Case Law Details
Sling Media Pvt. Ltd. Vs DCIT (ITAT Bangalore)
Payments forming part of CSR were claimed as deduction under section 80G. Held that assessee cannot be denied the benefit of claim under Chapter VI A, which is considered for computing ‘Total Taxable Income”. If assessee is denied this benefit, merely because such payment forms part of CSR, would lead to double disallowance, which is not the intention of Legislature’.
Facts- The assessee filed its returns for the Assessment Year 2016-17 on 30.11.2016 declaring total income of Rs.8,45,29,290/-. The return was selected for scrutiny. AO noted that assessee claimed sum of Rs.24,47,283/- towards additional depreciation u/s. 32(1)(iia) of the Act, on additions made during the AY 2016-17 on block of assets like Computers and Software. After considering the submissions, the AO disallowed the claim on the premise that the computers were installed in the office premises, thus would disentitle claim for additional depreciation within the meaning of the Proviso 2B to section 32(1)(iia) of the Act.
AO further noted that the assessee had spent Rs.15,77,889 towards CSR activities in the nature of donations made to certain eligible institutions and claimed deduction of Rs.7,71,505 u/s. 80G of the Act. AO sought to disallow the deduction claimed u/s. 80G of the Act. Being aggrieved by the additions made by AO, assessee filed appeal before CIT(A). CIT(A) dismissed the grounds of appeal and upheld the additions. Aggrieved by the order of CIT(A), assessee is in appeal before us now.
Conclusion- The assets eligible for additional depreciation must be plant or machinery. Also that such plant or machinery should not be installed in any office premises or residential accommodation. We note that the development activity carried on by the assessee cannot be considered to be a manufacturing activity. Accordingly, relying on the decision of Hon’ble Bombay High Court in case of CIT vs. IBM World Trade Corporation reported in (1981) 130 ITR 739, we do not find any infirmity in the disallowance of additional depreciation to assessee.
We note that assessee has suo moto disallowed the expenditure towards the CSR responsibilities u/s. 37(1) of the Act and claimed deduction u/s. 80G to the extent of donations paid to eligible charitable institutions. The observations of co-ordinate bench of this Tribunal in case of First American (India) Pvt. Ltd. vs. ACIT (supra) on the same issue has held that ‘in present facts of case, Ld.AR submitted that all payments forming part of CSR does not form part of profit and loss account for computing Income under the head, “Income from Business and Profession”. It has been submitted that some payments forming part of CSR were claimed as deduction under section 80G of the Act, for computing “Total taxable income”, which has been disallowed by authorities below. In our view, assessee cannot be denied the benefit of claim under Chapter VI A, which is considered for computing ‘Total Taxable Income”. If assessee is denied this benefit, merely because such payment forms part of CSR, would lead to double disallowance, which is not the intention of Legislature’.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
Present appeal is filed by assessee against order dated 09/12/2019 passed by the Ld.CIT(A), Bangalore-6 for assessment year 2016-17 on following grounds of appeal.
“1. The order of the LAO and the LAA (`Lower authorities’) are bad in law; against the facts of the case, to the extent the same are prejudicial to the Appellant. (Tax effect being Rs. 11,12,120)
2. On the facts and circumstances of the case, the Lower authorities have erred in Disallowing the Appellant’s claim of Rs 24,47,283 towards additional depreciation u/s 32(1)(iia) of the Income tax Act, 1961 Act on the additions made during the relevant Assessment Year to the Block of Assets-`Computers including Computer Software’
ii. Denying the benefit of deduction amounting to Rs 7,71,505 under Section 80G of the Act
The conclusions of the lower authorities in making addition and the reasons, basis, rationale in support of the impugned conclusion is contrary to facts, bad in law and liable to be quashed. (Tax effect being Rs 11,12,120)
3. The Lower authorities erred in disallowing the Appellant’s claim of additional depreciation amounting to Rs.24,47,283 under Section 32(1)(iia) of the Act on the additions made to the block of assets ‘Computers including Computer Software’-
i. By incorrectly holding that the Appellant was not eligible for the said claim since the Appellant engaged in the business of software development, the said assets were not used in the manufacture or production of articles or things. This assumption of the LAA were without appreciating the fact that having regard to the inputs and activities performed in the process of development of software products, all essential characteristics of `manufacture’ or ‘production’ of article or things have been met and therefore, the Appellant could not have been denied the said benefit of the claim
ii. By incorrectly holding that the said assets were installed in the ‘Office premises’ of the Appellant and therefore, were not eligible for the said claim; This stand of the LAA were without appreciating the argument of the Appellant that having regard to its nature of business and on the basis of the applicable judicial precedents, restriction of the benefit of additional depreciation adopting of such interpretation of the words ‘Office Premises’ by the Lower authorities would not be appropriate in the facts and circumstances of the case.
