Allowability of Deduction under section 80JJA if deduction not allowed in first year of employment

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Allowability of Deduction under section 80JJA if deduction not allowed in first year of employment 

Short Overview  If deduction under section 80JJA was refused in the first year of employment of new employee then it could not be said that for next two succeeding assessment years also, benefit of deduction would not be available because such an approach would defeat the very purpose for which deduction under section 80JJAA is allowed for three consecutive assessment years.

Assessee claimed deduction under section 80JJAA. AO denied deduction on the ground that employees did not work for more than 300 days in financial year 2006-07 relevant to assessment year 2007-08, i.e., the first year of employment.

It is held  It was not proper to say that if deduction under section 80JJA was refused in the first year of employment of new employee then for the next two succeeding assessment years also, benefit of deduction would not be available. Such an approach would defeat the very purpose for which deduction under section 80JJAA is allowed for three consecutive assessment years. This aspect has been clarified in Finance Act, 2018 by adding a second proviso to the definition of additional employee in Explanation (ii) to section 80JJAA. Even prior to such curative or clarificatory amendment, the claim for deduction under section 80JJAA could not be and ought not to have been disallowed on this ground.

Decision: In assessee’s favour.

IN THE ITAT, BANGALORE BENCH

N.V. VASUDEVAN, V.P. & B.R. BASKARAN, A.M.

Texas Instruments (India) (P) Ltd. v. Addl. CIT

IT(TP)A No. 169/Bang/2014, IT(TP)A No. 149/Bang/2014

6 March, 2020

Assessee by: Percy Pardiwala, Sr. Counsel

Revenue by: Muzafar Hussain, CIT(DR) (ITAT), Bengaluru.

ORDER

N.V. Vasudevan, V.P.

IT(TP)A No. 169/Bang/2014 is an appeal by the assessee while IT(TP)A.No. 149/Bang/2014 is an appeal by the Revenue. Both these appeals are directed against the Order, dated 27-2-2012 of Commissioner (Appeals), LTU, Bangalore relating to assessment year 2008-09.

  1. We shall first take up the appeal of the assessee for consideration.

Ground No. 1 raised by the revenue is general in nature and calls for no specific adjudication. Ground No. 2 raised by the revenue in its appeal and Ground No. 4 & 5 raised by the revenue in its appeal are with reference to determination of Arm’s Length Price (ALP) in respect of an international transaction of rendering of Software Development Services by the assessee to its Associated Enterprise in accordance with section 92 of the Income Tax Act, 1961 (Act). At the time of hearing it was brought to our notice by the learned counsel for the assessee that the issue with regard to determination of ALP has been settled under Mutual Agreement Procedure (MAP) between the assessee and the revenue and the assessing officer has under rule 44H(4) of the Income Tax Rules, 1962 has given effect to the MAP resolution vide proceedings dated 22-2-2016. Hence, the relevant grounds of appeal raised by the assessee as well as the revenue are dismissed as not requiring adjudication.

  1. The next issue raised by the assessee in its appeal in Ground No. 3.1 (sub-grounds 3.1.1 to 3.1.4) is with regard to the action of the revenue authorities in not allowing deduction under section 80JJAA of the Act amounting to Rs. 7,57,22,069. The provisions of section 80JJAA of the Act, as applicable for assessment year 2008-09 reads as follows :–

“80JJAA. Deduction in respect of employment of new workmen.–(1) Where the gross total income of an assessee, being an Indian company, includes any profits and gains derived from any industrial undertaking engaged in the manufacture or production of article or thing, there shall, subject to the conditions specified in sub-section (2), be allowed a deduction of an amount equal to thirty per cent of additional wages paid to the new regular workmen employed by the assessee in the previous year for three assessment years including the assessment year relevant to the previous year in which such employment is provided.

(2) No deduction under sub-section (1) shall be allowed —

(a) if the industrial undertaking is formed by splitting up or reconstruction of an existing undertaking or amalgamation with another industrial undertaking;

(b) unless the assessee furnishes along with the return of income the report of the accountant, as defined in the Explanation below sub-section (2) of section 288 giving such particulars in the report as may be prescribed.

Explanation.–For the purposes of this section, the expressions, —

(i) “additional wages” means the wages paid to the new regular workmen in excess of one hundred workmen employed during the previous year:

Provided that in the case of an existing undertaking, the additional wages shall be nil if the increase in the number of regular workmen employed during the year is less than ten per cent of existing number of workmen employed in such undertaking as on the last day of the preceding year;

(ii) “regular workman”, does not include —

(a) a casual workman; or

(b) a workman employed through contract labour; or

(c) any other workman employed for a period of less than three hundred days during the previous year;

(iii) “workman” shall have the meaning assigned to it in clause (s) of section 2 of the Industrial Disputes Act, 1947 (14 of 1947).”

  1. The first reason assigned by the assessing officer for denying the claim for deduction under section 80JJAA of the Act was that persons working in software industry cannot be said to be “Workmen” for the purpose of section 80JJAA of the Act. According to the assessing officer the definition of workmen for the purpose of section 80JJAA was the definition of the term as per section 2(s) of the Industrial Disputes Act, 1947 and that definition lays down that “Any person employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical and supervisory work for hire or reward, but does not include employees employed mainly in a managerial or administrative capacity. According to the assessing officer Software professionals are highly skilled workers and the nature of work performed by them were highly skilled whereas the skilled work contemplated by the definition of workmen in the Industrial Disputes Act, 1947 is ordinary skill and therefore the workmen of the assessee cannot be considered as “Workmen” for the purpose of section 80JJAA of the Act. The assessing officer also noticed that in assessee’s own case for assessment year 2001-02 and 2002-03, the Tribunal had not accepted the stand of the revenue in this regard but still chose not to follow the decision of the Tribunal as the revenue has not accepted the decision of Tribunal and had preferred appeal to the Hon’ble High Court on this aspect of deduction under section 80JJAA of the Act. On the question whether the employees employed in software industry can be said to be “Workmen”, the Bangalore Bench of ITAT has already settled this issue in assessee’s own case. The Tribunal held that Software Industry has also been notified as Industry for the purpose of Industrial Disputes Act, 1947 by the State of Karnataka and that the employees employed in software development industry render technical services and not services in the nature of supervisory or management character. In view of the aforesaid decision of the Tribunal, we are of the view that the above reason given by the assessing officer for denying the benefit of deduction under section 80JJAA of the Act cannot be sustained. In fact the Commissioner (Appeals) in the impugned order has also not sustained the disallowance of deduction under section 80JJAA of the Act on this ground and has followed the earlier order of the Tribunal in assessee’s own case.
  2. Before we deal with the other surviving reasons assigned by the assessing officer for denying the benefit of deduction under section 80JJAA of the Act, it is appropriate to recapitulate the conditions that need to be fulfilled for claiming deduction.

The conditions that need to be fulfilled by an assessee to claim benefit of deduction under section 80JJAA of the Act, are :–

(1) The assessee should be an Indian Company and the gross total income of the assessee should include profits and gains derived from any industrial undertaking engaged in the manufacture or production of article or thing. Admittedly this condition is satisfied in the case of the assessee.

(2) There are certain prohibition laid down in section 80JJAA(2) of the Act and it is not the case of the assessing officer that these prohibitions are applicable in the case of the assessee.

(3) The new workmen employed must be a regular workmen and the number of such new workmen employed should be in excess of one hundred workmen employed during the previous year.

(4) The increase in the number of regular workmen employed during the year should not be less than ten per cent of existing number of workmen employed in such undertaking as on the last day of the preceding year;

(5) If the above conditions are satisfied then 30% of the additional wages paid to new regular workmen employed by the assessee in the previous year, shall be allowed as deduction for three assessment years including the assessment year relevant to the previous year in which such employment is provided.

  1. The following are the details regarding the number of regular workmen and new workmen employed by the assessee during the F.Y. 2002-03 to 2007-08 relevant to assessment year 2003-04 to 2008-09 :–

Details of Number of regular workmen

Particulars Number of Regular “Workmen” Number of new workmen added
As on 31-3-2003 F.Y. 2002-03 (A.Y. 2003-04) 775 170
As on 31-3-2004 F.Y. 2003-04 (A.Y. 2004-05) 846 186
As on 31-3-2005 F.Y. 2004-05 (A.Y. 2005-06) 1048 351
As on 31-3-2006 F.Y. 2005-06 (A.Y. 2006-07) 1,056 211
As on 31-3-2007 F.Y. 2006-07 (A.Y. 2007-08) 1,187 295
As on 31-3-2008 F.Y. 2007-08 (A.Y. 2008-09) 1,105 131
  1. 7.The details of the new employees in respect of whom the assessee claimed deduction under section 80JJAA of the Act are given at page 176 to 182 of paper-book. From a perusal of the said list and the report of auditor for claiming deduction under section 80JJA of the Act in Form No. 10DA, a copy of which is at pages 80 to 85 of the assessee’s paper book, it can be seen that the deduction was claimed by the assessee under section 80JJAA of the Act on salary paid to 287 employees. It is also clear from the said report that the Salary paid to new workmen were nil for the Financial Year ending 31-3-2006 and 31-3-2008. Deduction has been claimed only in respect of wages paid to new regular workmen who were employed during the previous year 1-4-2006 to 31-3-2007. All the 287 employees were new employees who joined during the F.Y. 2006-07, on or after 12-6-2006 and therefore could not have put in service of 300 days or more during the F.Y. 2006-07 relevant to assessment year 2007-08. It is undisputed that they worked for 300 days during the previous year relevant to assessment year 2008-09.
  2. The second reason given by the assessing officer for denying the benefit of deduction under section 80JJAA of the Act, which is the reason that survives for consideration by the Tribunal is according to the assessing officer since the additional wages paid to these 287 employees were not eligible to deduction under section 80-JJAA of the Act because these employees did not work for more than 300 days in F.Y. 2006-07 relevant to assessment year 2007-08, the wages paid to these employees in assessment year 2008-09 will also not qualify for deduction under section 80JJAA of the Act. In other words according to the assessing officer if the condition for grant of deduction under section 80JJAA of the Act is not satisfied with reference to additional wages paid to new employees in the first year of their employment, then the additional wages paid to such new employees will not allowed in the second and third assessment years also. There is a reference in the assessing officer’s order that only 236 out of the 287 employees were new employees but these observations in the order of assessment is incorrect and contrary to the report of the Chartered Accountant in Form No. 10DA. It is admitted position that in respect of additional wages paid to new employees employed in the previous year relevant to assessment year 2008-09 was not claimed by the assessee, as the increase in the number of regular workmen employed during the year was not more than ten per cent of existing number of workmen employed in such undertaking as on the last day of the preceding year. It is also not disputed that these 287 employees worked for 300 days in the previous year relevant to assessment year 2008-09. The total wages paid to new workmen was Rs. 25,24,06,897 and deduction under section 80JJAA of the Act was claimed by the assessee at 30% of the above viz., a sum of Rs. 7,57,22,069.

