Existing hardware/software maintenance expense is revenue expense

DCIT Vs Gujarat Industries Power Co. Ltd (ITAT Ahmedabad)

Facts- The main issues/ grounds that are to be considered in the present appeals are –

1. Disallowance of corporate debt restructuring expenses;

2. Disallowance on upgradation of software expenses;

3. Loss due to foreign exchange difference rate.

Conclusion- With regard to disallowance of corporate debt restructuring expenses it is held that this issue is been settled by the judgement of the honourable Supreme Court in the case of India cements Ltd wearing it is held that loan is not an asset or a advantage of enduring nature and expenditure incurred in connection with obtaining loan is not capital expenditure.

With regard to disallowance on upgradation of software expenses it is held that as per jurisdictional High Court in the case of CIT -Vs- N.J. India Invest (P.) Ltd. Expenditure on maintenance, back-up and support services to existing hardware and software is revenue in nature, and therefore allow the expenditure as revenue in nature.

With regard to loss due to foreign exchange difference rate it is held that the issue is directly covered by the judgment of Hon’ble Delhi High Court in the case of CIT Vs. Industrial Financial Corporation of India Ltd., wherein it has been held that where the assessee enters into a contract for purchase of foreign currency on a future date at pre-determined rates, the difference between the forward contract rate and exchange rate on the date of entering into contract has to be recognized as income or expenses, which ascertained and definite in terms of contract and would be alone as business expenditure in the year of entering into forward contract itself, though as per the contract part payment is to be succeeding year.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

This is a bunch of four appeals filed by the Revenue and assessee and cross objection filed by the assessee. The details are as under:

2. The issues involved in these appeals are recurring in nature for all the assessment years, since for the sake of brevity ITA No. 1770/Ahd/2012 and CO No. 173/Ahd/2012 relevant to the Asst. Year 2004-05 is taken as lead case for disposal of the above batch of appeals.

3. The grounds of appeal raised by Revenue in ITA No. 1770/Ahd/2012 for A.Y. 2004-05 read as under:

“1. On the facts and in the circumstances of the case and in law, the Ld.CIT(Appeals) erred in deleting the addition of Rs.19,33,23,390/- (net of depreciation) made on account of capital expenditure. The Id.CIT(A) erred in not appreciating the fact that huge expenditure incurred towards spare parts which extended the life time of the machinery. Reliance is placed on the decision in the case of Ballimal Naval Kishor vs.CIT 222 ITR 414 (SC) and the Supreme Court decision m the case of CIT vs Saravana Spinning Mills Pvt.Ltd. (2007) 293 ITR 201 (SC)

2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition of Rs.18,31,26,525/- on account of Corporate Debt Restructuring (CDR) expenses as capital expenditure. The Id.CIT(A) erred in not-appreciating that the assessee has derived all the benefits in the form of restricting of the debt repayment, more convenient and easy rescheduled time-frame for repayments, reduction in interest rates, etc. over a long period of time, i.e. the assessee has derived benefit or advantage of enduring nature on account of the Corporate Debt Restructuring expenses (CDR) exercise, and as such the expenditure is capital in nature.

3. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in restricting the addition to Rs. 16.01 crores, being the amount of TDS on the total delayed payment charges as per TDS certificates, for the purpose of section 115JB as well as normal provisions of the Act for the year under appeal instead of the corresponding income of Rs. 78.10 crores without appreciating that the assessee is following mercantile system of accounting and that the assessee itself has offered the entire amount of Rs.78.10 crores as income under normal provisions only (and not under the provisions of section 115JB of the Act) in its revised return of income.

4. The appellant craves leave to add to amend or alter the above grounds as may be deemed necessary.

Relief Claimed in Appeal.

The order of the CIT(Appeals) on the above issue may be set aside and that of the Assessing Officer be restored.”

4. The grounds of appeal raised by assessee in cross objection (CO No. 173/Ahd/2012 in ITA No.1770/Ahd/2012) for A.Y. 2004-05 read as under:

“1. The learned Commissioner of Income Tax (Appeals) – I, Baroda [“the CIT(A)”] erred in fact and in law in confirming the action of the Assistant Commissioner of Income Tax, Circle – 1(1), Baroda [“the AO”] in making addition of Rs. 1,58,585 (net of depreciation) being expenses incurred on software on the ground that the same are capital in nature.

2. Without prejudice to above, the learned CIT(A) erred in fact and in law in confirming the action of the AO in allowing depreciation @ 25 % instead of 60 % on the software expenses treated as capital in nature.

3. The learned CIT(A) erred in fact and in law in confirming the action of the AO in making addition u/s. 14A of the Act.

4. The learned CIT(A) erred in fact and in law in enhancing the addition u/s. 14A to Rs. 8,97,194.

5. The learned CIT(A) erred in fact and in law in confirming the action of the AO in disallowing depreciation on MD’s residence amounting to Rs.4,36,389/-

Book Profits U/s. 115JB:

1. The learned CIT(A) erred in fact and in law in confirming the action of the AO to the extent of making addition of Rs.16,01,04,788 being delayed payment charges to the book profits computed u/s. 115JB of the Act.

0. The learned AO erred in fact and in law in charging interest u/s. 234B on the addition made on account of provision for deferred tax amounting to Rs.41,60,67,000 in the book profits u/s. 115JB despite the fact that the addition was made in view of retrospective amendment in section 115JB by the Finance Act, 2008 whereas the Assessee had filed the return of income on 1-11-2004”

5. As against the Grounds of Appeal raised by both parties, five issues/disallowances were already considered by this Tribunal in ITA No.3003/Ahd/2010 & ors. relating to A.Ys. 2003-04 & ors., vide order dated 28.02.2022. It is being agreed by both the parties that those four issues are already covered in assessee’s own case in ITA No.3003/Ahd/2010. Similarly, issue regarding disallowance under s.14A of the Act in computation of book profit under s.115JB of the Act is the issue considered by the Tribunal in ITA No.472/AHD/2013 & Others vide order dated 13-04-2022 relating to assessee’s own case for the Asst. Year 2009-10. Thus the recurring issues considered by this Tribunal in assessee’s own case for other Asst. Years are as follows:

(i) Replacement of parts of machines treated as capital expenditure;

(ii) Disallowance under s.14A

(iii) Disallowance under s.14A In computation of Book Profit u/s. 115JB

(iv) claim of deduction under 43B

(v) depreciation on Managing Director’s residence.

6. New issues/Grounds that is required for consideration in the present appeals for the Assessment Years 2004-05 & 2005­06 are

(vi) Disallowance of Corporate Debt Restructuring Expenses

(vii) Additions under section 115 JB on account of TDS on delayed payment charges

(viii) Disallowance on upgradation of software expenses

(ix) Charging of interest under section 234B on book Profits u/s. 115JB

(x) Loss due to foreign exchange difference rate

7. As the first five issues are being covered in assessee’s own case in ITA No. 3003/Ahd/2010 & ors. relating to A.Ys. 2003­04 & ors., dated 28.02.2022. The findings of the same had been reproduced hereunder:

“14. Issue No.1 regarding Replacement of parts in machineries treated as capital in nature. The Ld AR Mr. Milan Met ha appearing for the assessee submission is of two folds [a] that the Accounting method or accounting treatment whether statutorily prescribed under any law or otherwise cannot override the provisions of the Income Tax Act. Further Classification of items in the books is not relevant for deciding the treatment of such items while computing taxable income as held by the Hon’ble Supreme Court in the case of Kedarnath Jute Manufacturing Co Ltd – 82 ITR 363. Thus the book entries are not conclusive for determining the nature of expenditure. The provisions of law prevail over the book entries. Accordingly, consumption of spares being only replacement of spare parts would qualify under the head “current repairs” and treated as Revenue Expenditure. The Ld AR submitted before the Bench a “Technical Write Up” about the machinery and also details of spares consumed at regular intervals for various assessment years as follows:

Technical Write up

Stage # 1 Bucket Kit- General Electric, USA- G.E.Fr.6 Gas Turbine G.E.Fr.6 (ms6001B) Gas Turbine is 3 Stage turbine having set of Nozzle, Bucket and Shroud in each stage. Bucket set is assembled on turbine rotor in inverted fur-tree slots provided on rotor.

Stage # 2 Bucket Kit consists of 92 buckets which when assembled on the rotor forms a series like wheel. The basic function of Buckets is to convert the heat energy of hot flue gases in to mechanical energy and thereby driving the coupled generator, which generates the POWER.

Stage # 3 Due to high working temperature of around 800′ C and high speed of the turbine (5100 RPM), this component is the most critical in the turbine and failure of this component may lead to catastrophic damage to the machine. The buckets are designed with special profile of airfoil cross section for efficient energy conversion. It is manufactured using precision investment casing process using GTD-1 11 material, which is General Electric. USA proprietary material.

To overcome very high operating temperature, Buckets are coated with proprietary Thermal Barrier Coating (TBC)-GT FN33 and designed with cooling provision.

Because of the above specialties, buckets are designed and manufactured as per General Electric, USA proprietary material and process under very stringent quality control and tests.

For a power generating company, these spares are in the nature of consumables spares only notwithstanding its high cost. It is also to be submitted that the Original Equipment Manufacturer which in the case of the assessee company is BHEL / General Electric, USA have very categorically prescribed the operating life of the above bucket which helps to ensure trouble free operation and to avoid any catastrophic damage to the machine. Further it is also to be stated that by replacement of the buckets on completion of 48000 hours of continuous operation the power generation capacity is neither increased nor is the power plant efficiency or life of the plant gets increased. The cost of the Gas Turbine parts such as Buckets and Nozzles are high primary due to very special metallurgy and manufacturing process provided by the manufacturer viz. General Electric. USA. The landed cost to the assessee company also increases as the same is required to be imported and thus attracts custom duty, air freight, insurance etc.

The details of spares consumed at regular intervals for various Asst. years is as under:

14.1. The second fold of argument of the Ld. Counsel for the assessee is that the spares consumed during the year under the consideration does not give enduring benefit to the assessee nor it increases the life or capacity of the machines and therefore are in nature of current repairs allowable as revenue expenditure. The assessee being in the business of generation and distribution of power requires specialized machines for generating power. Some of the parts of the machines require replacement from time to time on being used for fixed number of hours. The number of hours after which the machines are to be replaced are prescribed by the original equipment manufacturer (OEM). As soon as the machines complete the prescribed number of firing hours, the same are replaced. Thus the replacement is of parts of machines and not the entire machinery. The classification of spares in the books is not relevant for determining taxability of such items as per Income Tax Act. Further the consumption of spares is 0.50% of the net block of plant and machinery as on 31.03.2005. Every year such expenditure is required to be incurred with regularity considering the nature of business.

14.2. In support of this contention the Ld AR further submitted that this issue is squarely covered by the decision of the co­ordinate Benches of ITAT, Hyderabad in the case of DCIT -Vs- AP Gas Power Corporation Ltd reported in 2014 [ID2]-GJX-0224-THYD wherein after detailed discussion of Supreme Courts and other Judgements held as follows:

“… … 15. We have heard the submissions of the parties and perused the orders of the revenue authorities as well as other materials placed on record. It is quite evident from the facts emanating from record that the expenditure incurred of Rs.20,21,46,278/- which is subject matter of disallowance was towards repair/replacement of nozzles, buckets, shrouds, bearings, pieces and combustion liners which are parts of the three gas turbines utilized for generating power. It is also a fact that the power generation plant consists of two systems i.e., gas turbines and generating unit. As can be noticed from the process of generation of power as discussed by the CIT(A) in his order, there is no intermediate product in the generation of power. It is also a fact on record that the replaced/repaired parts were relating to three gas turbines. A book let submitted by the assessee regarding operation and maintenance of heavy duty gas turbine clearly shows that a well planned maintenance programme is required for getting the maximum equipment availability and optimization of maintenance costs. The said book let further specifically notifies the parts which require careful attention and maintenance are those associated with the combustion process together with those exposed to the hot gases discharged from the combustion system. This include combustion liners, end caps, fuel nozzles assemblies, cross fire tubes, transition pieces, turbine nozzles, turbine stationery shrouds and turbine buckets. The said book let mentions about periodic inspection and repair/refurbish/replacement of the aforesaid parts of the gas turbine. It also mentions that when the parts are not repairable, they are to be replaced. From this, it is very much clear that the entire gas turbines are not replaced but some of its parts are either repaired or replaced as per the maintenance requirement. It is to be noted from the detailed discussion made by the CIT(A) that the assessee has submitted the details of periodic inspection to be made as recommended by the equipment manufacturer. Further it is a fact to be taken note of that the assessee has been claiming such expenditure towards replacement of nozzle, shrouds, buckets etc., from the F.Y. 1998-99 and all along the department has allowed such expenditure. This fact has not been controverted by the learned D.R. It is also a fact that out of the total block of the assets relating to gas turbines of Rs.517 crores, the repair and maintenance to the extent of Rs.20,21,46,278/-. Therefore, considering the quantum of expenditure, it cannot be said that there is replacement of the entire gas turbine so as to bring into existence a completely new asset resulting in enduring benefit to the assessee. It is a further fact on record that the assessee’s contention that there is no enhancement of capacity of the gas turbines or generation of power after replacement/repair of the part of the gas turbines remains uncontroverted.

