ORDER
Deepak R. Shah, Accountant Member
1. This appeal by assessee is directed against the order of learned CIT(A)-I, Bangalore dated 31.3.2003.
2. The first ground of appeal is against disallowance of a sum of Rs. 4,92,69,808/- being provision made for warranty liability in respect of products sold by the assessee.
2.1 The appellant is a Limited Company engaged in the business of sale of Computer Hardware and Software. The products sold by the assessee carry warranty for specified period. For Personal Computers, the warranty period is 3 years and for other products, the warranty period is one year. During the warranty period, if any defects are noticed, necessary rectification/replacement is to be carried out by the appellant free of cost. The appellant on the basis of past experience and certain fair and best estimate basis provided for such warranty liability in respect of sales made during the year. It is the contention of assessee that since the assessee is following mercantile system of accounting; the assessee is required to provide for all known liabilities even though the amount cannot be determined precisely or with certainty. This is in tune with accounting standards notified by the CBDT, where it is mentioned that the provision is to be made for ail known liabilities and losses even though the amount cannot be determined with certainty. The assessee, on the basis of its past experience, made provision in respect of goods sold during the year as percentage of sales. For providing such warranty claims, the assessee has entered into back to back arrangement with IBM Global Services India Pvt. Ltd. (IGSI). Pursuant to which the appellant’s application in the warranty period are to be discharged by the said company. In consideration thereof, the appellant has to pay over the fixed percentage of sales price to IGSI. The assessee claimed the liability as accrued liability whereas the AO held that the same is merely a provision and not an accrued liability. Learned CIT(A) held that the provision for warranty liability is a contingent liability and not on accrued liability. While so holding he followed the decision of ITAT in the case of Thermax Babcock and Wilcox Ltd. v DCIT 255 ITR (AT) 27.
2.2 Learned Counsel for assessee Shri Pardiwala submitted that the issue is now settled by following decisions:
CIT v. Beema Mfrs. (P) Ltd. 130 Taxman 400(Mad).
CIT v. Indian Transformers Ltd. 270 ITR 259 (Ker.)
CIT v. Vintec Corporation Ltd. 278 ITR 337 (Delhi)
Voltas Ltd. v. DCIT 64 ITD 232 (Mum.)
ITO v. Wanson (India) Ltd. 5 ITD 102 (Pune)
Jay Be Industries v. DCIT 66 ITD 530 (ASR.)
2.3 Learned Commissioner Shri D.K. Gupta, appearing for the revenue strongly supported the appellate order. He submitted that whether the assessee will be required to pay the liabuility or not is not known. The warranty liability may or may not arise. Thus the liability is contingent in nature and not an accrued liability. He also placed reliance on the decision of ITAT, Pune in the case of Thermax Babcock and Wilcox Ltd. v. DCIT 255 ITR (AT) 27.
2.4 We have carefully considered the relevant facts and the arguments advanced. The only reason to disallow the sum is that the liability is a contingent liability and not an accrued liability. We are unable to accept the contention. The liability to pay for warranty claims arises no sooner the sales are effected. The appellant has provided for liability on the basis of Sales made during the year. Though the exact amount cannot be quantified, however, the sum is based on the scientific approach and based on past experience. Various High Courts relied by learned Counsel for assessee has field that the liability in respect of such warranty claims is not a contingent liability but an accrued liability. The ITAT, Bangalore in the case of Motor Industries Co. Ltd. in ITA Nos. 396 to 399/Bang/98 dated 31.5.2004 and the decision in the case of Wipro-GE Medical Systems Ltd. in ITA No. 322-328/Bang/2001 dated 8.7.2002 has held that the liability towards warranty is inbuilt in the sale price itself and so the liability is not contingent but an ascertained one and to be allowed in the year of sales. We accordingly delete the disallowance of Rs. 4,92,69,808/-.
