DCIT Vs Landis+ Gyr Ltd. (ITAT Kolkata)
Expenditure incurred for construction / acquisition of new facility which had to be abandoned midway will be allowable as a revenue expenditure as incurred wholly or exclusively for the purpose of assessee’s business. It is to be noted that in the instant case also, the expenditure incurred by the appellant was for the purpose of installation of new ERP package which did not sail through and had to be abandoned midway. Hence, the expenditure incurred did not give rise to any enduring benefit to the appellant neither did it result in creation of a capital asset. The Hon’ble Calcutta HC, in the case of Graphite India Limited reported (221 ITR 420) has also held, that expenditure which did not result in bringing into existence if any capital asset of enduring nature would be admissible as revenue expenditure.
Assessee claimed deduction for expenditure of Rs. 28,18,250/- pertaining to installation of SCALA ERP software. The said project was abandoned during the year and SCALA ERP software was not installed. Hence, revenue deduction was claimed by assessee for the expenses incurred. Detailed reply was filed during assessment proceedings in support of the claim of the assessee. However, assessing officer disallowed the deduction for said expense stating that it is a capital expenditure which yields benefit for a longer period. However, AO allowed depreciation on the said expense @60%.
On appeal, the Ld. CIT(A) vide its order dated 11-08-2017 allowed the claim of the assessee stating that expense incurred by the assessee should be treated as revenue expenditure relying on the decision of Hon’ble Kolkata High Court in the case of Binani Cement Ltd. (2015) 233 Taxman 340 (Cal).We note that during the previous year under consideration, the assessee recognized an expenditure of Rs. 28,18,250/- in its profit and loss account. The said amount pertained towards an unsuccessful attempt to install an ERP package called SCALA. The said package failed to meet the requirements of the assessee and hence the project had to be abandoned midway. The expenditure incurred on said package was recognized in profit and loss account and was claimed as a revenue deduction u/s 37(1) of the Act. That being so, we decline to interfere in the order of ld CIT(A), his order on this issue is hereby accepted and the grounds of appeal raised by the Revenue is dismissed.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
The captioned appeal filed by the Revenue, pertaining to assessment year 2004-05, is directed against the order passed by the Commissioner of Income Tax (Appeals)-Kolkata, in appeal no. 211/CIT(A)-22/2004-05/14-15/Kol, which in turn arises out an assessment order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (in short the ‘Act’), dated 29.12.2006
2. The grievance raised by the Revenue are as follows:
1. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in holding that the expenditure for installation of an ERP package was capital in nature and also ignoring the fact that the Assessing Officer had little scope for verification?
2. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in deleting the addition of Rs. 1,67,60,563/- made on account of commission?
3. Whether on the facts and in the circumstances of the case and in law, the Ld C1T(A) was justified in deleting the addition of Rs. 30,46,678/- on account of Provision for Doubtful Debt?
4. Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) was justified in deleting the addition of Rs.12,45,123/- and Rs. 9,55,455/- on account of delayed payment of gratuity and leave encashment respectively?
5. Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) has erred in deleting the TP adjustment of Rs. 12,21,683/- on account of payment of Royalty by considering the payment of Royalty by the assessee @ 4.53% of the net sales?
6. Whether on the facts and in the circumstances of the case and in law, the Ld C1T(A) has erred in not considering the R&D Cess as intrinsically linked to the payment of Royalty and thereby excluding the same to arrive at the payment of Royalty @ 4.53% instead of 4.74% as computed by the TPO?
7. That it is prayed to set aside the order passed by the Ld CIT(A)-22 and restore the assessment order passed by the Assessing Officer in this case.
8. Department craves leave to add, alter or modify any or all of the above grounds of appeal at or before the time of hearing of the appeal.
3. Now we shall adjudicate these grounds one by one.
4. Ground No. 1 raised by the revenue reads as follows:
“Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in holding that the expenditure for installation of an ERP package was capital in nature and also ignoring the fact that the Assessing Officer had little scope for verification?”
5. Brief facts qua the issue are that on perusal of details of Misc. Expenses for Rs. 3,75,90,123/-, the assessing officer noticed that Software Expenses for Rs. 28,18,250/- is included in it. The AO was of the view that these software expenses were Capital Expenditure. However, assessee vide its letter contended that it should be treated as Revenue Expenditure. The Assessing Officer did not agree with assessee’s contention and held that these software expenses are of capital in nature which yields benefit for a longer period. However, depreciation @60% is allowed to the assessee. The assessing officer computed the disallowance as follows:
