Case Law Details

Case Name : ACIT Vs. Nicholas Piramal India Ltd. (ITAT Mumbai)
Appeal Number : I.T.A. No. 1939/Mum/2005
Date of Judgement/Order : 16/09/2020
Related Assessment Year : 2001-2002
Courts : All ITAT (7317) ITAT Mumbai (2108)

ACIT Vs. Nicholas Piramal India Ltd. (ITAT Mumbai)

We notice that assessee has incurred consultancy charges to list the ‘ADR’ in ‘NYSE’ and later dropped this project. The AO treated the expenditure as capital and disallowed the same and simultaneously, invoked provision of section 40(a)(i) and 195 of the Act. We notice that in the similar situation, the Hon’ble Bombay High Court in the case of Nimbus Communications Ltd.(supra) has treated the capital expenditure of share issue expenses, which ultimately aborted public issue. The expenditure does not have enduring benefit to the assessee and allowed these expenses as revenue expenditure by relying on CIT vrs. Essar Oil Ltd. case (ITA No. 921 of 2006) dated 16.10.2008 since the issue before is similar. Therefore, the ground raised by revenue is accordingly.

FULL TEXT OF THE ITAT JUDGEMENT

The present appeal has been filed by the revenue against the order of Ld. Commissioner of Income Tax (Appeals)-XIX,  Mumbai in short ‘Ld. CIT(A)’ dated 31.12.2004 for AY 2001­02.

2. The brief facts of the case are, the assessee is engaged in the business of manufacturing and sale of pharmaceuticals. Assessee filed its return of income showing total income of Rs. 116,592,027/- and deemed income u/s 115JB of the Act at Rs. 646,930,776/- was filed on 31.10.01 alongwith audit report u/s 44AB, audited statement of accounts and director’s report for the year ended 31.03.2000. The return was processed u/s 143(1) on 28.02.03. Subsequently, the case was selected for scrutiny and notice u/s.143(2) and 142(1) of the I.T. Act, 1961 were issued and served upon the assessee. In response, assessee filed relevant information as called for and after considering the detailed submission of assessee, AO rejected the contention of assessee and made disallowance.

3. Aggrieved with the above order, assessee preferred appeal before Ld. CIT(A) and made the detailed submission before Ld. CIT(A) with respect to addition/disallowance made by the AO, and Ld. CIT(A) considering the submissions of assessee, partly allowed the appeal of assessee.

4. Aggrieved with the above order, revenue preferred the appeal before us with the following grounds:-

1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in accepting the assessee’s devise of not claiming depreciation in respect of assets taken over on amalgamation of Piramal Holding Ltd and M/s. Boehringer Mannheim India Ltd. (BMIL), ignoring that provisions of Section 34 (1) of the Act. were omitted w.e.f. 1.4.88 and relying on the Supreme court judgement in the case of Mahindra Mills reported in 243 ITR which pertains to the period prior to the omission of the section.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of expenditure of Rs. 25.54 lakhs on closure of Thane Factory.

3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to grant depreciation @ 60% as against 25% granted by the AO. ignoring the fact that there was no specific mention in the schedule to allow depreciation @ 60% in the year under consideration.

4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AO to delete the disallowance of Rs. 1,34,80,125/- being professional fees paid to M/s. Brown & Wood

5. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing the AD to allow payment of Rs. 18,00,862/- in foreign exchange for professional services rendered, without appreciating that the payment is towards royalty covered u/s.40(a)(i).

6. On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in directing the A.O to allow relief of Rs. 5,61,25,000/- being the amount transferred to Debenture Redemption Reserve ignoring the fact that the assessee made the reserve after determining the net profit as per the company’s Act. There is no provision in Sec. 11 5J to reduce such amount from the net profit.

7. The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the AO be restored. The appellant craves leave to amend or alter any ground or add a new ground that may be necessary.

5. With regard to ground no. 1, Ld. DR submitted before us that Ld CIT(A) erred in accepting the assessee’s devise of not claiming depreciation in respect of assets taken over on amalgamation of Piramal Holding Ltd and M/s. Boehringer Mannheim India Ltd. (BMIL), ignoring that provisions of Section 34 (1) of the Act. were omitted w.e.f. 01.04.88 and relying on the Supreme court judgement in the case of Mahindra Mills reported in 243 ITR which pertains to the period prior to the omission of the section. He supported the findings of AO.

6. On the other hand, Ld. AR brought to our notice para 4 of CIT(A)’s order and submitted that this ground is squarely covered by the order of Coordinate Bench of Hon’ble ITAT in ITA 6392/Mum/2003 for AY 2000-01 in assessee’s own case, wherein Hon’ble ITAT has decided this issue in favour of assessee.

7. Considered the rival submissions and material placed on record. We notice from the record that the identical ground raised in the present appeal has already been decided by the Coordinate Bench of ITAT in ITA 6392/Mum/2003 for AY 2000-01 in assessee’s own case on merits. For the sake of clarity, it is reproduced below:-

20. We have perused the aforesaid orders passed in the assesse’s own case by the Tribunal in the aforementioned years, and are persuaded to subscribe to the claim of the ld. A.R that the issue as regards the entitlement of the assessee towards claim of depreciation on the assets taken over on amalgamation of BMIL and PHL is squarely covered in favour of the assessee. The Tribunal while disposing off the appeal of the assessee for A.Y 1998-99 had followed its earlier order for A.Y 1997-98, and had observed that the assesse’s claim for depreciation on the assets taken over on amalgamation of BMIL and PHL was found to be in order. The Tribunal while concluding as hereinabove had observed as under:

11. Ground No. 3 & 4 raised by the Revenue in its appeal read as under:-

3. Erred in accepting the assessee’s devise of not claiming depreciation in respect of assets taken over on amalgamation of BMIL and MPIL ignoring omission of the provisions of section 34 (1) of the I.T. Act w.e.f. 1-4-1988 relying on the Supreme Court judgment in the case of Mahindra Mill reported in 243 ITR 56 which pertains to the period prior the omission of the section;

4. Erred in accepting the assessee’s devise of not claiming depreciation on the assets of PHL taken over on amalgamation ignoring omission of the provisions of section 34(1) of the I.T. Act w.e.f. 1-4-1988 relying on the Supreme Court judgment in the case of Mahindra Mill reported in 343 ITR 56 which pertains to the period prior the omission of the section.”

12. After considering the rival submissions and perusing the relevant material on record, it is observed that an identical issue was involved in assessee’s own case for A.Y. 1997-98 and the Tribunal vide its order dtd. 16-05-2012 passed in ITA No. 4602/Mum/2001 has decided the same in favour of the assessee after recording all the relevant facts as well as the submissions of both the sides and decision rendered thereon in para No. 22 to 28 which read as under:-

“22. Gr.No.2 raised by the Revenue reads as follows:

“2. Erred in a accepting assessee’s device of not claiming depreciation ignoring omission of the provisions of Sec. 34(1) of the I.T. Act w.e.f. 01/04/1988 relying on the Hon’ble Supreme Court judgment in the case of M/s. Mahindra Mills Ltd. reported in 243 ITR 56 which pertained to the period prior to the section’s omission.”

23. As already seen BMIL merged with the assessee company as per the scheme of amalgamation w.e.f. 1/4/96. The assessee has claimed depreciation on the assets taken over as part of the merger. The AO noticed from the schedule of depreciation furnished by the assessee that depreciation was being claimed on the WDV without adjusting for depreciation allowable for A.Y.s 1995-96 & 1996-97 in the hands of erstwhile BMIL. The erstwhile BMIL did not opt to claim depreciation for the assessment years 1995-96 & 1996-97 although assets have been used in the business carried on by BMIL during those years. The AO was of the view that depreciation is not available to the assessee on the WDV without taking into consideration the allowable depreciation on the use of the assets during the assessment year 1995-96 & 1996-97 by BMIL. Depreciation charge being in the nature of a deduction for wear and tear of the assets, it was mandatory that depreciation is charged to arrive at the correct income for any given year. The AO referred to the decision of the Hon’ble Bombay High Court in the case of M/s. Premier Automobiles Ltd. 206 ITR 001(Bom), wherein it was held as follows:

“Under section 32 of the Act, the assessee is entitled to allowance of depreciation. It is for him to claim the same. If he does not claim the same or wants to forgo the same, he is free to do so. This judgement does not say anything about carry forward of depreciation which has not been claimed by the assessee in the particular year. So far as the current year’s depreciation is concerned, it is for the assessee to claim the same or not to claim the same. If he does not claim it, he loses the depreciation. There is no question of any depreciation allowable for that year and in that event the question of any unabsorbed depreciation of that year will not arise. This decision, however, cannot be carried any further to contend that the assessee is free not to claim depreciation in the year to which it pertains but carry forward the same to the subsequent year or years as it likes.”

It was further held that:

“what section 32 allows an assessee is the deduction by way of depreciation of an asset of an amount calculated as a percentage of the written down value thereof as may be prescribed. It is for the assessee to claim the same and furnish the requisite particulars. If the assessee does not claim the same, it cannot be allowed. But in that case, there will be no depreciation for that year which can be said to be unabsorbed to be carried forward to a subsequent year u/s. 32(2) of the Act. In other words, an assessee who des not claim deduction for the depreciation allowable to him u/s. 32 of the Act in the particular year loses it once for all.”

Accordingly, the WDV in respect of the assets belonging to erstwhile BMIL was adjusted (by reduction of the WDV) for the foregone depreciation for A.Y’s 1995-96 & 1996-97.

24. On appeal by the Assessee, the CIT(A) held that depreciation on the WDV as claimed by the Assessee on the assets in question should be allowed. The CIT(A) held that the AO was not correct in reading the judgment of the Hon’ble Bombay High Court in the case of Premier Automobiles (supra) as laying down a limitation that notional allowance has to be reduced from the WDV to arrive at the WDV of the subsequent year. The CIT(A) also found that the decision of the Hon’ble Supreme Court in the case of Mahindra Mills Ltd. (supra) clearly lays down the proposition that WDV has to be arrived at only after reducing depreciation actually allowed and in a case where the Assessee has not claimed depreciation it cannot be said that it was notionally allowed. Aggrieved by the order of the CIT(A) the revenue has raised Gr.No.2 before the Tribunal.

25. We have heard the rival submissions. We are of the view that the order of the CIT(A) has to be upheld. The Hon’ble Supreme Court in CIT Vs. Mahendra Mills (2000) 159 CTR (SC) 381 has laid down that the assessee is entitled to exercise his option even through the filing of revised return and that option cannot be denied to him nor can depreciation be thrust on the assessee against his willingness. It was held that until a claim is made for allowing deductions of the nature covered under s. 32 along with necessary particulars, there would hardly be any occasion for the ITO to ‘allow’ any ‘claim’. Two conditions – the making of a claim and the furnishing of particulars – have been read as cumulative conditions by the Hon’ble Supreme Court in Mahendra Mills (supra). If either of the two conditions are not fulfilled the AO cannot force the depreciation allowance on the assessee. It further follows logically that in the absence of a claim by the assessee the allowance cannot be thrust upon him even if the particulars are available to the AO. Therefore, the mere fact that the assessee before us did not make a claim for depreciation places a fetter upon the powers of the AO t allow depreciation.

26. The contention of the Revenue was that after 1st April, 1988, the condition of furnishing the particulars required by sub- sec. (1) and (2) of s. 34 has been done away with and that has altered the effect of the judgment in Mahendra Mills (supra). It is difficult to uphold the contention because not only has the Supreme Court viewed the conditions as cumulative, but more importantly, they have viewed the claim for depreciation as something over which the AO has no control and is the choice of none else than the assessee. It would be proper to understand the judgment as also laying down, impliedly, that if there is no claim of depreciation by the assessee, that should be an end of the matter. Therefore, the judgment also lays down in principle that irrespective of whether the statute requires the furnishing of the particulars are not, if there is no claim for depreciation, it cannot be allowed by the AO. The debate, therefore, as to whether the omission of s. 34(1) and (2) and r. 5AA of the IT Rules would change the position prima facie appears to be academic but since it has been raised and that question has also been answered by Mahendra Mills (supra) we proceed to decide the same. The following observations of the Supreme Court in this regard clinch the issue in favour of the position that despite the omission of the above sub-sections of s. 34 and the rule, still depreciation allowance cannot be thrust upon the assessee in the absence of a claim:

‘The language of the provisions of ss.32 and 34 is specific and admits of no ambiguity. Sec.32 allows depreciation as deduction subject to the provisions of s. 34. Sec. 34 provides that deduction under section shall be allowed only if prescribe particulars have been furnished. We have seen r. 5AA of the Rules which though since deleted provided for the particulars required for the purpose of deduction under s. 32. Even in the absence of r. 5AA,

the return of income in the form prescribed itself requires particulars to be furnished by the assessee and no claim for the depreciation has been made in the return. The ITO in such a case is required to compute the income without allowing depreciation allowance. The circular of the Board, dt. 11th April, 1955, is of no help to the Revenue. It imposes merely a duty on the officers of the Department to assist the taxpayers in every reasonable way, particularly, in the matter of claiming and securing relief. The officer is required to do no more than to advise the assessee. It does not place any mandatory duty on the officer to allow depreciation of the assessee does not want to claim that. The provision for claim of depreciation is certainly for the benefit of the assessee. It if does not wish to avail that benefit for some reason, benefit cannot be forced upon him. It is for the assessee to see if the claim of depreciation is to his advantage. Rather the ITO should advise him not to claim our view in the spirit of the circular, dt. 11th April, 1955. Income under the head ‘profits and gains of business or profession’ is chargeable to income-tax under s. 28 and that income under s. 29 is to be computed in accordance with the provisions contained in ss. 30 to 43A. The argument that since s. 32 provides for depreciation if has to be allowed in computing the income of the assessee cannot in all circumstances be accepted in view of the bar contained in s. 34. If s. 34 is not satisfied and the particulars are not furnished by the assessee, his claim for depreciation under s. 32 cannot be allowed. Sec. 29 is thus to be read with reference to other provisions of the Act. It is not in itself a complete code.’

27. The Supreme Court has observed that even in the absence of the rule, since the return form itself prescribes particulars to be furnished in support of the claim of depreciation, the allowance can be granted on if the assessee makes a claim and the particulars required in the return form are furnished. The ratio of the observations is that in order to obtain an allowance or deduction, it is necessary for the assessee to make a claim and also support it by necessary particulars or evidence. Therefore, the contention on behalf of the revenue that after the omission of sub- sec. (1) and (2) of s. 34 and r. 5AA w.e.f. 1st April, 1988, depreciation has to be mandatorily claimed cannot be accepted. It is further seen that Expln. 5 to 32 was introduced by the Finance Act, 2002 w.e.f 1-4-02 and it provides as follows:

Explanation 5. – For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income;

Thus, it can be safely said that omission of section 34 has not affected the assessee’s choice to claim depreciation allowance. This choice is, however, expressly taken away by insertion of Explanation 5 in section 32 with effect from 1st April, 2002, from assessment year 2002-03 onwards. In CIT Vs. Sree Senhavalli Textiles (P) Ltd., 259 ITR 77 (Mad), the Hon’ble Madras High Court has held that though after judgment was rendered by the apex Court in CIT Vs. Mahendra Mills (2000) 159 CTR (SC) 381: (2000) 243 ITR 56 (SC), Expln. 5 was inserted in s. 32(1) by the Finance Act, 2001, w.e.f. 1st April, 2002, declaring that ‘for the removal of doubts’ the provisions of sub-s (1) will apply whether or not the assessee claims deduction in respect of depreciation in computing his total income, that Explanation cannot be regarded as taking away the effect of the judgment of the Supreme Court for the years prior to the date of introduction of the Explanation. The law declared by the Supreme Court cannot be regarded as having merely raised doubts. The interpretation of the relevant provisions of the Act by the apex court settles the law, and unless the subsequent amendment to the statute is expressly given retrospective effect, the law laid down by the apex court will remain the binding law for the period to the amendment. The newly added Explanation takes effect only on and from 1st April, 2002, and will not be applicable for prior ye3ars. If claim made in the original return had been given up in the revised return, there was no obligation to consider the claim for depreciation.

27. The Hon’ble Supreme Court in the case of Mahendra Mills (Supra) had made the following observations:

“….Allowance of depreciation is calculated on the written down value of the assets, which written down value would be the actual cost of acquisition less the aggregate of all deductions “actually allowed” to the assessee for the past years. “Actually allowed” does not mean “notionally allowed”. If the assessee has not claimed deduction of depreciation in any past year it cannot be said that it was notionally allowed to him. A thing is “allowed” when it is claimed. A subtle distinction is there when we examine the language used in section 16 and sections 34 and 37 of the Act. It is rightly said that a privilege cannot be to a disadvantage and an option cannot become an obligation. The Assessing Officer cannot grant depreciation allowance when the same is not claimed by the assessee.”

28. In the light of the above observations of the Hon’ble Supreme Court, let us see the decision of the Hon’ble Bombay High Court in the case of Premier Automobiles (Supra). The question before the Hon’ble Court and the circumstances under which it arose were as follows:

“Whether, on the facts and in the circumstances of the case, the assessee-company could lawfully claim the development rebate in priority to depreciation allowance prescribed under section 32 of the Income-tax Act, 1961, while computing its total income for each of the assessment years 1970-71, 1971-72 and 1972­73?”