8.1. On appeal by the assessee against the order of assessing officer denying deduction under section 80JJAA of the Act, the Commissioner (Appeals) endorsed the view of the assessing officer on this aspect of deduction under section 80JJAA of the Act. Hence this appeal by the assessee before the Tribunal.

8.2. The learned counsel for the assessee brought to our notice the order of the assessing officer for assessment year 2007-08 in which he has while disallowing the claim for deduction under section 80JJAA of the Act for that assessment year has accepted the position that on additional wages paid to new workmen employed during the previous year relevant to assessment year 2005-06 who have worked more than 300 days during the previous year relevant to assessment year 2007-08, the assessee is entitled to deduction under section 80JJAA of the Act. It was pointed out that the ITAT in the appeal relating to assessment year 2007-08 in the case of the assessee in IT(TP)A.No. 1032/Bang/2011 Order, dated 16-6-2017 confirmed the disallowance under section 80JJAA of the Act only on the basis the increase in the number of regular workmen employed during the year was not more than ten per cent of existing number of workmen employed in such undertaking as on the last day of the preceding year. He relied on the decision of ITAT rendered in the case of Bosch Ltd. v. ACIT (2016) 74 Taxmann.com 161 (Bangalore-Trib.) : 2016 TaxPub(DT) 4545 (Bang-Trib) wherein at paragraph 23 of the aforesaid order the Tribunal observed that the deduction under section 80JJAA of the Act is allowed for three years including the year in which the employment is provided.

Hence, in each year it has to be seen that the workmen was employed for at least 300 days during that previous year and that such workmen was not a casual workmen or workmen employed through contract labour.

Therefore, if some workmen were employed for a period of less than 300 days in the previous year then no deduction is allowable in respect of payment of wages to such work men in the present year even if such workmen was employed in the preceding year for more than 300 days but in the present year, such workmen was not employed for 300 days or more.

It was submitted that by the very same reasoning the fact that in the first year of employment the additional wages paid is not allowed deduction for the reason that the workmen did not work for 300 days or more but if the next two assessment years, if he works for more than 300 days each, then the deduction under section 80JJAA of the Act has to be allowed. He also drew our attention to the insertion of a second proviso to Explanation (ii) to section 80JJAA of the Act (which defines additional employee) by the Finance Act, 2018, with effect from 1-4-2019, which reads as follows :–

“Provided further that where an employee is employed during the previous year for a period of less than two hundred and forty days or one hundred and fifty days, as the case may be, but is employed for a period of two hundred and forty days or one hundred and fifty days, as the case may be, in the immediately succeeding year, he shall be deemed to have been employed in the succeeding year and the provisions of this section shall apply accordingly;”

8.3 It was his submission that though the aforesaid amendment is applicable with effect from 1-4-2019, the aforesaid amendment which is intended to remove hardship to getting benefit of an incentive provision, should be held to be curative in nature in nature and should be held to be retrospective in operation on the principle laid down by the Hon’ble Supreme Court in the case of CIT v. Calcutta Export Company (2018) 93 taxmann.com 51 (SC) : 2018 TaxPub(DT) 2136 (SC).

The learned DR relied on the order of the assessing officer. However, the learned AR submitted that the assessee is claiming benefit of deduction for second year only, as it has accepted the fact that it is not eligible to claim deduction in the first year i.e., assessment year 2007-08 due to non-fulfilment of condition of 300 days.

  1. We have given a very careful consideration to the rival submissions.

The only reason given by the assessing officer for denying the benefit of deduction under section 80JJAA of the Act, which is the reason that survives for consideration by the Tribunal is according to the assessing officer since the additional wages paid to these 287 employees were not eligible to deduction under section 80JJAA of the Act because these employees did not work for more than 300 days in F.Y. 2006-07 relevant to assessment year 2007-08, the wages paid to these employees in assessment year 2008-09 will also not qualify for deduction under section 80JJAA of the Act. In other words according to the assessing officer if the condition for grant of deduction under section 80JJAA of the Act is not satisfied with reference to additional wages paid to new employees in the first year of their employment, then the additional wages paid to such new employees will not allowed in the second and third assessment years also. As pointed out by the learned counsel for the assessee, this approach of the revenue authorities is contrary to the assessing officer’s stand on claim for similar deduction under section 80JJAA of the Act in assessment year 2007-08.

In the order of assessment passed by the assessing officer for assessment year 2007-08, he has while disallowing the claim for deduction under section 80JJAA of the Act for that assessment year, accepted the position that on additional wages paid to new workmen employed during the previous year relevant to assessment year 2005-06 who have worked more than 300 days during the previous year relevant to assessment year 2007-08, the assessee is entitled to deduction under section 80JJAA of the Act. In the decision rendered in the case of Bosch Ltd. v. ACIT (2016) 74 Taxmann.com 161 (Bangalore-Trib.) : 2016 TaxPub(DT) 4545 (Bang-Trib) the Bangalore ITAT at paragraph 23 of the aforesaid order the Tribunal observed that the deduction under section 80JJAA of the Act is allowed for three years including the year in which the employment is provided. Hence, in each year it has to be seen that the workmen was employed for at least 300 days during that previous year and that such workmen was not a casual workmen or workmen employed through contract labour. Therefore, if some workmen were employed for a period of less than 300 days in the previous year then no deduction is allowable in respect of payment of wages to such work men in the present year even if such workmen was employed in the preceding year for more than 300 days but in the present year, such workmen was not employed for 300 days or more. By the very same reasoning the fact that in the first year of employment the additional wages paid is not allowed deduction for the reason that the workmen did not work for 300 days or more but if the next two Assessment years, if he works for more than 300 days each, then the deduction under section 80JJAA of the Act has to be allowed. It is not proper to say that if the deduction is refused in the first year of employment of the new employee then for the next two succeeding assessment years also, the benefit of deduction will not be available. Such an approach defeats the very purpose for which deduction under section 80JJAA of the Act is allowed for three consecutive Assessment years. This aspect has now been clarified in the Finance Act, 2018 by adding a second proviso to the definition of additional employee in Explanation (ii) to section 80JJAA of the Act. Even prior to such curative or clarificatory amendment, we are of the view that the claim for deduction under section 80JJAA of the Act cannot be and ought not to have been disallowed on this ground. We therefore direct that the deduction claimed by the assessee should be allowed.

  1. The next issue that arises for consideration in the appeal by the assessee is projected in Ground No. 3.2 (Sub-Grounds 3.2.1 to 3.2.9) and the same relates the action of the revenue authorities in disallowing claim of the assessee for deduction of a sum of Rs. 4,42,14,942 in relation to capital work in progress written off. The facts in this regard are that the assessee in F.Y. 2006-07 relevant to assessment year 2007-08 was planning expansion of its business premises and in that regard employed consultants and contractors for planning designing and constructing the new building.

However toward end of F.Y. 2006-07 relevant to assessment year 2007-08, the assessee decided to abandon the expansion plan and accordingly the entire expenditure incurred towards the expansion of the building premises was written off in the profit and loss account for assessment year 2007-08. Subsequently, in the previous year relevant to assessment year 2008-09, certain additional claims were made towards planning, designing, architecture fees amounting to Rs. 61,04,942. Over and above this the assessee had to pay damages of Rs. 3,81,10,000 to the contractor in respect of a clause in the agreement between the assessee and the Contractor, who was identified for the purpose of putting up the business premises for the purpose of expansion.

The relevant clause in the Agreement between the assessee and the contractor in this regard reads thus :–

Clause (d): [Page-4 of the Agreement between the assessee and Bagmane Developers Pvt. Ltd.]

“If the Client does not construct one or more structures not included in the scope of the project or does not engage the services of a developer (including the Contractor) to construct and develop one or more structures at the Site that are not included in the scope of the Project on or before the 31-8-2009, the client shall pay to the Contractor an amount equal to Rs. 3,81,10,000 (Rupees Three Crores Eighty one Lakhs Ten Thousand only) on the 31-802009.”

  1. In Schedule-K Note No. 17 to the Notes to Accounts the claim for deduction of the aforesaid two sums of Rs. 61,04,942 and Rs. 3,81,10,000 as follows :–

“The Company was planning expansion of building premises and had made payments in the nature of planning, designing and architecture fees, which was accounted as Capital work-in-progress.

The management had decided to call off the expansion plan and hence, the expenditure of Rs. 2,82,95,253 had been written off in the previous year. Further during the year, the management has acknowledged certain additional claims towards such planning, designing and architecture fees amounting to Rs. 61,04,942, which has been charged off in P & L A/c. The company had also entered into an agreement with a real estate developer (‘the developer’) for construction of building in phases.

The terms of the agreement provided for payment of compensation to the developer in the event of non-construction of the subsequent phases of the building within the stipulated time.

The management of the company has decided to call off the expansion plan and accordingly, provided for Rs. 3,81,10,000 representing compensation payable to the developer for non-construction of the subsequent phase of the building.”

  1. The assessee’s claim for deduction was not accepted by the assessing officer for the reason that the expenditure in question was a capital expenditure and therefore cannot be allowed as deduction. The Commissioner (Appeals) confirmed the order of the assessing officer. Aggrieved by the order of Commissioner (Appeals), the assessee is in appeal before the Tribunal.
  2. Before the Tribunal, it is not disputed by the parties that identical issue came up for consideration before this Tribunal in assessee’s case for assessment year 2007-08 and this tribunal upheld the orders of revenue authorities denying the claim of the assessee for deduction. The following were the relevant observations of the Tribunal :–