Therefore, in the aforesaid circumstances, it cannot be said that the expenditure incurred by the assessee in repair/replacement of the parts of the gas turbine, has resulted in bringing into existence of an asset of enduring benefit to the assessee so as to treat it as capital expenditure. So far as the decision in the case of CIT V/s. Saravana Spinning Mills (supra) is concerned, the CIT(A) has clearly brought out the distinguishing features. It is to be noted that in the case of CIT V/s. Saravana Spinning Mills, there is a clear observation of the Hon’ble Supreme Court that the Textile Plant consists of different departments having its own independent plants and machinery which produce different intermediate products. However, in the case of the assessee there is no such intermediate products which requires independent and separate plants and machinery. On the contrary, what the assessee has replaced is certain parts of the gas turbines and the gas turbines as a whole have not been replaced. Therefore, in this context the observation made by the Hon’ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills rather favours the assessee. Because the Hon’ble Supreme court in the said decision has held that when certain parts of a air conditioner or a T.V. is replaced, it does not amount to replacement of entire unit. Therefore, applying the same logic to the facts of the assessee’s case, it can be said that there is no replacement of the gas turbine as a whole but certain repair and replacement to some of the parts of the gas turbine, which does not result in bringing into existence a new asset of enduring nature, rather, the repair and maintenance are of recurring nature and essentially required for smooth running of business of the assessee i.e, generation of power. The other decision of the Hon’ble Supreme Court relied upon by the learned D.R. in the case of CIT V/s. Sri Man gayarkarasi Mills (P) Ltd. 315 ITR 114 also following the decision in the case of CIT V/s. Saravana Spinning Mills (supra), has laid down the same proposition of law. On the other hand, the decisions relied upon by the assessee as noted in the order of the CIT(A) clearly supports the view that the expenditure incurred by the assessee cannot be treated as capital expenditure. In the aforesaid view of the matter, we do not find any reason to interfere with the findings of the CIT(A) in this regard. We therefore, confirm the order of the CIT(A) and direct the Assessing Officer to delete the addition made on account of disallowance of expenditure to the tune of Rs.20,21,46,278/-.

14.3. Per contra the Ld DR appearing for the Revenue could not bring any contrary view on the above preposition but however contented that when the assessee itself claimed the above expenses in its books of account as “Capital” now cannot claim the same as “Revenue” and relied upon the order passed by the Assessing Officer and prayed for confirming the addition since it is recurring in nature.

15. We have given our thoughtful consideration on the materials placed before us namely Technical Write Up, Details of spares consumed at regular intervals for various Asst. years and the case laws relied by the assessee. We need not labour ourself in coming to a conclusion that the Replacement of parts in machineries treated as Not Capital but “Revenue” in nature for the following reasons:

a. For a power generating company, these bucket spares are in the nature of consumables spares only notwithstanding its high cost.

b. The buckets are designed with special profile of airfoil cross section for efficient energy conversion.

c. Due to high working temperature of around 800′ C and high speed of the turbine (5100 RPM), this component is the most critical in the turbine and failure of this component may lead to catastrophic damage to the machine.

d. It is also seen from the Original Equipment Manufacturer namely BHEL/General Electric, USA have very categorically prescribed the operating life of the above bucket which helps to ensure trouble free operation and to avoid any catastrophic damage to the machine.

e. Further it is also stated that by replacement of the buckets on completion of 48000 hours of continuous operation the power generation capacity is neither increased nor is the power plant efficiency or life of the plant gets increased.

f. The cost of the Gas Turbine parts such as Buckets and Nozzles are high primary due to very special metallurgy and manufacturing process provided by the manufacturer out side India and the assessee company procures the same by import and thus attracts custom duty, air freight, insurance etc.

g. Further the replacement of parts is Capital or Revenue is No more Res integra based on the observation made by the Hon’ble Supreme Court in the case of CIT V/s. Saravana Spinning Mills and CIT V/s. Sri Man gayarkarasi Mills (P) Ltd. 315 ITR 114 wherein held that when certain parts of an air-conditioner or a T.V. is replaced, it does not amount to replacement of entire unit.

h. Thus this issue is already dealt by the co-ordinate Benches of ITAT, Hyderabad in the case of DCIT -Vs- AP Gas Power Corporation Ltd wherein after detailed discussion held that expenditure incurred by the assessee cannot be treated as capital expenditure but Revenue expenditure only.

i. Thus, applying the same logic to the facts of the assessee ’s case, it can be said that there is no replacement of the gas turbine as a whole but certain repair and replacement to some of the parts of the gas turbine, which does not result in bringing into existence a new asset of enduring nature, rather, the repair and maintenance are of recurring nature and essentially required for smooth running of business of the assessee i.e, generation of power.

j. Therefore we have no hesitation in holding that the replacement of spares in the machineries would be allowable as Revenue expenditure only and addition made by the AO is directed to be deleted. Thus the Department ground is rejected.

20. Issue No.3 relates to disallowance under Section 14A of the Act. The Ld Counsel for the assessee submitted that the assessee disclosed tax free income of Rs.65,36,070/-, comprising of dividend income and interest on tax free bond. However there were no administrative expenses were incurred since the tax free income was essentially passive income requiring no efforts on the part of the assessee. The next part namely of financial expenses are concerned the assessee submitted it had not made any investments during the year in the assets yielding the tax free income. The adhoc disallowance of 10% on the exempt income under S.14A of the Act made by the AO is against law and the CIT[A] is also not correct in directing to adopt Rule 8D, since the assessment years are prior to the introduction Rule 8D. In the absence of any administrative expenses and no barrowed funds for such investments, the question of disallowance u/s.14A is unwarrented.