As is evident from the question, the controversy related to priority in the matter of set off of unabsorbed depreciation allowance and unabsorbed development rebate. The assessee had substantial amount of unabsorbed depreciation and unabsorbed development rebate which had been carried forward from year to year. The claim of the assessee was that as there was a time limit fixed under the Act for carrying forward of unabsorbed development rebate, it should be set off first against the current year’s profit in the respective years and thereafter if any profit is left, the unabsorbed depreciation should be adjusted. According to the Income-tax Officer, under the scheme of the Act, the unabsorbed depreciation had to be adjusted first and then only, if any profits are left, the unabsorbed development rebate can be adjusted. Thus, the question was of priority between carried forward unabsorbed development rebate and unabsorbed depreciation in the matter of set off against the current year’s profits. In the light of the above controversy, the Hon’ble Bombay High Court held as follows:

“Thus, it is clear that what section 32 allows an assessee is the deduction by way of depreciation of an asset of an amount calculated as a percentage of the written down value thereof as may be prescribed. It is for the assessee to claim the same and furnish the requisite particulars. If the assessee does not claim the same, it cannot be allowed. But in that case, there will be no depreciation for that year which can be said to be unabsorbed to be carried forward to a subsequent year under section 32(2) of the Act. In other words, an assessee who does not claim  deduction for the depreciation allowable to him under section 32  of the Act in the particular year, loses it once for all. He is not entitled to claim the same in a subsequent year though he will again be entitled in that subsequent year to claim depreciation for that year.” (underlining by us for emphasis).

The AO has relied on the underlined portion of the judgment to hold that an assessee who does not claim deduction for depreciation allowable to him under section 32 of the Act in a particular year loses it once for all. The AO has overlooked the fact that the above observation are in the context of priority of claims for development rebate of depreciation under section 32 of the Act. In our view the above observation does not support the case made out by the A.O. We, therefore, uphold the order of the CIT(A) and dismiss the Ground No.2 raised by the assessee”.

13. As the issues involved in the year under consideration as raised in ground No. 3 & 4 of the Revenue’s appeal as well as all the material facts relevant thereto are similar to that of A.Y. 1997-98, we respectfully follow the order of the co-ordinate Bench of this Tribunal for A.Y. 1997-98 and uphold the impugned order of the ld. CIT(A) giving relief to the assessee on these issues. Ground No. 3 & 4 of the Revenue’s appeal are accordingly dismissed.”

As the issue involved in the present appeal of the revenue i.e allowability of the assesse’s claim of depreciation on the assets taken over on amalgamation of BMIL and PHL is squarely covered by the aforesaid orders of the co-ordinate benches of the Tribunal in the assesse’s own case for A.Y 1997-98, A.Y 1998­99, A.Y. 1999-2000 and A.Y 2009-10, we therefore respectfully follow the same. Accordingly, finding no infirmity in the order of the CIT(A) who had directed the A.O to allow depreciation on the assets taken over on amalgamation of BMIL and PHL, as claimed by the asseseee company, we uphold the same to the said extent. The Ground of appeal No. 1 raised by the revenue is dismissed.

8. Therefore, respectfully following the above decision of Coordinate Bench of ITAT in assessee’s own case which is applicable mutatis mutandis in the present case, we are inclined to accept the submission of Ld. AR. Accordingly, the ground raised by the revenue stands dismissed.

9. With regard to ground no. 2, Ld. DR submitted before us that Ld. CIT(A) erred in deleting the disallowance of expenditure of Rs. 25.54 lakhs on closure of Thane Factory as business expenditure and supported the findings of AO.

10. On the other hand, Ld. AR brought to our notice para 6 of CIT(A)’s order and submitted that this ground is squarely covered by the order of Coordinate Bench of Hon’ble ITAT in ITA 6392/Mum/2003 for AY 2000-01 in assessee’s own case, wherein Hon’ble ITAT has decided this issue in favour of assessee.

