its business more efficiently. It was held that the scope, power, longevity of ERP and centrality to the functions of the business indicated that the same had improved assessee's business organisation and made it a better profit making apparatus for all time to come. Finally, he confirmed the disallowance made by the AO.
B) AO found that in his report, the Tax Auditor had reported a list of vouchers being payments made in cash above Rs.20,000/-. He directed the assessee to file explanation about the amount in question. It was stated that an amount was paid to one of the employee of the company who was in urgent need of money and all other payments were less than Rs.20,000/-. AO, held that in the case of Balaji Transport & Deshmukh Transport Services payments were made in excess of Rs. 20,000/- and the payees were known person and had regular business relation with the assessee and the payment to such persons was not covered under exceptions provided under Rule-6DD of the Income-tax Rules,1962 (Rules). Accordingly, he made a disallowance @ 20% of the total amount.
In appeal, FAA held that the assessee could not explain as to why cash payment was made by it to its own employee who was having regular bank account and in the said account assessee had been crediting salary and other allowances regularly. It was held that the assessee's auditor had pointed out that the sum paid in cash in violation of provision contained in the said Section, and the payment to those persons was not covered under the exception provided under Rule 6DD of the Rules.
C) During the assessment proceedings, the AO found that the assessee had debited a sum as prior period expenses. He directed the assessee to file the details in this regard. On examination of the details, the AO found that those payments were made for annual maintenance charges under the heads annual band width charges and consultancy charges and the payments related to earlier year. It was held that the payments did not have any relation with the year under consideration. He held that the assessee had not submitted any explanation justifying the claim of these expenses in the year under consideration. Accordingly, he made a disallowance.
In appeal, FAA held that as per the mercantile system of accounting expenses related to AY. 2001-02 were to be allowed in that AY only and same were not allowable in subsequent AY. However, he directed the AO to re-check the facts and verify the expenses and allow an amount in AY. 2001-02 only, if not allowed already allowed in earlier year. He confirmed the order of the AO to disallow the amount in question for the year under consideration.
D) During the assessment proceedings, the AO directed the assessee to explain as to why the claim made u/s 80HHC of the Act, especially with regard to excise duty, export benefits, miscellaneous income should not be considered for total turnover/should be reduced from the 90% of the calculation. After considering the reply of the assessee, the AO held that it had furnished explanation about excise duty and export benefits only but no explanation was filed by the assessee about miscellaneous income and the total turnover had to ascertained with reference to the books of accounts. AO held that the value of excise duty was essential part of total sales price and the issue had not reached finality and the matter was agitated by the department before the Apex Court in the case of Sudarshan Chemicals and hence, assessee's claim could not be entertained. He further held that other exports, benefits, particularly DEPB, would be assessable u/s 28(iv) of the Act. He referred to the file No. 153/2004/TPL dated 08.09.2014 issued by the CBDT that profit on sale of DEPB will not eligible for deduction u/s 80HHC. He also held that the assessee had not furnished any reply with regard to miscellaneous income and the unclaimed deposits could not be claimed as income arising out of business and scrap of octri refunds were also not part of the business. Accordingly, he recomputed the assessee's claim u/s 80HHC.
In appeal, FAA held that miscellaneous income consisted of scrap sales, liabilities written back and Octroi Refund. It was held that sale of raw material should not be included in the total turnover for the purpose of deduction u/s.80HHC of the Act and the AO should not include the sale of raw material scrap in the total turnover while calculating the deduction u/s.80HHC of the Act. It was held that sale of finished goods scrap had to be included in the profits of business. He confirmed the action of the AO, in part, with regard to scrap sale. He further held that liabilities written back and Octori Refund were the deemed income of the assessee as per the provisions u/s.41(1)of the Act and both the items did not have element of turnover. It was held that the AO had rightly excluded 90%of the aforesaid amounts form the profits of business while computing deduction u/s.80HHC of the Act. Regarding exclusion of export benefits on account of DEPB benefit, he held that issue was decided against the assessee by the decision of the Tribunal delivered for the AY. 2004-05.
E) During the assessment proceeding, the AO found that the assessee had shown total investment of Rs. 11,12,91,000/-. As per schedule 6 of the balance-sheet, that it had debited Rs. 4,64,53,000/- as Financial Charges in the P&L A/c, that the interest bearing fund had been used for non-business purposes in the form of investment. He directed the assessee to explain as to why the proportionate interest relatable to investment should not be disallowed for the year under consideration. After considering the explanation of the assessee the AO held that it had made huge investment of Rs. 11.12 Crores in the FY 2000-01 which continued to be in force during the whole FY 2001-02 and the assessee had made no attempt to establish the fact that investment was made through internal approvals. In the absence of transaction wise narration it was difficult to believe that no borrowed funds had been used for investment purposes and in the earlier year proportionate disallowance was made and then FAA had upheld the order of the AO. Finally, the AO made a disallowance on proportionate basis.
In appeal, FAA held that the Rule 8D cannot be applied prior to Assessment Year 2008-09 as decided by the Bombay High Court in the case of Godrej & Boyce Mfg Co.Ltd. 2010-TIOL-564-HC-MUM-IT. Referring to the decision of VIP industries 2010-TIOL-654-ITAT-MUM he held that disallowance should be restricted to 5% of the amount of the exempted income received by the assessee.
Assessee contended that the expenditure was incurred for ERP license system and it was only supporting fee and it was not capital expenditure. It was argued that it was not operating software and the assessee had to incur such expenditure every three years and it had got the license for limited period.
Having heard the parties, the tribunal held that,
A) + the system software did not form part of the profit-making apparatus of the assessee, that the business of the assessee was that of manufacturing of piston ring, casting ring etc., that Software was an enterprise resource and it facilitated the assessee's trading operations or enabled the management to conduct the assessee`s business more efficiently or more profitably. But, it would not make the software a profit-making apparatus. So, the expenditure incurred by the assessee has to be held to be revenue expenditure. Respectfully following the judgment of the Bombay High Court delivered in the matter of Raychem RPG Ltd. and considering the peculiar facts of the case, we decide first ground of appeal in favour of the assessee;
B) + the assessee had made a payment of Rs.21,954/- were paid to one of the employees, who had bank account and her salary and other emoluments were deposited in that account. In these circumstances it was to be explained by the assessee as what were the pressing circumstances like bank holiday that compelled it to make the payment in cash. We find that the assessee auditor of the company in his report has specifically mentioned that the amount in question was paid in violation of the provisions of section 40A(3), the assessee had not produced any evidence before the auditor or the AO to prove that the payments were covered by the exceptions mentioned in Rule 6DD of the Rules;
++ in the case of Satyam Ginning Pressing and Oil Mills, it was found by the Tribunal that the payment of the sum in cash exceeding the limit prescribed in section 40A(3) of the Act was made under exceptional and unavoidable circumstances. In the present case the assessee had not proved that 'exceptional and unavoidable circumstances' existed. Similarly, in the matter of Aloo Supply Co. High Court has laid down some principles, but how those principles are applicable to the case under appeal has not been proved by the assessee. Therefore, we are of the opinion that the order of the FAA does not suffer from any legal infirmity. Upholding his order, we decide ground no.2 against the assessee;
C) + FAA had specifically directed the AO to allow the expenditure in the earlier AY., if same was not already allowed in that year. In our opinion, the expenditure was incurred for business purposes and has to be allowed in one of the years. It is not uncommon business practice that in some cases bills are received in subsequent year for a particular item. But, that does not mean that the assessee is not entitled to claim the expenditure only because it is following mercantile system of accounting. In our opinion, the expenditure claimed by the assessee has to be allowed in the year under consideration, if same has not been allowed by the AO in the AY.2001-02, as directed by the FAA. Ground no.4 is allowed in favour of the assessee for statistical purposes;
D) + The assessee had not furnished the details of the miscellaneous income before the AO or the FAA, that FAA culled out necessary details and had decided the issue on merits, that he had partly allowed the issue of sale of scrap in favour of the assessee, that he had followed the decision of the Tribunal with regard to the benefits of Rs.92.79 lakhs. In our opinion the order of the FAA does not suffer from any legal infirmity. Respectfully, following the order of the Tribunal for the AY. 2004-05, we decide ground no.5 against the assessee. Appeal filed by the assessee is allowed, in part;
E) + Before us, DR left the issue to the discretion of the Bench and AR supported the order of the FAA. We find that the AY. involved is prior to 2008-09 and as per the decision of the jurisdictional High Court the provisions of section 14A r.w.r.8D cannot be invoked for making proportionate disallowance. We are aware that the Court also had held in the case of Godrej & Boyce Mfg Co. Ltd. that reasonable disallowance could be made in earlier AYs. In our opinion disallowance sustained by the FAA i.e.5% of the exempt income is reasonable and does not need interference from our side. Effective ground of appeal, filed by the AO, is rejected.
