Interest paid to MSME for delayed payment is not allowable

Dy. CIT (LTU) Vs. Bosch Ltd. (ITAT Bangalore)

Section 23 of MSMED Act has specifically provided that the interest paid to the Micro, Small & Medium Enterprises on account of delayed payment is not allowable as deduction from income.

Section 23 of MSMED Act has specifically prohibited the assessee from claiming the deduction from the income on account of interest paid to MSME. Section 24 is having overriding effect to the extent of any inconsistent provisions contained in any other law for the time being. We further note that as per the section 15 of the MSMED Act, the liability of the buyer to make the payment to MSME within the period as agreed between the parties or in case there is a delay beyond 45 days from the date of acceptance or date of deemed acceptance the interest payable as per section 16 shall be three times of the bank rate notified by the RBI. Thus as per section 16 of the MSMED Act, the payment of interest on delayed payment is in the nature of penalty or it is penal interest. Therefore once the payment of interest on delayed payment to MSME is regarded as a penal in nature then the said expenditure is otherwise not allowable under section 37 of the Income Tax Act, 1961 (in short ‘the Act’). Hence, in view of the specific provisions under MSMED Act, 2006 for payment of interest to the MSME being penal in nature and having the overriding effect of sections 15 to 23, we do not find any error or illegality in the orders of the authorities below in disallowing this claim of interest paid to the MSME.

“ Total cost of in-house research facility, giving break-up of expenditure on land and buildings : (Rs. in lakhs)

The dispute in this appeal is only regarding the quantum of weighted deduction under section 35(2AB) of the Act in respect of the expenditure incurred in-house R&D centre. The assessee has shown the gross expenditure of Rs. 42,58,31,000 and also shown the receipt of R&D center of Rs. 21,19,59,000. There is no dispute even regarding the correctness of the expenditure as well as receipts. Therefore, while allowing the deduction under section 35(2AB) of the Act the details as given in the said approval letter/order are accepted by both the parties. The assessee claimed weighted deduction on the gross expenditure without reducing the receipts as the same are in the nature of revenue/ income and included in the total income of the assessee. The authorities below allowed the claim of weighted deduction on the net amount after reducing the receipt from the gross expenditure. We note that an identical issue was considered by the co-ordinate Bench of this Tribunal in assessee’s own case for the assessment years 2005-06 & 2006-07 vide order dated 17-8-2017. We further note that initially the tribunal passed an order dated 8-9-2016 which was recalled in the Misc. Petition Nos. 18 to 20/Bang/2017 and the matter was again fixed for hearing and decided this issue after considering the judgments relied upon by the assessee. The Tribunal has finally decided this issue in para 7 as under :–

‘7. Second aspect of the matter is regarding the claim of deduction restricted by the assessing officer after reducing the income earned by the assessee from the R&D Center from the expenditure. There is no quarrel that section 35(2AB) contemplates the deduction up to 150% of the expenditure incurred on in-house R&D facility and therefore there is no scope of netting the said expenditure by any income earned by the said center. However if the assessee has received the reimbursement of the expenditure incurred on the R&D facility or received some grants in respect of the R&D facility then for the purpose of computing the deduction under section 35(2AB), such reimbursement or grant has to be adjusted against the expenditure because the reimbursement and grant are not recognized as revenue received or income of the assessee. In case of any income earned by the said R&D centre, the same has to be part of the total income of the assessee and therefore such income cannot be reduced from the expenditure for the purpose of computing the deduction under section 35(2AB) of the Act. An identical issue was considered by the Bombay Bench of the ITAT in the case of ACIT v. Wockhardt Limited (supra) in paras 10 to 12 as under :–

“10. We have carefully considered the submissions of the rival parties and perused the material available on record.

11. Section 35(2AB) reads as under :–

(2AB)(1) Where a company engaged in the business of bio-technology or in any business of manufacture or production of any article or thing, not being an article or thing specified in the list of the Eleventh Schedule incurs any expenditure on scientific research (not being expenditure in the nature of cost of any land or building) on in-house research and development facility as approved by the prescribed authority, then, there shall be allowed a deduction of a sum equal to (two) times of the expenditure so incurred.

Explanation.-For the purposes of this clause, “expenditure on scientific research”, in relation to drugs and pharmaceuticals, shall include expenditure incurred on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patents Act, 1970 (39 of 1970).

Thus, it would be seen that under the above provision of sub-section of (2AB) of section 35 weighted deduction of a sum equal to one and one half times of the expenditure incurred on scientific research on in house research and development facility is allowed to a company engaged in the business of manufacturing or production of any drugs, pharmaceuticals, electronic equipments, computers, telecommunication equipments, chemicals or any other article or thing notified by the Board. It may be noted that the bio-technology industry would qualify for deduction without the need of production of an article or thing from assessment year 2002-03. An Explanation has also been inserted which provides that “expenditure on scientific research”, in relation to drugs and pharmaceuticals, shall include expenditure on clinical drug trial, obtaining approval from any regulatory authority under any Central, State or Provincial Act and filing an application for a patent under the Patent Act, 1970.

12. From the above it is very clear that in the above sub-section the expression “any expenditure” on scientific research on in-house research and development as approved by the prescribed authority has been mentioned. Therefore, it is only the expenditure which has been incurred which is relevant in computing the weighed deduction and not the net expenditure after reducing any income earned as a result of such expenditure.’

Further the co-ordinate bench of this Tribunal in the case of Micro lab Ltd. (supra) again had an occasion to consider this issue in paras 12 & 16 to 18 as under :–

‘12. We have heard the submissions of the learned Departmental Representative and learned counsel for the assessee and also perused the documents filed in the paper book. As we have already seen, the assessee carries on scientific research. It is in the business of manufacture of drugs and pharmaceuticals. It incurred expenditure on scientific research and the quantum of such expenditure on scientific research, which is a sum of Rs. 7,80,52,805, is not in dispute. The weighted deduction under section 35(2AB) at 150 per cent. was claimed by the assessee at a sum of Rs. 12,57,00,920. What is now to be examined is the guidelines of the Department of Scientific and Industries Research, which the prescribed authority under section 35(2AB)(3) and (4) of the Act, has to follow before granting approval of the scientific research carried out by the assessee as eligible for deduction under section 35(2AB). A copy of the guidelines of the Department of Scientific and Industries Research is at pages 27 to 33 of the assessee’s paper book. Guideline 5(vii) is relevant for the present case and it reads as follows :–

“(vii) Assets acquired and products, if any emanating out of research and development work done in approved facility, shall not be disposed off without approval of the Secretary, DSIR. Sales realization arising out of the assets sold shall be offset against the research and development expenditure of the research and development center claimed under section 35(2AB) for the year in which such sales realization accrues under section 35(2AB) of the Income Tax Act, 1961. Expenditure claimed for deduction under the sub-section shall be reduced to that extent.”

13. .….…

14. ……..

15. ……..

16. The Department of Scientific and Industries Research guidelines No. vii has specifically provided that assets acquired if any out of research and development work shall be disposed of with approval of the Department of Scientific and Industries Research. The assessee has been submitting yearly audit reports and accounts of approved research and development sanction to the Department of Scientific and Industries Research. The research and development accounts have been separately maintained and separate profit and loss account prepared and the dossier sales have been credited to profit and loss account of research and development because these sales are part of normal sales.

17. It is clear from the sample copy of the license and supply agreement filed before us that the product development charges received by the assessee will not be covered under clause 5(vii) of the Department of Scientific and Industries Research guidelines.

18. As we have already seen, these receipts are credited to profit and loss account are part of normal sales. They are, therefore, not to be reduced from the expenditure incurred by the assessee on carrying out scientific research on which deduction under section 35(2AB) has to be allowed. We are, therefore, of the view that there is no merit in ground No. 2 raised by the Revenue and that the order passed by the Commissioner (Appeals) dated 9-4-2014 under section 154 of the Act cannot be sustained and the same is hereby reversed. Thus, ITA No. 764/B/14 by the assessee is allowed, while ground No. 2 raised by the Revenue is dismissed.”

Therefore it is settled proposition as per the precedence of this Tribunal that the income earned by the assessee from the R&D center cannot be reduced from the expenditure for the purpose of allowing the deduction under section 35(2AB) because the said income is part of the total income of the assessee. Accordingly, in principle, we decide this issue in favor of the assessee that the income earned by the assessee from the R&D center is not required to be reduced from the expenditure for the purpose of deduction under section 35(2AB) of the Act. However, the nature of the receipt as claimed by the assessee being income from the R&D centre has not been verified by the authorities below and therefore to that extent this aspect requires a proper verification and examination. Accordingly, we set aside this issue to the file of assessing officer for limited purpose of verification of the said amount received by the assessee and claimed as income of the R&D centre and then allow the claim of the assessee in view of the above observations and findings.’

21. As regards not raising objections before the DSIR we note that when there is no discrepancy or dispute about the gross expenditure as well as the receipts as claimed by the assessee and accepted by the DSIR then the question of raising any objection does not arise. Therefore we do not find any merits in the objections raised by the learned Departmental Representative

22. Ground No. 6 is regarding dis allowance under section 14A of the Act.

23. This issue is involved only in the assessment year 2008-09. During the course of assessment proceedings, the assessing officer asked the assessee to furnish the working under section 14A read with rule 8D of dis allowance of expenditure in respect of exempt income. The assessee filed the working with the assessing officer wherein the assessee made dis allowance on account of indirect administrative expenses of Rs. 1,45,512. The assessee made dis allowance on the basis of cost incurred regarding number of persons involved and number of man hours spent and multiplied by ratio of average investment on which income is exempt. The assessing officer did not accept this working of the assessee and worked out the dis allowance under rule 8D on account of interest expenditure of Rs. 2,33,135 and on account of indirect administrative expenses of Rs. 30,63,052. Thus the assessing officer made a total dis allowance of Rs. 34,41,699 inclusive of the dis allowance made by the assessee itself of Rs. 1,45,512. The assessee challenged the action of the assessing officer before the Commissioner (Appeals) but could not succeed.

24. Before us, the Learned Senior Counsel for the Assessee has submitted that the assessee has computed suo moto dis allowance by considering the Senior Management man hours cost attributable to the earning of the exempt income and thereafter the said cost was apportioned in the ratio of average investment and turnover of taxable income.

25. As regards the dis allowance of interest, the Learned Senior Counsel for the Assessee has pointed out that the assessee’s own funds are far exceed to the investment made in the mutual funds. He has referred to the details of reserves and surplus of the assessee as per the balance sheet and submitted that the reserves and surplus of the assessee has increased by more than Rs. 576 Crores during the year whereas the investment made during the year is only about Rs. 262 Crores. Even otherwise the total non-interest bearing fund of the assessee is more than Rs. 2,275 Crores which is many times more than the total investment of the assessee at Rs. 910 Crores. Thus the Learned Senior Counsel for the Assessee has submitted that when the assessee’s own fund is more than sufficient to meet the requirement of the investment then no dis allowance is called for on account of interest under section 14A of the Act. He has further contended that the assessing officer has applied rule 8D for the purpose of disallowing the indirect administrative expenses without giving a finding as to how the computation of the assessee is incorrect. The assessing officer ought to have given a objective satisfaction in the assessment order that the claim of the assessee and the computation made by the assessee is not correct. In support of his contention, he has relied upon the decision of Honorable jurisdictional High Court in the case of Microlabs Ltd. (supra) as well as the decision of Honorable Allahabad High Court in the case of CIT v. UP Electronics Corpn. Ltd. (2017) 397 ITR 113. The Learned Senior Counsel for the Assessee has submitted that the Honorable High Court has specifically observed that when the assessee has shown interest free fund then even if the investment is made out of common pool of fund and non-interest bearing fund was more than the investment in the tax free securities, no dis allowance of interest expenditure under section 14A can be made. The Honorable High Court has disapproved the action of the assessing officer in invoking section 14A and rule 8D(2) of rules where the assessing officer has disallowed exemption without recording his satisfaction. The Honorable High Court has further observed that the recording of satisfaction to show as to why voluntary dis allowance made by the assessee was unreasonable and unsatisfactory and it is a mandatory requirement of law. Thus the jurisdiction to apply section 14A of the Act contemplates satisfaction of condition precedent therein on the part of the assessing officer. Hence, the Learned Senior Counsel for the Assessee has submitted that the dis allowance made by the assessing officer is not sustainable when the assessee has given a reasonable and proper computation of dis allowance by taking into consideration the man hours of the senior management in the ratio of exempt income and taxable income.

26. On the other hand, the learned Departmental Representative has submitted that the assessee has made huge investment and therefore, high level administration is involved in taking the decision of investment. The quantum of dis allowance to be computed as per the rule 8D and therefore the assessing officer is justified in computing the dis allowance as per rule 8D. In support of his contention, he has relied upon the decision of Delhi Tribunal in the case of Joint Investment Ltd. v. Asst. CIT (2014) 33 ITR(T) 373 (Delhi – Trib.) as well as Punjab & Haryana High Court in the case of Avon Cycles Ltd. v. CIT (2015) 228 Taxman 368 (Mag.) and submitted that when the funds utilized by the assessee was mixed fund then interest paid on the borrowed fund was also relatable to interest on investment made in tax free funds. Hence the interest expenditure relatable to the investment in the tax free fund was to be computed under the provisions of rule 8D(2)(ii) of the Act. The learned Departmental Representative has referred to the para 11.3 of the assessment order and submitted that the assessing officer has recorded his satisfaction regarding not accepting the dis allowance made by the assessee. Therefore the conditions precedent for invoking the provisions of section 14A is satisfied in this case. He has relied upon the orders of the authorities below.

27. We have considered the rival submissions as well as the relevant material on record. As regards the dis allowance on account of interest expenditure, we find that the assessee has claimed interest free funds of more than Rs. 2,275 Crores in comparison to the total investment of Rs. 910 Crores. There is no quarrel on the point that if the assessee’s own funds are more than investment made then no dis allowance is called for on account of interest expenditure under section 14A of the Act. The Honorable jurisdictional High Court in the case of Micro labs Ltd. (supra) while dealing with an identical issue has observed at page 496 para 5 as under :–

‘5. For the second question, the observations made by the Tribunal in the impugned order reads as under:–

“32. Ground No. 2 raised by the assessee reads as follows:–

“2. The learned Commissioner (Appeals) has erred in sustaining the additions made by the assessing officer under section 14A read with rule 8D on the ground that the appellant has not produced the evidentiary support in relation to dispersal of loan and utilization of loan. Whereas the appellant has produced the evidence that the amount invested was out of positive bank balance and no borrowings were utilized for the purpose of investment.”

33. The assessee earned dividend income of Rs. 38,75,857. It quantified a sum of Rs. 3,22,426 as expenditure incurred in earning tax free income dividend income which does not form part of the total income and which is to be disallowed under section 14A of the Act.

34. The break-up of the sum of Rs. 3,22,426 is not specifically given, but is stated to be relating to management fee, legal & professional charges, security transaction charges and NSDL charges. It is thus clear that the assessee by implication had claimed that there was no expenditure incurred by way of interest, either directly or indirectly, which is attributable to the borrowed funds which were used for the purpose of investment which yielded tax free income.

35. The assessing officer observed that Schedule G to the Financial Statements of the assessee had shown investment to the tune of Rs. 28,45,29,937 in shares mutual funds of various companies. He was of the view that such investments cannot be made routinely. No prudent businessman would make any investment without applying the resources wisely. Obviously this entails expenditure, direct as well as indirect. He thereafter proceeded to make dis allowance under section 14A of the Act, which is given as annexure to the assessment order and enclosed as ANNEXURE- II to this order.

36. Aggrieved by the assessment order, the assessee preferred appeal before the Commissioner (Appeals).

37. Before Commissioner (Appeals), the assessee submitted that interest bearing loans were borrowed for specific purposes and not for investment purposes and in support of the above contention, the Assessee filed copies of balance sheets as on 31-3-2003 up to 31-3-2009 to show that the various loans availed from banks were all taken for specific purposes and could not have been utilized for making any investments out of which exempt income was earned. These loans include short term loans from IDBI Bank, Exim Bank, Barclays Bank and Standard Chartered Bank in respect of which it was explained that the loans could not have been used for making any long term investment. Copies of some communications from banks regarding sanction of the loans were also filed before me to substantiate the nature of the loan. In respect of IDBI loan, it was submitted that the same had been returned back before the year end, thus bringing the balance to Nil.

38. On consideration of the above submissions and on perusal of the relevant documents, the Commissioner (Appeals) was of the view that the claim of the Assessee was not evidenced from the documents submitted in view of the loans and other sources of funds being mixed up in the common pool of funds. The Commissioner (Appeals) further held that the burden of proof in this matter clearly continues to rest with the Assessee and that it was not enough to merely show that surplus funds were available or that bank loans had been availed for specific purposes including short term reasons. A one-to-one correlation must also be established to prove that the loans were absolutely utilized for the purpose for which they were claimed. The Commissioner (Appeals) also held that there was no utilization certificate from the bank filed before the assessing officer nor was such evidence furnished before the Commissioner (Appeals). The Commissioner (Appeals) also held that the documents submitted from the bank during the course of appeal only refer to the disbursal of the loan and even these specify certain conditions required to be met. The date-wise actual disbursal and utilization is not proved from the ledger copies as submitted. The Commissioner (Appeals) also referred to the decision of Mumbai ITAT in the case of Hercules Hoists Ltd. (ITA No. 7944, 7946, 2255 & 7943/Mum/2011), wherein it was held that with the introduction of rule 8D the burden of proof on the assessee has become “more stringent, so that rather than showing existence of sufficient capital, the matter would be required to be examined from the stand point of utilization of the borrowed interest bearing funds.” In the absence of categorical utilization certificate from the bank, the Commissioner (Appeals) was of the view that there was no evidentiary support of the assessee’s claim. Hence, the dis allowance under section14A of the Act as made by the assessing officer was upheld by the Commissioner (Appeals).

39. Aggrieved by the order of Commissioner (Appeals), the assessee has raised ground No. 2.

40. We have heard the rival submissions. A copy of the availability of funds and investments made was filed before us which is at pages 38 to 42 of the assessee’s paper book and the same is enclosed as ANNEXURE- III to this order. It is clear from the said statement that the availability of profit, share capital and reserves & surplus was much more than investments made by the assessee which could yield tax free income.

41. The Honorable Bombay High Court in Reliance Utilities & Power Ltd. 313 ITR 340 (Bom) has held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no dis allowance under section 14A towards any interest expenditure can be made. This view was again confirmed by the Honorable Bombay High Court in CIT v. HDFC Bank Ltd., ITA No. 330 of 2012, judgment date 23-7-2014, wherein it was held that when investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax free securities, no dis allowance of interest expenditure under section 14A can be made.

42. In the light of above said decisions, we are of the view that dis allowance of interest expenses in the present case of Rs. 49,42,473 made under rule 8D(2)(ii) of the Income Tax Rules should be deleted. We order accordingly.”

The aforesaid shows that the Tribunal has followed a decision of the Bombay High Court in the case of CIT v. HDFC Bank Ltd. (2014) 366 ITR 505. When the issue is already covered by a decision of the High Court of Bombay with which we concur, we do not find any substantial question of law would arise for consideration as canvassed.”

Accordingly, in case when the assessee’s own fund is more than the investment made in the tax free securities then the dis allowance on account of interest expenditure under section 14A is not called for. Since the details filed by the assessee are pertaining to the financial year 2006-07 and not for the financial year 2007-08 relevant to the assessment year under consideration therefore, we set aside this issue to the record of the assessing officer for limited purpose of verification of relevant facts of availability of interest free assessee’s own funds and then decide this issue in the light of various binding precedents.

28. As regards the indirect administration expenses, we find that the assessing officer has applied rule 8D(2)(iii) without examining the actual expenditure attributable to the exempt income. There may be a case where the actual expenditure claimed by the assessee and debited to the profit and loss account which can be attributed to the exempt income would be less than the computation made by the assessing officer under rule 8D being 0.5% of average investment. Therefore, the dis allowance cannot be made more than the actual expenditure attributable to the exempt income and debited to the profit and loss account. In the case on hand, the assessee has worked out the dis-allowance on account of indirect administrative expenses by taking the man hours of the higher administration in proportion of the tax free income and taxable income. Therefore in case the quantum of expenditure worked out under rule 8D is exceeding the actual expenditure then the workings under rule 8D fails. Accordingly, when the assessing officer has not made an attempt to first find out the expenditure which is attributable to the earning of the exempt income and has directly applied rule 8D then the matter requires a proper verification and reconsideration. Hence, we set aside this issue to the record of the assessing officer to verify and consider the attributable expenditure which is debited to the profit and loss account and relatable to the exempt income and then consider both the proportionate attributable expenditure actually debited to the profit and loss account and the working under rule 8D for the purpose of dis allowance under section 14A of the Act.

29. In the result, the Ground No. 6 of the assessee’s appeal is allowed for statistical purpose.

Revenue’s Appeal :–

30. The revenue has raised the following grounds for the assessment year 2007-08 :–

“1. The order of learned Commissioner (Appeals) is opposed to law and facts of the case.

2. The learned Commissioner (Appeals) erred in allowing the assessee’s claim of depreciation on intangibles.

3. The Commissioner (Appeals) erred in allowing the assessee’s claim that sub license fee for SAP R/3 systems and other application software amounting to Rs. 14,39,26,053 is to be treated as revenue expenditure.

4. The learned Commissioner (Appeals) erred in allowing the claim of depreciation on expenditure towards trademark.

5. For these and such other grounds that may be urged at the time of hearing.”

31. Ground No. 1 is general in nature and does not require any specific adjudication.

32. Ground Nos. 2 & 4 are regarding dis allowance of depreciation on intangible assets.

33. We have heard the learned Departmental Representative as well as Learned Senior Counsel for the Assessee and considered the relevant material on record. At the outset, we note that an identical issue was considered by this Tribunal in assessee’s own case for the assessment year 2004-05. The Commissioner (Appeals) has allowed the claim of the assessee in para 9.1 as under :–

9.1 While treating the claim of expenditure in terms of section 37 as revenue outflow in assessment year 2003-04 & assessment year 2004-05 the assessing officer in assessment year 2005-06 & assessment year 2006-07 treated the expenditure as being in the nature of an intangible asset on which depreciation was allowed under section 32. In the impugned assessment year 2007-08 this treatment was not followed. In the sub-sequent assessment year 2008-09 however, depreciation, once again, was allowed by the assessing officer on this item. This is clearly a mistake for which the assessing officer is directed to allow depreciation. In her appellate order for assessment year 2006-07 my predecessor has also confirmed the nature of the expenditure as being capital in nature on which depreciation is allowable.

Thus it is clear that for the earlier assessment year the assessee claimed this expenditure as revenue in nature however, the assessing officer treated the same as capital in nature and allowed the depreciation which was confirmed by the Tribunal. Therefore, when the assessing officer itself has treated this expenditure as capital being intangible asset and allowed the depreciation then the claim of depreciation on the said intangible asset cannot be denied for the year under consideration. Further the issue of depreciation on intangible asset is covered by the decision of Honorable Supreme Court in the case of Techno Shares & Stocks Ltd. v. CIT (2010) 327 ITR 323. Hence we do not find any merit in this ground of revenue’s appeal and accordingly the same is dismissed.

34. Ground No. 3 is regarding dis allowance of expenditure being sub-license fees for SAP and other application software.

35. We have heard the learned Departmental Representative as well as learned Authorized Representative and considered the relevant material on record. The assessing officer has disallowed the expenditure by treating the same as capital in nature whereas the Commissioner (Appeals) has allowed the claim of the assessee by holding that the expenditure was incurred for application software and therefore, the same is allowable revenue expenditure.

36. The learned Departmental Representative has relied upon the decision of Pune Bench of the Tribunal in the case of Sudarshan Chemical Industries Ltd. v. Asstt. CIT (2008) 110 ITD 171 and submitted that the Tribunal while considering the identical issue of ERP Implementation has held that this expenditure is towards acquiring intangible asset and therefore is capital in nature. He has also relied upon the decision of Special Bench of Delhi Bench of ITAT in the case of Amway India Enterprises v. Dy. CIT (2008) 111 ITD 112 and submitted that if software having its utility to the assessee for a period of beyond two years then the same is considered as an accruing of benefit of enduring nature and therefore it will be an expenditure of capital in nature. Thus the learned Departmental Representative has relied upon the orders of the assessing officer and submitted that the issue is covered by the decision of Pune Bench of the Tribunal in the case of Sudarshan Chemicals Industries Ltd. (supra) as well as Special Bench in the case of Amway India Enterprises (supra).

37. On the other hand, the Learned Senior Counsel for the Assessee has submitted that the expenditure is incurred on software application as the facts are recorded by the Commissioner (Appeals) in para 8 of the impugned order. He has further contended that the payment for application software even results in enduring benefit to the assessee in the form of improvement in the efficiency with consequential organization changes it still does not result in acquisition of any capital asset. Thus the Learned Senior Counsel for the Assessee has submitted that when the expenditure has not brought into existence any capital asset then the same cannot be treated as capital in nature. He has relied upon the decision of Honorable Madras High Court in the case of CIT v. Southern Roadways Ltd. (2008) 304 ITR 84 as well as decision dated 29-11-2016 of the co-ordinate Bench of this Tribunal in the case of AXA Business Services (P) Ltd. v. DCIT in IT(TP)A No. 334/Bang/2013 and others.

38. Having considered the rival submissions as well as relevant material on record, at the outset we note that the expenditure incurred by the assessee is in respect of application software. The Special Bench of the Tribunal in the case of Amway India Enterprises (supra) has laid down the guidelines on this issue in paras 59 & 60 as under :–

“ 59. Our conclusions on the issue under consideration thus can be summarized as under:–

(i) When the assessee acquires a computer software or for that matter the license to use such software, he acquires a tangible asset and becomes owner thereof as held above relying on the decision of Honorable Supreme Court in the case of TCS (supra).

(ii) Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time, it can be said that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure. Any software having its utility to the assessee for a period beyond two years can be considered as accrual of benefit of enduring nature. However, that by itself will not make the expenditure incurred on software as capital in nature and the functional test as discussed above also needs to be satisfied.

(iii) Once the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred on computer software is capital or revenue has to be seen from the point of view of its utility to a businessman and how important an economic or functional role it plays in his business. In other words, the functional test becomes more important and relevant because of the peculiar nature of the computer software and its possible use in different areas of business touching either capital or revenue field or its utility to a businessman which may touch either capital or revenue field.

60. Having laid down the criteria for determining the nature of expenditure incurred on acquisition of software, whether capital or revenue, we are of the view that these criteria need to be applied to determine the exact nature of expenditure incurred by the assessees in the present cases for acquiring different softwares. Since this exercise is required to be done in respect of each and every software independently having regard to the criteria laid down above, we are of the view that the matter needs to be restored back to the file of the assessing officer for doing such exercise. The assessing officer shall examine the question whether expenditure on computer software is capital or revenue in the light of the criteria laid down above after giving an opportunity of being heard to the assessees. Ifon such examination, the assessing officer comes to the conclusion that the expenditure is capital expenditure, then the question regarding allowing depreciation will be decided in accordance with the principles laid down in the sub-sequent paragraphs.”

Therefore even if the test of ownership and enduring benefits are satisfied, the question remains whether the expenditure incurred on computer software is capital or revenue depending upon its utility to the business man and how important and economic or fundamental role it plays in the business. Thus the Special Bench has observed that the functional test becomes more important and relevant because of the peculiar nature of the computer software and its possible use in different areas of business i.e., capital or revenue field or its utility to the business man. The Honorable Madras High Court in the case of Southern Roadways Ltd. (supra) has clearly laid down the rule that even if the expenditure incurred on software results in enduring benefit and if it has not resulted in bringing any new capital asset in existence then it cannot be treated as capital expenditure. The co-ordinate Bench of this Tribunal in the case of AXA Business Services (P) Ltd. (supra) has held in para 21 as under :–

‘ 21. We have considered the rival submissions as well as the relevant material on record. The assessee has submitted the details and explanation regarding this expenditure before the authorities below which has been reproduced by the Commissioner (Appeals) in para 6 as under :–

“The expenses incurred by the Company essentially relates to the following :–

*Service charges paid to AXA Group Solutions Private Limited for the following services :–

–Application Support–Bug fixing, Ensuring all applications are functioning properly at all times;

–Application Maintenance–Enhancements/changes in the existing applications; and

–Application Development–Developing new one time usage IT applications supporting the Appellant’s organizational/departmental requirements.

** SAP Maintenance charges–includes expenses incurred towards incorporation of new developments and maintenance of SAP software. “

Though the assessee has claimed that this is expenditure for application support and SAP maintenance charges however without examination of the relevant invoices and description of the items of expenditure, it is not possible to give a conclusive finding that a particular item of expenditure would fall in the category of capital or revenue. It is pertinent to note that if the expenditure is incurred as an annual recurring maintenance charges or annual up gradation of the existing software then it would be in the nature of revenue. On the other hand, if the expenditure is incurred in replacing the existing software and it is not a recurring annual expenditure then though the life of software is very short, the same would be capital in nature and that is why the depreciation @ 60% is allowable on such capital asset because of the nature of the asset which becomes obsolete within a very short period. Therefore as far as the SAP maintenance charges are concerned, the same are revenue in nature however the other expenses in respect of upgradation of the existing software requires proper verification and examination of the relevant record including the invoices to ascertain whether these are recurring annual maintenance charges or its substitute and upgradation of the software. This ground is partly allowed and partly set aside for statistical purpose.’

Thus in view of the above facts and circumstances when the expenditure in question has not resulted in bringing a new capital asset in existence then the same can be allowed as a revenue expenditure even if the expenditure can have the benefit to the assessee in the form of improvement in the efficiency. Hence we do not find any error or illegality in the order of Commissioner (Appeals) qua this issue.

39. For assessment year 2008-09, the revenue has raised the following grounds :–

“1. The order of learned Commissioner (Appeals) is opposed to law and facts of the case.

2. The Commissioner (Appeals) erred in allowing the assessee’s claim that expenditure on application software amounting to Rs. 4,03,67,157 is to be treated as revenue expenditure.

3. The learned Commissioner (Appeals) erred in remitting the issue of deduction under section 43B to the assessing officer has the Commissioner (Appeals) does not have the power to remit back an issue.

4. For these and; such other grounds that may be urged at the time of hearing.”

40. Ground No. 1 is general in nature and do not require any specific adjudication.

41. Ground No. 2 is regarding expenditure on application software, this ground is common as in the assessment year 2007-08. In view of our finding for the assessment year 2007-08, this ground stand disposed of on the same terms and consequently this ground is dismissed.

42. Ground No. 3 is regarding deduction under section 43B of the Act.

43. The assessee claimed a deduction of sales tax of Rs. 2,56,286 under section 43B as paid during the year under consideration. The Commissioner (Appeals) noted that this claim was not made by the assessee in the return of income inadvertently but the conditions stipulated under section 43 are fulfilled. Accordingly, the assessing officer was directed to verify the assessee’s claim with regard to the payments made towards sales tax and if found correct allow the deduction of the amount permissible under law. The grievance of the revenue is limited to the power of the Commissioner (Appeals) to remit back the issue to the assessing officer.

44. We have heard the learned Departmental Representative as well as learned Authorized Representative and considered the relevant material on record. Since this claim was not made in the return of income and therefore, it was not allowed by the assessing officer. However, this claim was remitted by the Commissioner (Appeals) and ask the assessing officer to verify the factual aspect of payment of the sales tax during the year and then allow the claim. Even for the sake of argument if it is accepted that the Commissioner (Appeals) has no jurisdiction to remand the issue, we are of the opinion that when the claim of the assessee is only in respect of payment of sales tax during the year under consideration then the only thing to be examined and verified by the assessing officer is to confirm the payment of sales tax as claimed by the assessee during the year under consideration. Accordingly, in the facts and circumstances of the case, we set aside this issue to the record of the assessing officer to verify the claim of the assessee and then decide the same as per law.

45. In the result, the assessee’s appeals are partly allowed and revenue’s appeal for the assessment year 2007-08 is dismissed and for the assessment year 2008-09 is partly allowed.