21. Per contra the Ld DR appearing for the Revenue accepted that many rulings by various Court on this issue and however supported the orders of the lower authorities.

22. We have given our thoughtful consideration on the materials placed before us, the issue is now settled by the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. -Vs- Commissioner of Income Tax, New Delhi reported in [2018] 91 taxmann.com 154 (SC) wherein it clearly held that Rule 8D is prospective in nature and could not have been made applicable in respect of assessment years prior to 2007 when this rule was inserted w.e.f. March 24, 2008 vide Income Tax (Fifth Amendment) Rules, 2008. Further jurisdictional High Court in the case of Principal Commissioner of Income-tax-4 -Vs- Sintex Industries Ltd. reported [2017] 82 taxmann.com 171 (Gujarat) wherein it is clearly held that the Expenditure incurred in relation to income not includible in total income (Administrative expenses) – Whether where assessee already had its own surplus fund against which minor investment was made, no question of making any disallowance of expenditure in respect of interest and administrative expenses under section 14A arose and, therefore, there was no question of any estimation of expenditure in respect of interest and administrative expenses under rule 8D. Further the Hon’ble Court referred the another decision in the case of Pr. CIT v. India Gelatine & Chemicals Ltd. [2015] 376 ITR 553/[2016] 66 taxmann.com 356 wherein it is observed that when the assessee had sufficient interest-free funds out of which concerned investments had been made, disallowance under Section 14A is not justified. Thus we clear in our mind the direction given by the Ld CIT[A] to apply Rule 8D is not proper and there being the surplus funds were invested by the assessee and there were no administrative expenses, the disallowance made u/s.14A is unwarranted and liable to be deleted. Thus the Cross Objection filed by the assessee is allowed by deleting the addition made u/s.14A of the Act.

23. . Issue No. 4 relates to depreciation on building used for Managing Director’s residence. Ld AR submitted that as per the depreciation chart in the tax audit report, an addition of Rs.87,27,750/- on account of GIPCL House under the head factory building. The assessee claimed MD’s house is residence-cum-office building is used for the purpose of residence/office of the Managing Director and he discharges his official duties 365 days for official meetings, therefore the rate of depreciation of 10% is claimed by the assessee. Per Contra the Ld DR relied on the orders of the Lower Authorities.

24. We have given our thoughtful consideration on the materials placed before us, as the building is used for official-cum-residential purpose by the Managing Director, with all office facilities we find that 10% depreciation can be granted on this Building and direct the AO to allow the same. Accordingly the CO filed on this ground is allowed.

25. Issue No.5 relates to disallowance of contribution made to various organizations: The assessee claimed payment of Rs.2,00,000/= to SVADES, Rs.95,65,559/= to DEEP and Rs.15,36,500/= to various NGOs the same were disallowed by the AO. But the Ld CIT[A] granted relief in cases were the assessee has submitted Certificate of Registration of 80G in respect of payments made to SVADES and DEEP and balance amount was confirmed.

26. In our considered view the CIT[A] has granted appropriate relief to the assessee, which does not require any further inference. Accordingly the CO filed on this ground is dismissed.

27. Issue No.6 relates to claim of disallowance under S.43B of the Act. The learned CIT(A) by his detailed order has held that the AO was correct in not allowing the deduction of interest amounting to Rs.2,49,82,597/-. However, the AO is directed to allow this as a deduction in AY 2008-09. Similarly, the interest payment disallowed in the earlier year, which was actually paid in the PY corresponding to AY 2007-08 should be allowed as deducting in this year.

28. In our considered view the CIT[A] has granted appropriate relief to the assessee, which does not require any further inference. Accordingly the CO filed on this ground is dismissed.”

8. Thus, the above five issues [though differently numbered] are covered by assessee’s own case which is admitted by both the parties. Now we proceed with the remaining five issues.

9. Disallowance of Corporate Debt Restructuring Expenses, this expenses were incurred by the assessee towards resettling of interest rate and for restructuring debt. The assessee also paid fees to consult in respect of restructuring. The assessing officer disallowed the restructuring expenses on the ground the assessee has derailed benefit of enduring in nature which is not revenue expenditure. The assessee submitted on negotiation of interest rate and term loans from IDBI Bank and restructured its debts payment schedule. As a result of restructuring activity no asset comes into existence nor it leads to improvement of efficiency or productivity of any existing assets. There is no increase in capital, production capacity remains the same. Thus the assessee relied upon Supreme Court judgement in the case of India cements Ltd’s 60 ITR 52, CIT versus GSFC 358 ITR 323 Gujarat, and other decisions on similar lines and claimed that the AO is not correct in making the disallowance.

10. We have given our thoughtful consideration and perused the material available on record. This issue is been settled by the judgement of the honourable Supreme Court in the case of India cements Ltd wearing it is held that loan is not an asset or a advantage of enduring nature and expenditure incurred in connection with obtaining loan is not capital expenditure. Further in the case of Compton engineering Co Ltd 242 ITR 317 honourable Madras High Court held that professional fee paid to management consultant for comprehensive restructuring of business could not be treated as capital expenditure, since the report was not for the purpose of any new business, but for efficient carrying on of existing business. Further it is a fact that out of Rs.17.3 crore of total resetting premium paid, as recovery was made from the assessee to the extent of Rs.14.62 crores in the financial year 2004-05 onwards and credited to sales account. This also shows that resetting premium paid was on revenue account. This the assessing officer contention that by incurring expenses in question, the assessee derailed benefit of enduring nature is not tenable in view of the decision of the hon’ble Supreme Court in the case of India cements Ltd., thus addition made by the assessing officer is hereby deleted and expenditure is to be treated only Revenue in nature. Thus issue no. vi is allowed in favour of the assessee.

11. Additions under section 115 JB on account of TDS on this delayed payment charges. The assessee charged interest to Gujarat Electricity Board [GEB] on account of delayed payments for the period 1-4-2003 to 31-3-2004 a sum of rupees 78.09 crores. The matter was referred to high-power committee by GEB. On 11-06-2004, after finalisation of accounts. The TDS Certificate received from GEB wherein GEB deducted TDS to the tune of Rs.16.01 crores on late payment charges of Rs.78.09 crores, the assessee offered this Rs.16.01 crore actually received and no change made in 115 JB profits as the accounts where already finalised. Therefore roof revise return filed on 31-03-2006 offering entire amount of Rs. 78.09 crores to tax under normal solutions leaving the book profit under section 115 JB unchanged, where the assessing officer added this 78.09 crores in the book profit under section 115 JB.

12. The ld CIT[A] deleted the addition by passing a detailed speaking order which is as follows:

“13.2 I have considered facts of the case and appellant’s submissions. In brief, facts of the matter are that erstwhile GEB (now GUVNL) created provision of interest towards delayed payment charges (DPC) of Rs.78.1 crore in favour of appellant on 31.3.2004, on which tax of Rs.16.01 crore was deducted at source and deposited to the credit of Government. On being informed about this in June, 2004, appellant included the tax deducted at source of Rs.16.01 crore as its income under normal provisions of the Act and filed return of income accordingly. Appellant did not include such amount of Rs.16.01 crore in its book profits u/s.115JB. On getting only proportionate credit of tax at source i.e. Rs.3.28 crore u/s. 143(1), appellant revised its return of income for A.Y.2004-05 on 31.3.2006 to include entire amount of Rs.78.1 crore, being delayed payment charge receivable from GEB as its income under the normal provisions of Act. In the revised return filed, appellant did not include the delayed payment charges of Rs.78.1 crore or for that matter even TDS of Rs.16.01 crore in the book profit u/s.115JB on the plea that its accounts were prepared in accordance with Part II and Part III to Schedule VI of the Companies’ Act & accounting standards applicable there under and net profit shown in the profit and loss account could be altered only for prescribed items of adjustments specified in that section. Reliance was placed on decision in the case of Apollo Tyres Ltd. vs. CIT 255 ITR 273 (SC) in this regard. Decision in the case of Apollo Tyres (supra) was in the context of section 115J and not section 115JB. In the case of Sumer Builders Pvt. Ltd. (2012) 19 taxman.com 43 (Mumbai), distinction was drawn between provisions of section 115J and provisions ‘of section 115JB and it was held that u/s.115JB, AO has powers to go behind accounts of a company and see as to whether same have been prepared in accordance with requirements of Part II and Part III of Schedule VI of the Companies’ Act, 1956. Relevant portion of the decision is as under:-

“When one compare the provisions of section 115J as to the requirement of the preparation of accounts, it can be seen that originally the requirement was only limited that accounts shall be prepared in accordance with the provisions of Part II and Part III of Schedule VI of the Companies Act, 1956. But this requirement has been enlarged under section 115JB. As per the 1st proviso the requirement is that while preparing the accounts it should be ensured that Accounting Policies and Accounting Standard etc., adopted for preparing the accounts shall be the same as per the accounts laid down before the company in its annual general meeting. As per the second proviso it has been provided that if the company has adopted the financial year which is different from the previous year, then it should be ensured that while adopting such accounts same Accounting Policies and Accounting Standard etc. are followed. Thus, the Act has recognized that there may be cases where financial year of the company may be different from the previous year and if the financial accounts are adopted in the previous year then such accounts must have similar Accounting Policies and Accounting Standard etc. (Para 9)