iii. Despite the Appellant’s claim that such assets were primarily, essentially and extensively used by the Appellant in its core business activities of software development and not for any general purpose (Tax effect being Rs 8,09,145)
4. The Lower authorities erred in denying the deduction u/s 80G of the Act amounting to Rs.7,71,505 claimed by the Appellant on donations made to certain eligible organizations made as a part of its Corporate Social Responsibility (CSR) programme-
a. Without appreciating the Appellant’s claim that in the absence of any express prohibition under the provisions of Section 80G of the Act, such claim could not have been denied.
b. By incorrectly holding that allowance of any deduction under the provisions of Section 80 G of the Act could not be allowed when CSR expenditure is not an allowable expenditure under section 37 (1) of the Act, thereby failing to understand that the said sections are two independent sections governing different components of computation of taxable income under the Act altogether and failing further to understand that it was inappropriate and unauthoritative import of the essence of the provisions of Section 37 (1) of the Act into provisions of Section 80G of the Act
c. By erroneously holding that any allowance of such claim under section 80G of the Act would amount to circumvention of both the intention of legislation as well as provisions of Income tax Act, though such intention of the legislation as perceived by the Lower Authorities has not been demonstrated by the bare provisions contained in Section 80G of the Act
d. By holding that claim of the Appellant under Section 80G of the Act, if allowed, would amount to violation as per the provisions of Companies Act, 2013whereas it was beyond the powers of the LAA in examining the compliances under the other Acts; especially when in any case, the disallowance was already made under Section 37(1) of the Act in the return of income filed by the Appellant (Tax effect being Rs 2,55,083)
5. The Lower Authorities erred in charging the interest under section 234D on assessed income consequent to additions made during the assessment. (Tax effect being Rs 47,889)
6. Under The circumstances where under the grounds of Appeal with the substantiations are required to be filed within 60 days of the date of receipt of the Appellate order, the Appellant prays that it be permitted to add, amend, alter and improve upon the grounds of Appeal. (Tax effect being Rs 11,12,120)”
Brief facts of the case are as under:
2. The Ld.AO observed that the assessee is a 100% subsidiary of Sling Media Inc., USA and provides software development services to its parent company as a captive unit. It filed its returns for the Assessment Year 2016-17 on 30.11.2016 declaring total income of Rs.8,45,29,290/-. The return was selected for scrutiny. The Ld.AO during the course of assessment proceedings called for various documents, that were submitted by the representative of assessee.
2.1 The Ld.AO noted that assessee claimed sum of Rs.24,47,283/- towards additional depreciation u/s. 32(1)(iia) of the Act, on additions made during the AY 2016-17 on block of assets like Computers and Software. After considering the submissions, the Ld.AO disallowed the claim on the premise that the computers were installed in the office premises, thus would disentitle claim for additional depreciation within the meaning of the Proviso 2B to section 32(1)(iia) of the Act.
2.2 The Ld.AO further noted that the assessee had spent Rs.15,77,889 towards CSR activities in the nature of donations made to certain eligible institutions and claimed deduction of Rs.7,71,505 u/s. 80G of the Act. The Ld.AO sought to disallow the deduction claimed u/s. 80G of the Act.
3. Aggrieved additions made by the Ld.AO, assessee filed appeal before the Ld.CIT(A).
3.1 The Ld.CIT(A) after considering submissions of assessee held as under:
“The appellant’s claim that it is engaged in the manufacturing and production of article or thing is not accepted in light of the foregoing facts. The AO, while noting that the computers on which the additional depreciation was claimed were installed in the office premises of the appellant has not examined this primary aspect. In view of the explicit provisions of section 32(1)(iia), it is held the appellant is not entitled to claim additional depreciation as Computers and Software installed during the year. These grounds of appeal are dismissed.”