11. Considered the rival submissions and material placed on record. We notice from the record that the identical ground raised in the present appeal has already been decided by the Coordinate Bench of ITAT in ITA 6392/Mum/2003 for AY 2000-01 in assessee’s own case on merits. For the sake of clarity, it is reproduced below:-

22.We have deliberated at length on the issue under consideration and find ourselves to be in agreement with the view taken by the CIT(A) that the assesse’s claim for deduction of the aforesaid expenses as a revenue expenditure is well in M/s Nicholas Piramal India Ltd. order. In fact, we find that the issue is squarely covered by the order of the Hon’ble High Court of Bombay in the assesse’s own case for A.Y 1998-99 in CIT-7 Vs. Nicholas Piramal (India) Ltd. (2016) 69 taxmann.com 164 (Bom). In the said case, the Hon’ble High Court after deliberating on the assesse’s claim of expenses pertaining to closure of its “Thane Unit”, had observed, that the business of manufacturing of drugs at different units constituted single business and closing down of one unit and shifting its activity to other units was an expenditure that was incurred by the assessee for purposes of its business. As the facts leading to the disallowance of “Thane factory” expenses of Rs. 28,92,000/- by the A.O during the year under consideration remains the same as were involved in the aforesaid preceding years, therefore, respectfully following the view taken by the Hon’ble High Court we uphold the order of the CIT(A) in context of the said issue during the year under consideration. Accordingly, finding no infirmity in the order of the CIT(A) who had directed the A.O to delete the aforesaid disallowance of Rs. 28,92,000/-, we uphold the same to the said extent. The Ground of appeal No. 2 raised by the revenue is dismissed.

12. Therefore, respectfully following the above decision of Coordinate Bench of ITAT in assessee’s own case which is applicable mutatis mutandis in the present case, we are inclined to accept the submission of Ld. AR. Accordingly, the ground raised by the revenue stands dismissed.

13. With regard to ground no. 3, Ld. DR submitted before us that Ld. CIT(A) erred in directing the AO to grant depreciation @ 60% as against 25% granted by the AO. ignoring the fact that there was no specific mention in the schedule to allow depreciation @ 60% in the year under consideration and supported the findings of AO.

14. On the other hand, Ld. AR brought to our notice para 7 of CIT(A)’s order and submitted that this ground is squarely covered by the order of Coordinate Bench of Hon’ble ITAT in ITA 6392/Mum/2003 for AY 2000-01 in assessee’s own case, wherein Hon’ble ITAT has decided this issue in favour of assessee.

15. Considered the rival submissions and material placed on record. We notice from the record that the identical ground raised in the present appeal has already been decided by the Coordinate Bench of ITAT in ITA 6392/Mum/2003 for AY 2000-01 in assessee’s own case on merits. For the sake of clarity, it is reproduced below:-

  1. We have deliberated at length on the issue under consideration and find that a similar issue had recently came up before a co-ordinate bench of the Tribunal in the assesse’s own case for A.Y 2009-10 i.e Piramal Healthcare Limited (now known as Piramal Enterprise Ltd.) Vs. Dy. CIT-7(1), Mumbai (ITA No. 1257/Mum/2014, dated -07/05/2019). The Tribunal while finding favour with the claim of the assessee that the expenses incurred by the assessee on purchase of a software which brought greater efficiency in functioning of its business was allowable as a revenue expenditure had observed as under :

“11. We have deliberated at length on the issue under consideration and are unable to persuade ourselves to subscribe to the view taken by the lower authorities. We find that the issue that expenses incurred by an assessee on purchase of a software which brought greater efficiency in functioning of its business had been held by the Hon’ble High Court of Bombay in the case of PCIT Vs. Holicin Services (South Asia) Ltd. (2018) 93 Taxmann.com 270 (Bom), as allowable as a revenue expenditure. Further, the Hon’ble High Court of Bombay in the case of CIT Vs. Raychem RPG Ltd. (2012) 346 ITR 138 (Bom) had observed that the expenditure incurred by an assessee on purchase of a software which facilitated its trading operations or enabled the management to conduct its business more efficiently or more profitably would not form part of the profit making apparatus of the assessee and would be allowable as a revenue expenditure. Also, we find that a similar view had also been taken by the Hon’ble High Court of Delhi in the case of CIT Vs. Amway India Enterprises (2012) 346 ITR 341 (Del). In the aforesaid case, it was observed by the High Court that the expenditure incurred by the assessee on purchase of software application and payment made for acquiring license to use those applications was to be allowed as a revenue expenditure. In the backdrop of the aforesaid settled position of law, we are of the considered view that as the aforesaid software purchased by the assessee did not form part of its profit making apparatus and only facilitated carrying its business more efficiently, therefore, the same was rightly claimed by it as a revenue expenditure. We thus in terms of our aforesaid observations direct the A.O to allow the software expenses of Rs.14,00,800/- as claimed by the assessee. The Ground of Appeal No. 1 is allowed.”