In appeal, FAA held that the ERP Software was a capital asset. It was held that computer, a tangible asset, alone could not function without the help of software and ERP had enabled the assessee to carry out its business more efficiently. It was held that the scope, power, longevity of ERP and centrality to the functions of the business indicated that the same had improved assessee's business organisation and made it a better profit making apparatus for all time to come. Finally, he confirmed the disallowance made by the AO.
B) AO found that in his report, the Tax Auditor had reported a list of vouchers being payments made in cash above Rs.20,000/-. He directed the assessee to file explanation about the amount in question. It was stated that an amount was paid to one of the employee of the company who was in urgent need of money and all other payments were less than Rs.20,000/-. AO, held that in the case of Balaji Transport & Deshmukh Transport Services payments were made in excess of Rs. 20,000/- and the payees were known person and had regular business relation with the assessee and the payment to such persons was not covered under exceptions provided under Rule-6DD of the Income-tax Rules,1962 (Rules). Accordingly, he made a disallowance @ 20% of the total amount.
In appeal, FAA held that the assessee could not explain as to why cash payment was made by it to its own employee who was having regular bank account and in the said account assessee had been crediting salary and other allowances regularly. It was held that the assessee's auditor had pointed out that the sum paid in cash in violation of provision contained in the said Section, and the payment to those persons was not covered under the exception provided under Rule 6DD of the Rules.
C) During the assessment proceedings, the AO found that the assessee had debited a sum as prior period expenses. He directed the assessee to file the details in this regard. On examination of the details, the AO found that those payments were made for annual maintenance charges under the heads annual band width charges and consultancy charges and the payments related to earlier year. It was held that the payments did not have any relation with the year under consideration. He held that the assessee had not submitted any explanation justifying the claim of these expenses in the year under consideration. Accordingly, he made a disallowance.
In appeal, FAA held that as per the mercantile system of accounting expenses related to AY. 2001-02 were to be allowed in that AY only and same were not allowable in subsequent AY. However, he directed the AO to re-check the facts and verify the expenses and allow an amount in AY. 2001-02 only, if not allowed already allowed in earlier year. He confirmed the order of the AO to disallow the amount in question for the year under consideration.
D) During the assessment proceedings, the AO directed the assessee to explain as to why the claim made u/s 80HHC of the Act, especially with regard to excise duty, export benefits, miscellaneous income should not be considered for total turnover/should be reduced from the 90% of the calculation. After considering the reply of the assessee, the AO held that it had furnished explanation about excise duty and export benefits only but no explanation was filed by the assessee about miscellaneous income and the total turnover had to ascertained with reference to the books of accounts. AO held that the value of excise duty was essential part of total sales price and the issue had not reached finality and the matter was agitated by the department before the Apex Court in the case of Sudarshan Chemicals and hence, assessee's claim could not be entertained. He further held that other exports, benefits, particularly DEPB, would be assessable u/s 28(iv) of the Act. He referred to the file No. 153/2004/TPL dated 08.09.2014 issued by the CBDT that profit on sale of DEPB will not eligible for deduction u/s 80HHC. He also held that the assessee had not furnished any reply with regard to miscellaneous income and the unclaimed deposits could not be claimed as income arising out of business and scrap of octri refunds were also not part of the business. Accordingly, he recomputed the assessee's claim u/s 80HHC.
In appeal, FAA held that miscellaneous income consisted of scrap sales, liabilities written back and Octroi Refund. It was held that sale of raw material should not be included in the total turnover for the purpose of deduction u/s.80HHC of the Act and the AO should not include the sale of raw material scrap in the total turnover while calculating the deduction u/s.80HHC of the Act. It was held that sale of finished goods scrap had to be included in the profits of business. He confirmed the action of the AO, in part, with regard to scrap sale. He further held that liabilities written back and Octori Refund were the deemed income of the assessee as per the provisions u/s.41(1)of the Act and both the items did not have element of turnover. It was held that the AO had rightly excluded 90%of the aforesaid amounts form the profits of business while computing deduction u/s.80HHC of the Act. Regarding exclusion of export benefits on account of DEPB benefit, he held that issue was decided against the assessee by the decision of the Tribunal delivered for the AY. 2004-05.
E) During the assessment proceeding, the AO found that the assessee had shown total investment of Rs. 11,12,91,000/-. As per schedule 6 of the balance-sheet, that it had debited Rs. 4,64,53,000/- as Financial Charges in the P&L A/c, that the interest bearing fund had been used for non-business purposes in the form of investment. He directed the assessee to explain as to why the proportionate interest relatable to investment should not be disallowed for the year under consideration. After considering the explanation of the assessee the AO held that it had made huge investment of Rs. 11.12 Crores in the FY 2000-01 which continued to be in force during the whole FY 2001-02 and the assessee had made no attempt to establish the fact that investment was made through internal approvals. In the absence of transaction wise narration it was difficult to believe that no borrowed funds had been used for investment purposes and in the earlier year proportionate disallowance was made and then FAA had upheld the order of the AO. Finally, the AO made a disallowance on proportionate basis.
In appeal, FAA held that the Rule 8D cannot be applied prior to Assessment Year 2008-09 as decided by the Bombay High Court in the case of Godrej & Boyce Mfg Co.Ltd. 2010-TIOL-564-HC-MUM-IT. Referring to the decision of VIP industries 2010-TIOL-654-ITAT-MUM he held that disallowance should be restricted to 5% of the amount of the exempted income received by the assessee.
Assessee contended that the expenditure was incurred for ERP license system and it was only supporting fee and it was not capital expenditure. It was argued that it was not operating software and the assessee had to incur such expenditure every three years and it had got the license for limited period.
Having heard the parties, the tribunal held that,
A) + the system software did not form part of the profit-making apparatus of the assessee, that the business of the assessee was that of manufacturing of piston ring, casting ring etc., that Software was an enterprise resource and it facilitated the assessee's trading operations or enabled the management to conduct the assessee`s business more efficiently or more profitably. But, it would not make the software a profit-making apparatus. So, the expenditure incurred by the assessee has to be held to be revenue expenditure. Respectfully following the judgment of the Bombay High Court delivered in the matter of Raychem RPG Ltd. and considering the peculiar facts of the case, we decide first ground of appeal in favour of the assessee;
B) + the assessee had made a payment of Rs.21,954/- were paid to one of the employees, who had bank account and her salary and other emoluments were deposited in that account. In these circumstances it was to be explained by the assessee as what were the pressing circumstances like bank holiday that compelled it to make the payment in cash. We find that the assessee auditor of the company in his report has specifically mentioned that the amount in question was paid in violation of the provisions of section 40A(3), the assessee had not produced any evidence before the auditor or the AO to prove that the payments were covered by the exceptions mentioned in Rule 6DD of the Rules;
++ in the case of Satyam Ginning Pressing and Oil Mills, it was found by the Tribunal that the payment of the sum in cash exceeding the limit prescribed in section 40A(3) of the Act was made under exceptional and unavoidable circumstances. In the present case the assessee had not proved that 'exceptional and unavoidable circumstances' existed. Similarly, in the matter of Aloo Supply Co. High Court has laid down some principles, but how those principles are applicable to the case under appeal has not been proved by the assessee. Therefore, we are of the opinion that the order of the FAA does not suffer from any legal infirmity. Upholding his order, we decide ground no.2 against the assessee;
C) + FAA had specifically directed the AO to allow the expenditure in the earlier AY., if same was not already allowed in that year. In our opinion, the expenditure was incurred for business purposes and has to be allowed in one of the years. It is not uncommon business practice that in some cases bills are received in subsequent year for a particular item. But, that does not mean that the assessee is not entitled to claim the expenditure only because it is following mercantile system of accounting. In our opinion, the expenditure claimed by the assessee has to be allowed in the year under consideration, if same has not been allowed by the AO in the AY.2001-02, as directed by the FAA. Ground no.4 is allowed in favour of the assessee for statistical purposes;
D) + The assessee had not furnished the details of the miscellaneous income before the AO or the FAA, that FAA culled out necessary details and had decided the issue on merits, that he had partly allowed the issue of sale of scrap in favour of the assessee, that he had followed the decision of the Tribunal with regard to the benefits of Rs.92.79 lakhs. In our opinion the order of the FAA does not suffer from any legal infirmity. Respectfully, following the order of the Tribunal for the AY. 2004-05, we decide ground no.5 against the assessee. Appeal filed by the assessee is allowed, in part;
E) + Before us, DR left the issue to the discretion of the Bench and AR supported the order of the FAA. We find that the AY. involved is prior to 2008-09 and as per the decision of the jurisdictional High Court the provisions of section 14A r.w.r.8D cannot be invoked for making proportionate disallowance. We are aware that the Court also had held in the case of Godrej & Boyce Mfg Co. Ltd. that reasonable disallowance could be made in earlier AYs. In our opinion disallowance sustained by the FAA i.e.5% of the exempt income is reasonable and does not need interference from our side. Effective ground of appeal, filed by the AO, is rejected.
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