“8. Ground no. 3 challenges the addition of capital work in progress written off during the year amounting to Rs. 28,295,253. It was submitted that this assessee-company was planning expansion of building premises and the payments have been made towards planning, designing and architecture fees which are accounted and shown as capital work progress and the management has decided to call off the expansion plan hence the expenditure incurred on the expansion of building had claimed the revenue expenditure which was disallowed by the assessing officer. Being aggrieved, the appellant is before us. The learned counsel relied upon the decision of Hon’ble Delhi High Court in case of Indo Rama Synthetics (I) Ltd. v. CIT (2011) 333 ITR 18 (Del) : 2011 TaxPub(DT) 0093 (Del-HC) and the decision of Hon’ble Calcutta High Court in case of Binani Cement Ltd. v. CIT (2015) 60 taxmann.com 384 (Cal) : 2015 TaxPub(DT) 1490 (Cal-HC) and the decision of the coordinate bench ITAT, Mumbai in case of DCIT v. Mukund Ltd. in ITA No. 2708/Mum/2009 and also decision of High Court of Bombay in case of CIT v. Idea Cellular Ltd. (2016) 76 taxmann.com 77 (Bom) : 2016 TaxPub(DT) 4396 (Bom-HC) in support of the proposition that any capital expenditure incurred in respect of abandoned project should be allowed as a deduction.

  1. We heard the rival submissions and perused the material on record. The submission of the learned counsel cannot be accepted for the simple reason that the decision relied upon by the learned counsel relates to the expenditure which is in the nature of revenue incurred with the object of enhancing the profitability and the efficiency of the existing business. Whereas in the present case it is an expenditure incurred to bring into an existence the capital asset. This cannot be allowed as a revenue expenditure. Infact, in the case relied by the Hon’ble counsel for the assessee the decision of Hon’ble Delhi High Court in case ofIndo Rama Synthetics (I) Ltd. v. CIT(supra) The Hon’ble High Court observed vide para 18 as under —

“Once it is accepted as a fact that the assignment given to the said consultants was for the purpose of improving operational efficiencies and was not to incur any enduring benefit in capital field but to carry on the existing business more efficiently and profitably, the irresistible conclusion which follows is that such expenditure was allowable as business expenditure. [See CIT v. Praga Tools Ltd. (1986) 157 ITR 282 (AP) : 1986 TaxPub(DT) 0487 (AP-HC) and CIT v. Crompton Engineering Co. Ltd. (2000) 242 ITR 317 (Mad ) : 2000 TaxPub(DT) 0268 (Mad-HC)].”

Therefore, it follows that the expenditure incurred in the revenue field for expansion of an existing unit is allowable, whereas the expenditure on the capital account, the same cannot be allowed as a revenue expenditure. Hence the ground no. 3 of appeal filed by the assessee is dismissed.”

  1. The learned counsel for the assessee argued that the expenditure in question cannot be regarded as capital expenditure and was incidental to carrying on business of the assessee and was revenue expenditure.

According to him had the project been completed the expenditure would have been capitalized and depreciation claimed on the capitalized value of assets but since the project was abandoned, the expenditure had to be regarded as revenue expenditure. The following decisions were cited in support of the claim so made, viz., Empire Jute Mills Ltd. v. CIT (1980) 124 ITR 1 (SC) : 1980 TaxPub(DT) 1083 (SC); CIT v. ACC Ltd. 172 ITR 257 (SC); ACIT v. Sutlej Industries Ltd. (2005) 94 TTJ 108 (Delhi-ITAT) : 2005 TaxPub(DT) 0079 (Del-Trib); Excel Industries Ltd. v. Dy. CIT (2004) 86 TTJ 840 (Mumbai-ITAT) : 2004 TaxPub(DT) 0231 (Mum-Trib); CIT v. Graphite India Ltd. (1996) 221 ITR 862 (Calcutta) : 1996 TaxPub(DT) 1172 (Cal-HC). In particular it was argued that in so far as the damages of Rs. 3,81,10,000 is concerned, the claim was not engaging the services of the contractor in future for other contracts and that cannot be regarded as having any nexus with the capital work in progress written off in the books of accounts of the assessee and therefore to that extent the claim for deduction ought to have been allowed by the revenue authorities. The learned DR relied on the order of the revenue authorities and the decision of the tribunal rendered on identical issue in assessment year 2007-08.