3.2 Regarding the disallowance of the deduction claimed by the assessee u/s. 80G which related to its CSR expenditure, Ld.CIT(A) held as under:
“I am unable to except the argument of the appellant as allowing deduction u/s 80G on expenditure which was disallowable u/s 37(1) would amount to giving an unintended benefit which is not envisaged under the provisions of law. The AO Las made a detailed discussion in paras 4.5 to 4.10 of the assessment order of why such a claim should not be entertained and I am in agreement with the interpretation of the statutes as made by the AO. The addition of Rs.7,71,505/- on this account is therefore sustained. This ground of appeal is dismissed.”
Aggrieved by the order of Ld.CIT(A), assessee is in appeal before us now.
4. Grounds nos. 1 & 2 are general in nature and therefore do not require adjudication.
5. Ground no. 3-The Ld.AR submitted that assessee is engaged in rendering software development and testing services to its parent company. He submitted that, for the purpose of business, assessee acquired new computers that forms part of block of assets, placed at pages 136-138 of the paper book. He also placed reliance on the invoices detailing the purchase of such computer equipments. It is submitted by the Ld.AR that assessee is engaged in rendering of software development services is to be regarded as an industrial undertaking engaged in the manufacture of article or thing that is eligible for deduction u/s. 32(1)(iia) of the Act.
5.1 The Ld.AR submitted that the software is developed based on the inputs fed into the computers that would result in an executable programme. He thus submitted that the entire process falls within the category of “manufacture of articles or things”, to claim additional depreciation under the said section. He submitted that there is no dispute that these computers are installed in the office premises of assessee. The Ld.AR placed reliance on the decision of Hon’ble Bombay High Court in the case of ESI vs. Reliable Software Systems Pvt. Ltd. reported in [2012] 5 AIR BOM. R 795. He submitted that the said decision was relied by the co-ordinate bench of this Tribunal in case of Manhattan Associates (India) Development Centre Pvt. Ltd. vs. DCIT reported in [2019] 112 taxmann.com 200.
5.2 On the contrary, the Ld.Sr.DR relied on the observations of Ld.CIT(A). He submitted that assessee is a capital service provider as per the Master Service Agreement placed at page 180 of the paper book. He submitted that the Master Service Agreement further specifies that assessee is engaged in the business of software development, consulting services etc., which cannot be considered to be manufacturing activity. He placed reliance on the specific observations by the Ld.CIT(A) in para 5.1 of the impugned order.
5.3 Alternatively, the Ld.AR raised additional ground, wherein it is prayed that assessee may be allowed depreciation in subsequent years on the enhanced Written Down Value of Block of Assets at the prevailing rates.
5.3.1 The Ld.Sr.DR did not object for the additional ground being admitted.
5.4 We note that the additional ground is directly connected with the main issue of disallowance and no new facts needs to be investigated for adjudicating the same.
5.4.1 Considering the submissions and respectfully following the decisions of Hon’ble Supreme Court in case of National Thermal Power Co. Ltd. Vs. CIT reported in (1998) 229 ITR 383 and Jute Corporation of India Ltd. Vs. CIT reported in 187 ITR 688, we are admitting the additional ground raised by the assessee.
We have perused the submissions advanced by both sides in light of records placed before us.
5.5 Admittedly, the computes installed by the assessee are used for development of software. We have referred to the term ‘plant and machinery’ as appearing in section 32(1)(iia) of the Act which is defined in section 43(3) of the Act as under:
“(3) “plant” includes ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession but does not include tea bushes or livestock or buildings or furniture and fittings;”
The above definition is an inclusive definition wherein any equipment used for the purposes of business is to be considered as plant. The Ld.AR brought to our notice the Rule 5 of IT Rules that provides for rates of depreciation. The rates of depreciation is given in Appendix 1 as per the block of assets wherein the single block of asset consist of multiple assets with different rates of depreciation. It is pointed that the third block of Appendix-1 includes computers, wherein computer is eligible for 60% depreciation. Thus, it cannot be denied that computer is covered within the purview of plant and machinery.
5.6 We note that co-ordinate bench in the case of Texas Instruments (India) Pvt. Ltd. Vs. Addl. CIT as reported in [2020] 115 taxmann.com 154 have considered an identical situation by observing as under.
“18. We have heard the submissions of the learned counsel for the Assessee and the learned DR. The provisions of Sec.32(1)(iia) of the Act based on which the additional depreciation was claimed by the Assessee reads thus:
“Sec.32 Depreciation.