3. The next issue of appeal is against treatment of purchase of software amounting to Rs. 33,14,298/- as capital expenditure as against claim of assessee as revenue expenditure.
3.1 The assessee acquired certain application software for a sum of Rs. 33,14,298/- and claimed the same as revenue expenditure. The AO held that since these results in enduring benefit to the assessee, it is a capital expenditure and not revenue expenditure but depreciation on the same is to be allowed. Learned CIT(A) held that in absence of any material to decide the lifespan of said software, the decision relied by the counsel for assessee cannot be examined. He also held that the depreciation on non-tangible asset is allowable Under Section 32(1)(ii). This implies that software which is an intangible asset can also be a capital asset and hence when the assessee acquires the same, it amounts to capital expenditure and not revenue expenditure. He also relied upon the decision of Hon’ble Rajasthan High Court in the case of CIT v. Arawali Construction Co. (P) Ltd. 259 ITR 30.
3.2 Learned Counsel for assessee Shri Pardiwala submitted that what the assessee acquired is application software and not system software. The application software has limited life unlike system software, which is used as tools of business. It is like any component or consumable item or spare part in a plant and machinery. By using such software, merely the efficiency of computers used in production is enhanced but by itself no capital asset is brought into existence. Even though there is enduring benefit, all the expenses, which gives the assessee an enduring benefit, does not automatically become capital expenditure. For this proposition, he relied upon the decision of Hon’ble Supreme Court in the case of Alembic Chemicals Works Co. Ltd. v. CIT 177 ITR 377 and the decision of Hon’ble Supreme Court in the case of Empire Jute Co. Ltd. v. CIT 124 ITR 1. He also relied upon the decision of IT AT, Mumbai in ITA No. 154/MUM/95 in the case of Unichem Laboratories Ltd. v DCIT dated 18.5.2005 and in the case of DCIT v. Udyan Bose in ITA No. 4153/Mum/96 dated 28.10.2002. He submitted that the decision of Hon’ble Rajasthan High Court will not apply on the facts of the case.
3.3 Learned CIT Shri D.K. Gupta appearing for revenue strongly supported the appellate order. He submitted that the assessee is in the business of manufacture of hardware and software. The software used is in the production line and hence to be treated as tools of business. As per Section 32(1)(ii), such intangible assets are also eligible for depreciation. He further relied upon the following decisions to substantiate his argument that the amount on purchase of software is capital expenditure and not revenue expenditure.
Jonas Woodhead and Sons (India) Ltd. v. CIT 224 ITR 342 (SC)
Eimco KCP Ltd. v. CIT 242 ITR 659 (SC)
CIT v. Arawali Constructions Co. (P) Ltd. 259 ITR 30 (Raj.)
3.4 In reply, learned Counsel for assessee submitted that the eligibility of depreciation on intangible assets Under Section 32(1)(ii) has not altered the situation. Earlier the amount paid for know-how patents, copyrights, trademarks licences etc. were though capital expenditure was not eligible for depreciation. With introduction of Section 32(1)(ii), the same are eligible for claiming depreciation. This by itself does not mean that whenever the payment is made for intangible assets, the same always amounts to capital expenditure.