  1. We have given a careful consideration to the rival submissions and are of the view that since identical claim has been considered capital expenditure by the tribunal in assessment year 2007-08, we find no reason to take a contrary view. The nature of the capital work in progress written off being identical, respectfully following the decision of the Tribunal, we uphold the orders of the revenue authorities. We also find all the case laws cited by the learned counsel for the assessee before us were dealt with and distinguished by the assessing officer. We are also of the view that the damages of Rs. 3,81,10,000 though was in connection with a claim for not engaging the services of the contractor in future for other contracts cannot be regarded as having no nexus with the capital work in progress written off in the books of accounts of the assessee and therefore to that extent the claim for deduction and cannot be allowed as deduction and were rightly held to be capital expenditure by the revenue authorities. We however find that in Ground No. 3.2.9 the assessee has submitted that a sum of Rs. 61,04,942 was disallowed under section 40(a)(i)/(ia) of the Act and that sum is also part of the sum of Rs. 4,42,14,942 which was disallowed by the assessing officer as capital expenditure and therefore to the extent of Rs. 61,04,942 there has been a double addition made by the revenue authorities. We are of the view that it would be just and appropriate to direct the assessing officer to look into this aspect while giving effect to the decision of the Tribunal after affording opportunity of being heard to the assessee and if the contention is found to be correct, allow relief to the assessee. Thus the relevant grounds of appeal being Ground No. 3.2.1 to 3.2.8 are dismissed while Ground No. 3.2.9 is treated as allowed for statistical purpose.
  2. The next issue that arises for consideration is disallowance of additional depreciation claimed by the assessee. The grievance in this regard is projected by the assessee in Ground No. 3.3 (sub-grounds 3.3.1 to 3.3.4) of the grounds of appeal filed before the Tribunal. The facts with regard to the claim of additional depreciation made by the assessee are that the assessee claimed additional depreciation of Rs. 1,61,35,457 on additions to Plant & Machinery during the previous year. The details of the Plant & Machinery on which additional depreciation was claimed by the assessee is given as Annexure-1 to this order.
  3. The assessing officer on perusal of the details of Plant and Machinery on which additional depreciation was claimed by the assessee was of the view that the description of the items of plant and machinery on which additional depreciation was claimed by the assessee were such that those items cannot be regarded as Plant and Machinery but were to be regarded as “Office Equipment” on which additional depreciation cannot be claimed under section 32(1)(iia) of the Act. Besides the above, the assessing officer was also of the view that the assessee was in the business of Software Development and only computer systems can be considered as Plant & Machinery in the case of the assessee. He was also of the view that the plant and machinery on which additional depreciation is claimed should be used in manufacture of article or thing and since the assessee was only a manufacturer of software, the aforesaid items which were claimed as Plant & Machinery, even if were to be regarded as Plant & Machinery, additional depreciation cannot be allowed because these items were not used by the assessee in the manufacture of computer software. In response to a query by the assessing officer as above, the assessee submitted that any appliance capable of being installed and used in any place where people work or gather, and desire to communicate, such items cannot be construed as office appliance and in this regard placed reliance on the decision of Hon’ble Punjab & Haryana High Court in the case ofCIT v. Punjab Wireless Systems Ltd. (2007) 296 ITR 489 (P & H) : 2007 TaxPub(DT) 0150 (P&H-HC). The assessee further gave a list of assets on which additional depreciation has been claimed, which we have annexed as annexure-2 to this order. The assessing officer however proceeded to hold that the definition of Plant as given in section 43(3) of the Act is an inclusive definition and the word “Plant” has been defined to include ships, vehicles, books, scientific apparatus and surgical equipment used for the purposes of the business or profession but does not include tea bushes or livestock or buildings or furniture and fittings. The assessing officer laid emphasis on the words “used for the purpose of business” in the definition of Plant and concluded that the assessee failed to show how the items of assets on which additional depreciation was claimed was used for the purpose of business of Manufacture of Software by the assessee. He also held that the assets in question were not used in manufacture of software and the condition laid down in section 32(1)(iia) of the Act for claiming depreciation is that the assets on which depreciation is claimed should be used for the manufacture or production of an article or thing. The assessing officer accordingly denied the claim of the assessee for additional depreciation. The Commissioner (Appeals) confirmed the order of the assessing officer as there was no other facts brought to notice by the assessee before Commissioner (Appeals). Aggrieved by the order of the Commissioner (Appeals), the assessee is in appeal before the Tribunal.
  4. We have heard the submissions of the learned counsel for the assessee and the learned DR. The provisions of section 32(1)(iia) of the Act based on which the additional depreciation was claimed by the assessee reads thus :–

“Section 32. Depreciation.–(1) In respect of depreciation of —

(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1-4-1998,

owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed —

(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;

(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed:

“(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31-3-2005, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to twenty per cent. of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii):”

  1. A bare reading of the aforesaid provisions shows that the new machinery or plant should be used by an assessee engaged in the business of manufacture or production of any article or thing and the new machinery or plant need not be used in manufacture or production of any article or thing. The learned counsel has before us relied on the decision of the Hon’ble Madras High Court High Court in the case ofCIT v. VTM Ltd. (2010) 319 ITR 336 (Madras) : 2010 TaxPub(DT) 0782 (Mad-HC) wherein the assessee-company was engaged in the business of manufacture of textile goods. During the relevant assessment year, it had set up a wind mill for generation of power and claimed additional depreciation thereon under section 32(1)(iia). The assessing officer disallowed the claim on the ground that the assessee was engaged only in the manufacture of textile goods and the setting up of a wind mill had absolutely no connection with the manufacture of textile goods. However, the Commissioner (Appeals) as well as the Tribunal allowed the assessee’s claim of additional depreciation. On appeal to the High Court, the Hon’ble High Court held that for application of section 32(1)(iia) what is required to be satisfied in order to claim the additional depreciation is that a new machinery or plant, which has been set up, should have been acquired and installed after 31-3-2002 by an assessee, who was already engaged in the business of manufacture or production of any article or thing. The said provision does not state that the setting up of a new machinery or plant, which was acquired and installed after 31-3-2002 should have any operational connectivity to the article or thing that was already being manufactured by the assessee. Therefore, the contention that the setting up of a windmill had nothing to do with the manufacture of textile goods was totally not germane to the specific provision contained in section 32(1)(iia). In the light of the aforesaid decision, we are of the view that one of the basis on which the revenue authorities disallowed the claim of the assessee for disallowance of additional depreciation cannot be sustained.
  2. As far as the question whether the assets on which the assessee claimed additional depreciation should be regarded as “Plant” or “Office Equipment”, we do not find sufficient material before the revenue authorities to come to a conclusion one way or the other. The learned counsel for the assessee submitted in the course of his arguments that the assets on which additional depreciation is claimed were used for testing process while designing semi-conductors which was also a business which the assessee was carrying on. These details have not been brought on record by the assessee before the lower authorities nor before us. He also placed reliance on the decision of the Hon’ble Bombay High Court in the case ofCIT v. IBM World Trade Corpn. (1981) 130 ITR 739 (Bombay) : 1981 TaxPub(DT) 0292 (Bom-HC) wherein the Hon’ble Bombay High Court held the expression “office equipment” used in section 33 should be construed in context of appliances which are generally used in office as an aid for proper function of office and that EA machines, data processing machines installation and operation of which is on scientific basis, and which has their roles to play cannot be equated with office appliances and therefore such machines are “Plant” and not “Office appliances”. As we have already observed there is complete lack of details to decide whether the assets in question are “Plant” or “Office equipment” in the absence of the role these assets perform and purpose for which these assets are used by the assessee.