(1)In respect of depreciation of–
(i) buildings, machinery, plant or furniture, being tangible assets;
(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,
owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed–
(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;
(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed:
“(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to twenty per cent. of the actual cost of such machinery or plant shall be allowed as deduction under clause(ii):”
19A. A bare reading of the aforesaid provisions shows that the new machinery or plant should be used by an assessee engaged in the business of manufacture or production of any article or thing and the new machinery or plant need not be used in manufacture or production of any article or thing. The learned counsel has before us relied on the decision of the Hon’ble Madras High Court High Court in the case of CIT Vs. VTM Ltd.319 ITR 336 (Madras) wherein the assessee-company was engaged in the business of manufacture of textile goods. During the relevant assessment year, it had set up a wind mill for generation of power and claimed additional depreciation thereon under section 32(1)( iia). The IT(TP)A No.169 & 149/Bang/2014 Assessing Officer disallowed the claim on the ground that the assessee was engaged only in the manufacture of textile goods and the setting up of a wind mill had absolutely no connection with the manufacture of textile goods. However, the Commissioner (Appeals) as well as the Tribunal allowed the assessee’s claim of additional depreciation. On appeal to the High Court, the Hon’ble High Court held that for application of section 32(1)(iia) what is required to be satisfied in order to claim the additional depreciation is that a new machinery or plant, which has been set up, should have been acquired and installed after 31-3-2002 by an assessee, who was already engaged in the business of manufacture or production of any article or thing. The said provision does not state that the setting up of a new machinery or plant, which was acquired and installed after 313-2002 should have any operational connectivity to the article or thing that was already being manufactured by the assessee. Therefore, the contention that the setting up of a windmill had nothing to do with the manufacture of textile goods was totally not germane to the specific provision contained in section 32(1)(iia ). In the light of the aforesaid decision, we are of the view that one of the basis on which the revenue authorities disallowed the claim of the Assessee for disallowance of additional depreciation cannot be sustained.
20. As far as the question whether the assets on which the Assessee claimed additional depreciation should be regarded as “Plant” or “Office Equipment”, we do not find sufficient material before the revenue authorities to come to a conclusion one way or the other. The learned counsel for the Assessee submitted in the course of his arguments that the assets on which additional depreciation is claimed were used for testing process while designing semi-conductors which was also a business which the Assessee was carrying on. These details have not been brought on record by the Assessee before the lower authorities nor before us. He also IT(TP)A No.169 & 149/Bang/2014 placed reliance on the decision of the Hon’ble Bombay High Court in the case of CIT Vs. IBM World Trade Corpn. (1981) 130 ITR 739 (Bombay) wherein the Hon’ble Bombay High Court held the expression “office equipment” used in Sec.33 should be construed in context of appliances which are generally used in office as an aid for proper function of office and that EA machines, data processing machines installation and operation of which is on scientific basis, and which has their roles to play cannot be equated with office appliances and therefore such machines are “Plant” and not “Office appliances”. As we have already observed there is complete lack of details to decide whether the assets in question are “Plant” or “Office equipment” in the absence of the role these assets perform and purpose for which these assets are used by the Assessee. We therefore set aside the order of CIT(A) on this limited issue of determining whether the assets on which additional depreciation is claimed by the Assessee can be regarded as Plant. The Assessee is directed to furnish the details and description to the AO in this regard, who shall decide the issue afresh in accordance with law, after affording Assessee opportunity of being heard. In the event of the AO coming to the conclusion that the assets in question are in the nature of plant, the claim for additional depreciation should be allowed. With these observations we allow the relevant grounds of appeal for statistical purpose.”
5.7 From the above, we note that it was a case of windmill for generation of power wherein additional depreciation was claimed by assessee. The Assessing Officer therein disallowed the claim on the ground that assessee was engaged only in manufacture of textile goods and setting up of windmill had no connection with the manufacture of textile goods.
5.8 We note that assessee is already claiming 60% depreciation on the computers which are used for the purpose of business and in rendering of software development services to its associated enterprises. We note that the Ld.AO granted depreciation as per the provisions u/s. 43(3) read that Rule 5 as well as appendix-1 has been granted.