Now, who is going to check this aspect ? Obviously, the Registrar of Companies is not concerned with these aspects whether accounts adopted for the previous year are same or not because the Registrar of Companies at best is concerned whether the accounts adopted and laid before the annual general meeting are in accordance with the requirements of Part II and Part III of Schedule VI of the Companies Act, 1956. Therefore, in view of these enlarged requirements, it is held that Assessing Officer has powers to go behind the accounts and see whether same have been prepared in accordance with the requirements of Part II and Part III of Schedule VI of the Companies Act, 1956. (Para 10)”

Further, Special Bench of ITAT in the case of Rain Commodities Ltd. (2010) 131 TTJ 514 (Hyd) held that the Assessing Officer has power to alter net profit for the purpose of section 115JB in two situations, firstly if it was discovered by him that profit and loss account was not drawn up in accordance with Part II & Part III of Schedule VI to the Companies’ Act and secondly if accounting policies & accounting standards were incorrectly adopted for preparation of profit and loss account laid before the annual general meeting. Appellant’s contention that for the purpose of section 115JB, no alteration at all, under any circumstances is permitted to the net profit arrived at in the accounts prepared in accordance with Parts II & III of Schedule VI of the Companies Act is therefore not tenable. As discussed henceforth, the profit & loss account placed before the AGM in appellant’s case was not as per its accounting policy of revenue recognition in respect of delayed payment charges. As per ‘Significant Accounting Policies’ contained in Schedule 21 of appellant’s Annual Report for 2003-04, delayed payment charges under Power Purchase Agreements were to be recognized as revenue, on grounds of prudence, as and when recovered. Tax of Rs.16.01 crore was deducted at source from provision of delayed payment charges of Rs.7.1 crores before 31.3.2004. Out of total delayed payment charges of Rs.78.1 crore, amount of Rs.16.01 crore was undisputedly recovered/received by appellant and should have been recognized as income of F.Y.2003-04 as per revenue recognition norms and accounting policies followed by appellant. The AGM took place much later, i.e. on 25.9.2004 and ample time was available with appellant to modify the accounts to be presented before the AGM by recognizing revenue of Rs.16.01 crore in accordance with appellant’s accounting policy on revenue recognition. However, appellant did not recognize delayed payment charges of Rs.16.01 crore in its P & L account. Since the accounts presented before the AGM were not prepared as per accounting policy on revenue recognition of delayed payment charges, it would be justified to alter net profit arrived at by the appellant by adding amount of Rs.16.01 crore, being delayed payment charges recovered to the book profit u/s.115JB. As far as balance amount out of Rs.78.1 crore is concerned, the same was not recovered and should not have been recognized as income/revenue in A.Y.2004-05 for the purpose of section 115JB as well as normal provisions of the Act. To sum up, it is held that in A.Y.2004-05, out of Rs.78.1 crore, only Rs.16.01 crore should have been included in the book profits u/s.115JB as well as in the income chargeable to tax under normal provisions of the Act. In view of above, addition to the book profit u/s.115JB is confirmed at Rs.16.01 crore out of Rs.78.1 crore and balance is deleted.

13.2.1 Another aspect of the matter (which is also raised by the AO) is regarding allowability of credit of entire tax deducted at source of Rs.16.01 crore in A.Y.2004-05. Assessing Officer referred to provisions of section 199 in this regard; however, ultimately held entire amount of Rs,78.1 crore as includible in book profits u/s.115JB for such alternate reasoning. As per section 199, as it stood before its amendment by Finance Act, 2008, credit for tax deducted at source is to given on production of TDS certificate in the assessment year for which income is assessable. It has been held above in para 13.2 above that out of Rs.78.1 crore, only Rs.16.01 crore is to be considered as income assessable in A.Y.2004-05. In A.Y.2006-07, appellant received partial claim of Rs.23 crore (out of DPC of Rs.78.1 crore) and included the same in book profits u/s.HSJB. Amount of Rs.23 crore was excluded by appellant from the taxable income of A.Y.2006-07 under normal provisions on the ground that Rs.78.1 crore in full had already been included in taxable income of A.Y.2004-05 as per normal provisions of the Act. Since only Rs.16.01 crore out of DPC of Rs.78.1 crore’hns been directed to be assessed as income of A.Y.2004-05 under normal provisions of the Act; consequently, in A.Y.2006-07, delayed payment charges of Rs.23 crore are directed to be assessed under normal provisions of the Act besides being included in book profits for the purpose of section 115JB. In accordance with section 199, credit to be allowed in A.Y.2004-05 out of tax deducted at source of Rs.16.01 crore would be on proportionate basis only. Credit of balance TDS out of Rs.16.01 crore is to be allowed on proportionate basis in A.Y.2005-07 & 2007-08, where remaining income was assessable and was in fact credited in the books of accounts also. In other words, credit of TDS of Rs.16.01 crore to be allowed in various assessment years would be Rs.3.2819 crore (16.01/78.1) in A. Y.2004-05, Rs. 4.7149 crore (23/78.1) in A.Y.2006-07 and remaining, i.e. Rs.8.0132 crore in A.Y.2007-08, subject to verification by the Assessing Officer of the calculations with reference to income assessable in each year.”