We therefore set aside the order of Commissioner (Appeals) on this limited issue of determining whether the assets on which additional depreciation is claimed by the assessee can be regarded as Plant. The assessee is directed to furnish the details and description to the assessing officer in this regard, who shall decide the issue afresh in accordance with law, after affording assessee opportunity of being heard. In the event of the assessing officer coming to the conclusion that the assets in question are in the nature of plant, the claim for additional depreciation should be allowed. With these observations we allow the relevant grounds of appeal for statistical purpose.

  1. The other ground of appeal in the assessee’s appeal with regard to levy of interest under section 234B and 234D are purely consequential and the assessing officer is directed to give consequential relief.
  2. In the result, appeal by the assessee is treated as partly allowed.
  3. Now we shall take up the appeal of the revenue for consideration.

Ground No. 1 and 6 are general in nature and calls for no specific adjudication.

Ground No. 4 & 5 are with regard determination of ALP in respect of an international transaction between the assessee and it’s AE. The issue has already been settled between the assessee and the Revenue in Mutual Agreement Procedure (MAP) under the Double Taxation Avoidance Agreement between India and USA. Hence, these grounds are dismissed as infructuous. Ground No. 2 & 3 alone remain to be adjudicated.

  1. As far as Ground No. 2 raised by the revenue is concerned, the same relates to the action of the Commissioner (Appeals) in holding that payment of lease rental on finance lease of cars will not attract Tax Deduction at Source (TDS) provisions and thereby deleting the addition made by the assessing officer under section 40(a)(i) & 40(a)(ia) of the Act. The facts with regard to this ground of appeal are that the assessee obtained certain vehicles on lease on a finance lease arrangement. On payment of lease rents under finance lease arrangement of Rs. 7,87,93,536, the assessee did not deduct tax at source. It was the plea of the assessee that the payment in question was not in the nature of “Rent” within the meaning of the term under section 194-I of the Act and therefore no tax was deducted at source at the time of making payment to the finance company. The assessing officer however held that the payment was in the nature of a payment to a contractor for execution of a work and the assessee ought to have deducted tax at source under section 194-C of the Act. Since no tax was deducted at source, the assessing officer disallowed deduction of a sum of Rs. 7,87,93,536 by invoking the provisions of section 40(a)(ia) of the Act.
  2. On appeal by the assessee the Commissioner (Appeals) held that provisions of section 194-C of the Act were not applicable to payment of lease rentals as the payment cannot be considered as payment to a contractor for carrying out any “Work”. Explanation III to section 194C of the Act defines Work for the purpose of section 194C of the Act as follows :–

“For the purposes of this section, the expression “work” shall also include —

(a) advertising;

(b) broadcasting and telecasting including production of programmes for such broadcasting or telecasting;

(c) carriage of goods and passengers by any mode of transport other than by railways;

(d) catering.”

  1. The Commissioner (Appeals) relied on decision of Delhi bench of the tribunal inACIT v. Sanjay Kumar (2011) 15 Taxmann.com 230 (Delhi) : 2012 TaxPub(DT) 0022 (Del-Trib) and Mumbai Bench of ITAT in the case of Bhail Bulk Carriers v. ITO (2011) 20 Taxmann.com 87 (Mum) : 2012 TaxPub(DT) 1997 (Mum-Trib) in which it has been held that the payment made by the assessee for taking cranes and ships on lease on time basis, did not constitute payment with regard to ‘works contract’ as defined in section 194C and hence the assessee was not required to deduct tax at source under this action.
  2. Aggrieved by the order of the Commissioner (Appeals) the revenue has raised Ground No. 2 before the Tribunal. The learned DR relied on the order of the assessing officer and further submitted that the applicability of provisions of section 194-I of the Act has not been considered by the Commissioner (Appeals). We are of the view that the assessing officer made the addition only on the basis of provisions of section 194C of the Act and he did not invoke the provisions of section 194I of the Act. As far as provisions of section 194C of the Act is concerned, we are of the view that the Commissioner (Appeals) has rightly come to the conclusion that payment of lease rentals under a finance lease will not attract the provisions of section 194C of the Act.