5.9 The assets eligible for additional depreciation must be plant or machinery. Also that such plant or machinery should not be installed in any office premises or residential accommodation. We note that the development activity carried on by the assessee cannot be considered to be a manufacturing activity. Accordingly, relying on the decision of Hon’ble Bombay High Court in case of CIT vs. IBM World Trade Corporation reported in (1981) 130 ITR 739, we do not find any infirmity in the disallowance of additional depreciation to assessee. However, the alternative plea to allow the deprecation in the subsequent assessment year on the enhanced WDV of block of assets at the prevailing rates cannot be denied.
Accordingly, we allow the additional ground raised by assessee and dismiss the Ground no. 3.
6. Ground no. 4 – The Ld.AR has submitted that assessee has been Rs. 15,77,889/- toward CSR activities. It has been submitted that donations were made to eligible institutions and deduction u/s. 80G was claimed to an extent of Rs. 7,71,505/-that pertained to such donations. It has also been submitted by Ld.AR that assessee has suo moto disallowed the said expenditure u/s. 37(1) of the Act for the year under consideration which is clear from pages 103-104 of the paper book. He placed reliance on the decision of co-ordinate bench of this Tribunal in the case of First American (India) Pvt. Ltd. vs. ACIT in ITA No. 1762/Bang/2019 by order dated 29.04.2020.
The Ld.Sr.DR placed reliance on the orders passed by authorities below. We have perused the submissions advanced by both sides.
6.1 We note that assessee has suo moto disallowed the expenditure towards the CSR responsibilities u/s. 37(1) of the Act and claimed deduction u/s. 80G to the extent of donations paid to eligible charitable institutions. The observations of co-ordinate bench of this Tribunal in case of First American (India) Pvt. Ltd. vs. ACIT (supra) on the same issue is as under.
“15. In our view, expenditure incurred under section 30 to 36 are claimed while computing income under the head, ‘Income form Business and Profession”, where as monies spent under section 80G are claimed while computing “Total Taxable income” in the hands of assessee. The point of claim under these provisions are different.
16. Further, intention of legislature is very clear and unambiguous, since expenditure incurred under section 30 to 36 are excluded from Explanation 2 to section 37(1) of the Act, they are specifically excluded in clarification issued. There is no restriction on an expenditure being claimed under above sections to be exempt, as long as it satisfies necessary conditions under section 30 to 36 of the Act, for computing income under the head, “Income from Business and Profession”.
17. For claiming benefit under section 80G, deductions are considered at the stage of computing “Total taxable income”. Even if any payments under section 80G forms part of CSR payments( keeping in mind ineligible deduction expressly provided, the same would already stand excluded while computing, Income under the head, “Income form Business and Profession”. The effect of such disallowance would lead to increase in Business income. Thereafter benefit accruing to assessee under Chapter VIA for computing “Total Taxable Income” cannot be denied to assessee, subject to fulfillment of necessary conditions therein.
18. We therefore do not agree with arguments advanced by Ld.Sr.DR.
19. In present facts of case, Ld.AR submitted that all payments forming part of CSR does not form part of profit and loss account for computing Income under the head, “Income from Business and Profession”. It has been submitted that some payments forming part of CSR were claimed as deduction under section 80G of the Act, for computing “Total taxable income”, which has been disallowed by authorities below. In our view, assessee cannot be denied the benefit of claim under Chapter VI A, which is considered for computing ‘Total Taxable Income”. If assessee is denied this benefit, merely because such payment forms part of CSR, would lead to double disallowance, which is not the intention of Legislature.
20. On the basis of above discussion, in our view, authorities below have erred in denying claim of assessee under section 80G of the Act. We also note that authorities below have not verified nature of payments qualifying exemption under section 80G of the Act and quantum of eligibility as per section 80G(1) of the Act.
21. Under such circumstances, we are remitting the issue back to Ld.AO for verifying conditions necessary to claim deduction under section 80G of the Act. Assessee is directed to file all requisite details in order to substantiate its calim before Ld.AO. Ld.AO is then directed to grant deduction to the extent of eligibility.”
6.2 Respectfully following the above view, we direct the Ld.AO verify the payments made by assessee towards CSR that also forms part of deduction u/s. 80G. Ld.AO shall then grant the deduction claimed u/s. 80G of the Act in accordance with law.
Accordingly, this ground raised by assessee stands allowed for statistical purposes.
7. Ground no. 5 is consequential in nature and therefore do not require adjudication.
8. Ground no. 6 is general in nature.
Accordingly, the appeal filed by assessee stands partly allowed. In the result, the appeal filed by assessee stands partly allowed.
Order pronounced in the open court on 30th November, 2021.
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