13. On going through the above facts and circumstances of the case we do not find any infirmity in the order passed by the ld.CIT[A]. Thus no interference is called for and we uphold the order passed by the ld CIT[A]. Thus issue no. (vii) is allowed in favour of the assessee.

14. Disallowance on upgradation of software expenses of Rs.1,58,585/-. The assessee incurred upgradation of software expenditure to integrate the internal communication system email to Lotus notes within the company. This expenditure has been incurred only for facilitating the trading operation leaving the fixes untouched. However the assessing officer has disallowed the above expenditure under treated as capital expenditure being enduring the nature. The ld CIT[A] also confirmed this addition after allowing Depreciation on this expenses.

15. Before us the Ld Counsel submitted that jurisdictional High Court in the case of CIT -Vs- N.J. India Invest (P.) Ltd. reported in [2013] 32 taxmann.com 367 (Gujarat) held that Expenditure on maintenance, back-up and support services to existing hardware and software is revenue in nature, and therefore allow the expenditure as revenue in nature. Per contra the Ld DR could not contravent this decision and could not produce any decision in favour of the Revenue. Therefore respectfully following the jurisdictional judgement in the case of the NJ India Invest P Ltd [cited supra] we allow this ground and delete the addition made by the AO. Thus issue no. (viii) is allowed in favour of the assessee.

16. Charging of interest under section 234B on book profits. The AO charged interest u/s.234B on addition made on account of provision for deferred tax amounting to Rs.41,60,67,000/= in the book profit u/s.115JB relying on restrospective amendment made in section 115JB by the Finance Act, 2008. This issue is squarly covered against the assessee by recent judgement of the Karnataka High Court judgement in the case of CIT -Vs- JSW Steel Ltd. reported in [2020] 121 taxmann.com 39 (Karnataka) as follows:

7. The Supreme Court in the case of Star India (P.) Ltd., supra has held that liability to pay interest arising on default is in the nature of quasi punishment and even though it is permissible for the legislature to retrospectively legislate yet, such retrospectivity is normally not permissible to create an offence retrospectively. It is true that the assessee could not have paid advance tax in case of a deferred tax liability in respect of Assessment Year 2005-06, when the amendment was brought into force in 2008. However, it is pertinent to mention here that clause (h) to second proviso to section 115JB(2) of the Act has been incorporated with effect from 1-4-2001. The retrospective operation of the aforesaid provision has not been challenged by the assessee and therefore, the aforesaid provision has to be given effect to. The Tribunal clearly acceded to its jurisdiction in holding that no interest could be levied under section 234B of the Act. In the result, the second substantial question of law is answered in favour of the revenue and against the assessee.

17. Respectfully following the above judgement in the case of the JSW Steel Ltd we reject this ground and the confirm the addition made by AO. Thus issue no. (ix) is allowed in favour of the Revenue.

18. Loss due to foreign exchange difference rate:

19. The assessee incurred a loss of Rs.21,26,000/- due to foreign exchange rate difference, which is a actual loss and not notional loss. The assessee-company itself availed foreign currency demand loan from various banks. As part of the terms and conditions all these FCDL loans the assessee was required to take forward contract in respect of these for repayment of the loans on the date of maturity. Difference between the exchange rate and the rate as per the forward contract was debited to the profit & loss account as foreign exchange loss. The AO has not accepted this loss. The ldAR claimed that the issue is directly covered by the judgment of Hon’ble Delhi High Court in the case of CIT Vs. Industrial Financial Corporation of India Ltd., reported in 185 taxmann.com 296 wherein it has been held that where the assessee enters into a contract for purchase of foreign currency on a future date at pre-determined rates, the difference between the forward contract rate and exchange rate on the date of entering into contract has to be recognized as income or expenses, which ascertained and definite in terms of contract and would be alone as business expenditure in the year of entering into forward contract itself, though as per the contract part payment is to be succeeding year.

20. Respectfully following the above judgments, we allow the grounds raised by the assessee. Thus, the issue no.(x) is allowed in favour of the assessee.

21. In the result, appeals and cross objection of the assessee are partly allowed, whereas the appeal of the Revenue also is partly allowed.

This Order pronounced in Open Court on 26/05/2022.