As the issue involved in the present appeal is squarely covered by the aforesaid order of the Tribunal in the assesse’s own case for A.Y 2009-10, therefore, we respectfully follow the same. Accordingly, finding no infirmity in the order of the CIT(A), who had directed the A.O to delete the disallowance of Rs. 1,16,79,995/-, we uphold the same to the said extent. Before parting, we may herein observe that consequent to our aforesaid observation the depreciation of Rs. 29,19,999/- that was allowed by the A.O by treating the aforesaid ‘computer software expenses’ as a ‘capital expenditure’ shall resultantly be withdrawn. The Ground of appeal No. 3 raised by the revenue is dismissed.

16. Therefore, respectfully following the above decision of Coordinate Bench of ITAT in assessee’s own case which is applicable mutatis mutandis in the present case, we are inclined to accept the submission of Ld. AR. Accordingly, the ground raised by the revenue stands dismissed.

17. With regard to ground no. 4, Ld. DR submitted before us that Ld. CIT(A) erred in directing the AO to delete the disallowance of Rs. 1,34,80,125/- being professional fees paid to M/s. Brown & Wood and relied upon the order of AO.

18. On the other hand, Ld. AR brought to our notice para 9 of CIT(A) and para 8 of assessment order. He submitted that no doubt the consultancy service fees paid to M/s Brown & Wood in respect of issue and listing of American Depository Receipt (ADR) on ‘NYSE’. In order to enhance the working capital fund for the purpose of business. But the assessee ultimately dropped the proposed ‘ADR’ issues. The assessee received the professional advice and made effort to list the ‘ADR’ issue in ‘NYSE’, but dropped the idea. When the project is discontinued, the expenditure becomes revenue and allowable as business expenditure. He submitted that AO disallowed the expenditure in two counts, first as capital expenditure and second is u/s 40(a)(i) r.w.s. 195 of the Act.

19. With regard to capital expenses, he submitted that the project is discontinued and it is allowable as revenue expenditure and relied on Hon’ble Bombay High Court decision in the case of CIT vrs. Maganese Ore India Ltd. (2016) (67 com 268), in which the Hon’ble High Court held that capital asset has never come into existence and ITAT has allowed travelling expenses or ore testing charges only as revenue expenditure.

20. Further, he relied in the case of CIT vrs. Nimbus Communications Ltd. (ITA No. 4244 of 2010) and submitted that the Hon’ble Bombay High Court held that the findings of fact recorded by ITAT is that there is dispute that the assessee has in fact incurred the expenditure and that on account of the aborted public issue offer, no new asset has come into existence and consequently, there is no question of the assessee getting any enduring benefit. He submitted that even in the given case, assessee has aborted the listing of issue in ‘NYSE’ and there is no enduring benefit in the expenditure incurred by assessee. Therefore, it is also revenue expenditure.

21. With regard to disallowance u/s 40(a)(i), he submitted that the services were incurred outside India and provisions of section 40(a)(i) and section 195 are not attracted.

22. Considered the rival submissions and material placed on record. We notice that assessee has incurred consultancy charges to list the ‘ADR’ in ‘NYSE’ and later dropped this project. The AO treated the expenditure as capital and disallowed the same and simultaneously, invoked provision of section 40(a)(i) and 195 of the Act. We notice that in the similar situation, the Hon’ble Bombay High Court in the case of Nimbus Communications Ltd.(supra) has treated the capital expenditure of share issue expenses, which ultimately aborted public issue. The expenditure does not have enduring benefit to the assessee and allowed these expenses as revenue expenditure by relying on CIT vrs. Essar Oil Ltd. case (ITA No. 921 of 2006) dated 16.10.2008 since the issue before is similar. Therefore, the ground raised by revenue is accordingly

23. With regard to invoking provision of section 40(a)(i), we are in agreement with the submission of the Ld. AR that these services were rendered outside India and none of the income earned by M/s Brown & Wood is taxable in India and there is no obligation on the assessee to deduct tax.

24. With regard to ground no. 5, Ld. DR submitted before us that Ld. CIT(A) erred in directing the AO to allow payment of Rs. 18,00,862/- in foreign exchange for professional services rendered, without appreciating that the payment is towards royalty covered u/s.40(a)(i) of the Act and relied upon the order of AO.

