CIT & Anr. v. IBM India Ltd. - Taxpublishers.in

SUBSCRIBE FOR FULL CONTENT


The Tax Publishers2013 TaxPub(DT) 1945 (Karn-HC) : (2013) 357 ITR 0088 : (2013) 089 DTR 0025 Income Tax Act, 1961 --Business expenditureAllowability Provision for warranty liability--Assessee-company had claimed deduction of provision made for warranty liability in respect of products sold and contended that it was not a contingent liability but should be allowed as Revenue expenditure. Revenue contended that the said issue was covered by the judgment of the Supreme Court in Rotork Controls India (P.) Ltd. v. CIT 2009 TaxPub(DT) 1730 (SC) : (2009) 314 ITR 62 (SC) and a relief was permissible only if the condition set out in the said judgment was fulfilled, therefore, the matter was to be remanded back to assessing officer for fresh consideration in view of law declared in the said judgment. *Held:* Not rightly so, as it was found that the assessee had consistently provided a sum equivalent to 3 per cent to 4 per cent of the sale price of the products sold towards the liability that it had incurred to carry out repairs and replacement during the warranty period. Once the warranty liability was based on a scientific calculation, the assessee was entitled to deduction under section 37. Therefore, once the condition stipulated in the Apex Court Judgment was fulfilled, no case for interference with the said finding or for remanding the matter to the assessing authority was made out. Income Tax Act, 1961 Section 37(1) Income Tax Act, 1961 --Capital or Revenue expenditure--Expenditure incurred on purchase of software Nature of--Assessee was a limited company engaged in the business of sale of computer hardware and software. Assessee had applied certain amount towards projects of software and claimed deduction of same as Revenue expenditure. Assessing officer disallowed the sum as Revenue expenditure, under section 37(1). *Held:* Was not justified as the amount was paid for application of software and not for system software, which enabled, the assessee to carry out his business operation efficiently and smoothly. However, such software itself did not work on standalone basis, therefore, the same had to be fitted to a computer system to work. Though certain application was an enduring benefit, it did not result into acquisition of any capital asset. It merely enhanced the productivity or efficiency and, therefore, it had to treated as revenue expenditure. Income Tax Act, 1961 Section 37(1) Income Tax Act, 1961 --MAT--Book profit under section 115JA Computation provision for doubtful debts--Assessee contended that while computing book profit within the meaning of section 115JA provision made for doubtful debts should not be added as it did not amount to provision made for meeting liabilities, other than ascertained liabilities within the meaning of section 115JA(ii). Assessing officer held that the provision was for unascertained liabilities and since it was merely a provision for unascertained liabilities and as per clause (c) of section 115JA(ii), the same could not be reduced while computing the 'book profit' under section 115JA of the Act. *Held:* Was justified as the issue was covered in the case of CIT & Anr. v. Wizmann Homes Ltd. (in IT Appeal No. 918 of 2008) wherein it was held States that that Explanation to the, section 115JA for the purposes of this section, 'book profit' means the net profit as shown in the P&L a/c for the relevant previous year prepared under sub-section (2) as increased by the amount mentioned in the Explanation. One such amount was in sub-clause (c)-the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities. By Finance Act No. 2 of 2009 with effect from 1-4-1998, the present clause (g) had been substituted by including the amount or amounts set aside as provision for diminution in the value of any asset. Therefore, in the light of the aforesaid judgment, the said amount was to be added to the book profit. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 1945 (Karn-HC) : (2013) 357 ITR 0088 : (2013) 089 DTR 0025

Income Tax Act, 1961

--Business expenditureAllowability Provision for warranty liability--Assessee-company had claimed deduction of provision made for warranty liability in respect of products sold and contended that it was not a contingent liability but should be allowed as Revenue expenditure. Revenue contended that the said issue was covered by the judgment of the Supreme Court in Rotork Controls India (P.) Ltd. v. CIT 2009 TaxPub(DT) 1730 (SC) : (2009) 314 ITR 62 (SC) and a relief was permissible only if the condition set out in the said judgment was fulfilled, therefore, the matter was to be remanded back to assessing officer for fresh consideration in view of law declared in the said judgment. Held: Not rightly so, as it was found that the assessee had consistently provided a sum equivalent to 3 per cent to 4 per cent of the sale price of the products sold towards the liability that it had incurred to carry out repairs and replacement during the warranty period. Once the warranty liability was based on a scientific calculation, the assessee was entitled to deduction under section 37. Therefore, once the condition stipulated in the Apex Court Judgment was fulfilled, no case for interference with the said finding or for remanding the matter to the assessing authority was made out.

Income Tax Act, 1961 Section 37(1)

Income Tax Act, 1961

--Capital or Revenue expenditure--Expenditure incurred on purchase of software Nature of--Assessee was a limited company engaged in the business of sale of computer hardware and software. Assessee had applied certain amount towards projects of software and claimed deduction of same as Revenue expenditure. Assessing officer disallowed the sum as Revenue expenditure, under section 37(1). Held: Was not justified as the amount was paid for application of software and not for system software, which enabled, the assessee to carry out his business operation efficiently and smoothly. However, such software itself did not work on standalone basis, therefore, the same had to be fitted to a computer system to work. Though certain application was an enduring benefit, it did not result into acquisition of any capital asset. It merely enhanced the productivity or efficiency and, therefore, it had to treated as revenue expenditure.

Income Tax Act, 1961 Section 37(1)

Income Tax Act, 1961

--MAT--Book profit under section 115JA Computation provision for doubtful debts--Assessee contended that while computing book profit within the meaning of section 115JA provision made for doubtful debts should not be added as it did not amount to provision made for meeting liabilities, other than ascertained liabilities within the meaning of section 115JA(ii). Assessing officer held that the provision was for unascertained liabilities and since it was merely a provision for unascertained liabilities and as per clause (c) of section 115JA(ii), the same could not be reduced while computing the 'book profit' under section 115JA of the Act. Held: Was justified as the issue was covered in the case of CIT & Anr. v. Wizmann Homes Ltd. (in IT Appeal No. 918 of 2008) wherein it was held States that that Explanation to the, section 115JA for the purposes of this section, 'book profit' means the net profit as shown in the P&L a/c for the relevant previous year prepared under sub-section (2) as increased by the amount mentioned in the Explanation. One such amount was in sub-clause (c)-the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities. By Finance Act No. 2 of 2009 with effect from 1-4-1998, the present clause (g) had been substituted by including the amount or amounts set aside as provision for diminution in the value of any asset. Therefore, in the light of the aforesaid judgment, the said amount was to be added to the book profit.