We find no grounds to interfere with the order of the Commissioner (Appeals). Accordingly Ground No. 2 raised by the revenue is dismissed.

  1. Ground No. 3 raised by the revenue is with regard to the grievance of the revenue in treating amount paid towards automation software as revenue expenditure. The facts with regard to this ground of appeal are that the assessee claimed deduction of a sum of Rs. 135,52,51,594 while computing income from business under the head “Data Automation software Expenses”. The assessing officer called upon the assessee to explain the nature of the aforesaid expenditure. The assessee vide itsLetter, dated 28-7-2011 explained to the assessing officer that the software in question were “Electronic Design Automation” (EDA) which are used by the assessee’s designers for product design and verification. The assessee pointed out that EDA software license is acquired by the Texas Instruments Inc. USA under a global agreement from vendors of such software like Synopsis, Cadence, Mathwork, Magma, Rational etc., and the assessee is allowed to use such software and billed on the basis of actual hours the assessee uses the software. The assessee therefore submitted that the expenditure was a payment for license to use software and the assessee never acquired any right or interest in the software and therefore the payment made for right to use such software was purely revenue expenditure and should be allowed as deduction. The assessing officer however did not allow the claim of the assessee by concluding that the expenditure was capital expenditure and therefore only depreciation at 60% would be allowed and not the entire expenditure. The following were the relevant observations of the assessing officer :–

“5.3 The assessee’s submission is carefully considered. The Data Automation Software is a computer software which is being used by the assessee for designing its products. Electronic Design Automation (EDA) is a category of software tools for designing electronic systems such as printed circuit boards and integrated circuits. The tools work together in a design flow that chip designers use to design and analyze entire semiconductor chips.

The expenditure on computer software under the head. “Data Automation Software expenses” is necessarily an expenditure which is required to be capitalized by the assessee. Assessee’s relies on the Hon’ble Supreme court decision in the case of Empire Jute Co Ltd. v. CIT (1980) 124 ITR 1 (SC) : 1980 TaxPub(DT) 1083 (SC) is misplaced since the decision was given by the Hon’ble Court in a different set of facts and circumstances. The assessee has not stated or clarified in its submission dated 28-7-2011 as to how it has applied the judgment in the case of Empire Jute Co Ltd. in its case.

5.4 The computer software expenses have been held to be capital in nature by the Hon’ble Rajasthan High Court in the case of CIT v. Arawali Construction Co. (P) Ltd. (2003) 259 ITR 30 (Raj) : 2003 TaxPub(DT) 0316 (Raj-HC). The Hon’ble Court held as under :–

“The fact on record is that the payment of Rs. 1,38,360 was not made as consultancy fee to Hindustan Computers Ltd. in fact, the payment was made for outright sale of ‘computer software’ which is used as technique in mining operations. The finding of the Commissioner (Appeals) was that the acquisition of software cannot be treated to be an asset of endurable nature. If the programme is used in one mining to another mining operation, why it should not be treated as capital asset and expenditure on that, capital expenditure. Considering these facts and decision of their Lordships and later decision of the Bombay High Court, in our view, the acquisition of technical know-how is a capital expenditure, therefore, the assessing officer has rightly treated the expenditure on acquiring the computer software as expenditure of capital nature and rightly allowed depreciation as per rules.”

5.5 Reliance is also placed on the decision in the case of Amway India Enterprises v. DCIT (ITAT, Del-Special Bench) (2008) 111 ITD 112 (Del) : 2008 TaxPub(DT) 1656 (Del-Trib). In this case the Hon’ble ITAT held that computer software was tangible asset eligible for depreciation @ 60%.

In the result, the Automation software expenses of Rs. 135,52,51,594 are held to be capital in nature. The amount as claimed in P & L A/c is disallowed and added back. Instead, the assessee is allowed depreciation on the amount @ 60%.

[Addition Rs. 54,21,00,637]”

  1. On appeal by the assessee, the Commissioner (Appeals) deleted the addition made by the assessing officer holding that the assessee acquired on purchase by the assessee and as per the Agreement with the owner of the software the assessee had only a right to use the software and that the software was an enabling tool in the business of the assessee and therefore the expenditure question was revenue expenditure. Aggrieved by the order of the Commissioner (Appeals), the revenue is in appeal before the Tribunal.
  2. We have heard the rival submissions. A copy of the group cost allocation Agreement dated 24-3-2006 is at page 406 of assessee’s paper book. The agreement is between Texas Instruments Inc., USA and the assessee. The Agreement refers to the US parent company of the assessee having acquired license to use EDA tools from the vendors and the right of the assessee to use the same and the fact that billing will be done on the assessee on the basis of actual use of the software by the assessee. It is thus clear that the assessee had acquired no right or interest whatsoever in the EDA tools and had only a right to use the software. It is not the case of the revenue that the EDA tools was not connected to the business of the assessee. In such circumstances, we are of the view that the deduction was rightly allowed by the Commissioner (Appeals) as revenue expenditure. We find no grounds to interfere with the order of the Commissioner (Appeals) and dismiss Ground No. 2 raised by the revenue.
  3. In the result, appeal by the revenue is dismissed while the appeal by the assessee is partly allowed.

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