25. On the other hand, Ld. AR brought to our notice para 10 of CIT(A)’s order and submitted that the payment made to two persons who were non-resident and having no PE in India. Also they were not present in India for more than 90 days in aggregate. Therefore, Article 7 and Article 15 are not applicable. He brought to our notice Hon’ble Bombay High Court decision in CIT Vrs. NCG Networks (India) Pvt. Ltd. (ITA No. 397 of 2015), particularly, para ‘e’ ‘f’ and ‘g’ at page 229 of the paper book. Further relied on the case of Ashok Piramal management Corp. Ltd. Vrs. ACIT (161 ITD 234) (Mum Trib).

26. Considered the rival submissions and material placed on record. We notice from the record that the identical ground raised in the present appeal has already been decided by the Hon’ble Bombay High Court in the case of CIT vrs. NCG Networks (India) Pvt. Ltd. (ITA No. 397 of 2015). For the sake of clarity, which is reproduced below:-

e. In the present facts, the amendment by introduction of Explanation-6 to Section 9(1)(iv) of the Act took place in the year 2012 with retrospective effect from 1976. This could not be have been contemplated by the Respondent when he made the payment which was subject to tax deduction at source under section 194C of the Act during the subject Assessment year, would require deduction under section 194J of the Act due to some future amendment with retrospective effect.

f. Further, we also notice that under Section 40(a)(i) of the Act, under which the expenditure has been disallowed by the Revenue, meaning of royalty as defined therein, is that as provided in Explanation 2 to Section 9(1)(vi) of the Act and not Explanation 6 to Section 9(1)(vi) of the Act. Thus, the disallowance of expenditure under Section 40(a)(i) of the Act can only be if the payment is ‘Royalty’ in  terms of Explanation 2 to Section 9 (1)(vi) of the Act. Undisputedly, the payment made for channel placement as a fee, is not royalty in terms of Explanation 2 to Section 9(1)(vi) of the Act. Therefore, no disallowance of expenditure under Section 40(a) (vi) of the Act, can be made in the present facts.

27. Therefore, the issue in present appeal also relating to AY 2001-02, the amendment took place in the year 2012. Respectfully following the above decision of Hon’ble High Court which is applicable mutatis mutandis in the present case, we are inclined to accept the submission of Ld. AR. Accordingly, the ground raised by the revenue stands dismissed.

28. With regard to ground no. 6, Ld. DR submitted before us that Ld. CIT(A) erred in directing the A.O to allow relief of Rs. 5,61,25,000/- being the amount transferred to Debenture Redemption Reserve ignoring the fact that the assessee made the reserve after determining the net profit as per the company’s Act. There is no provision in Sec. 115J to reduce such amount from the net profit and relied upon the order of AO.

29. On the other hand, Ld. AR brought to our notice para 11 of CIT(A)’s order and submitted that this ground is squarely covered by the order of Coordinate Bench of Hon’ble ITAT in assessee’s own case for AY 1997-98 reported in (2013) 32 taxmann.com 283 (Mum Trib), wherein Hon’ble ITAT has decided this issue in favour of assessee.

30. Considered the rival submissions and material placed on record. We notice from the record that the identical ground raised in the present appeal has already been decided by the Coordinate Bench of ITAT in assessee’s own case on merits for AY 1997-98 reported in (2013) 32 taxmann.com 283 (Mum Trib). For the sake of clarity, it is reproduced below:-

55. Aggrieved by the order of the CIT(A), the Revenue has raised ground No 6 before the Tribunal. We are of the view that the order of the CIT(A) on this issue has to be upheld and the reliance placed by the Departmental Representative on the order of the AO cannot be accepted. As rightly held by the CIT(A) the amount in question cannot be said to be a reserve but was only a provision. The liability for which such provision was made was an ascertained or known liability and, therefore, amount was to be reduced from the profit as per P&L a/c prepared in accordance with provisions of Companies Act, 1956 to arrive at the book profits under s. 1I5JA of the Act. Consequently ground No.6 raised by the Revenue is dismissed.

31. Therefore, respectfully following the above decision of Coordinate Bench of ITAT in assessee’s own case which is applicable mutatis mutandis in the present case, we are inclined to accept the submission of Ld. AR. Accordingly, the ground raised by the revenue stands dismissed.

32. In the net result, the appeal filed by the revenue stands Order pronounced in the open court on 16.09.2020.

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