3.5 We have carefully considered the relevant facts, arguments advanced and the decisions cited. For determining the nature as to whether the expenses are capital or revenue, the same can be with regard to facts of each case, as no one test or principle or criteria is paramount or conclusive or of universal application. When expenditure is made not only once and for all but also with a view to bringing into existence an asset or an advantage for the enduring benefit, the same can be properly classified as capital expenditure. At the same time, even though the expenses are once and for all and may give an advantage for enduring benefit but is not with a view to bringing into existence any asset, the same cannot be always classified as capital expenditure. The test to be applied is, is it a part of company’s working expenses or is it expenditure laid out as a part of process of profit earning. Is it on the capital lay out or is it an expenditure necessary far acquisition of property or of rights of a permanent character, possession of which is condition on carrying on a trade at all. Hon’ble Supreme Court in the case of Alembic Chemical Co. (supra) held that the concept of payment made once and for all and of ‘enduring benefit’ must respond to the changing economic realities of the business. It is also observed that “once for all” payment test is also inconclusive. In a given case, the test of “enduring benefit” might break down. In the light of above principle, let us examine the facts of the present case. The assessee in the course of its business acquired certain application software. It is made clear that the amount is paid for application software and not system software. The application software enables the assessee to carry out Its business operation efficiently and smoothly. However, such software itself does not work on stand alone basis. The same has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Thus, for payment of such application software, though there is an enduring benefit, it does not result into acquisition of any capital asset. The same merely enhances the productivity or efficiency and hence to be treated as revenue expenditure. The decision of Hon’ble Rajasthan High Court in the case of Arawali Construction Co. is distinguishable on the facts. By paying the sum, the assessee do not acquire any technical know-how but merely right to use such software and hence, the decision of Hon’ble Rajasthan High Court will not apply. We accordingly hold that the amount paid is revenue expenditure and not capital expenditure.
4. The next issue in appeal is raised in ground No. 4 and 5. The issue relates to treatment of a sum received from IBM Global Services India
Ltd. (IGSI) in respect of transfer of skilled personnel and in respect of sharing of customer database. It is the contention of appellant that the amount received is a capital receipt not chargeable to tax. Alternatively, it is the contention that even if the same is in respect of transfer of capital asset, capital gain cannot be charged as there is no cost of such assets and hence, computation of capital gain fails.
4.1 During the relevant financial year, the appellant entered into an agreement on 25.8.97 with IGSI under which it transferred its skilled personnel and database for a consideration of Rs. 18.4 crores and Rs. 5.3 crores respectively. The appellant included the above sum in its return by way of abundant caution. At the same time, along with the return of income, the assessee claimed that the said sum is not chargeable to tax but is capital receipt. The AO held that the amount received is not capital receipt as there is no corresponding asset represented in balance sheet. These were created over the years through the expenditure debited to revenue account. The amount received is therefore to be treated as revenue receipt. Learned CIT(A), after considering the terms of agreement as also the sample copies of appointment letters issued by appellant to its employees, held that the appellant has no power to transfer its employees. The power is only to terminate the services but not to direct the employees to join the particular concern. Hence the amount cannot be considered to have been received for transfer of capital asset. He also held that the amount received on transfer of skilled personnel is not for the loss of source of income or income earning apparatus, but is compensation towards loss of business due to loss of skilled personnel. While so holding he relied upon the decision of Hon’ble Bombay High Court in the case of H H Maharani of Morvi v. CIT 49 ITR 594. He concluded that the amount of Rs. 18.4 crores received is towards fees for technical services to be rendered by skilled personnel to new company. It was held that the agreement is dated 25.8.97. The employees will join IG5I with effect from 1.9.97. The employees have consented only after 1.9.97. Hence, at the time of consent they were employees of appellant company. He therefore concluded that the amount received is fees for technical services as per Explanation 2 to Section 9(1)(vii).
4.2 As regards consideration received towards customer database, it was held that the same is royalty within the meaning of Explanation 2 to Section 9(1)(vi). In respect of alternate argument of assessee Learned CIT(A) held that the consideration received is towards transfer of capital asset and the assessee has incurred cost for acquiring such assets. The assessee has incurred substantial expenses towards training, and salary of these skilled personnel. Similarly for preparation of database, the expenses on collecting and classifying the same have been incurred. Even if there is any difficulty in estimating such expenses, it cannot be said that no cost is incurred in relation to such asset and hence, even if the sum received is considered towards transfer of capital asset, the cost can be attributed to same and gain can be computed.
4.3 Learned Counsel Shri Pardiwala appearing for assessee submitted that due to emerging trends in the international information technology market, and in line with IBM’s worldwide practices. There is need to set up an independent entity to undertake services activity. For this purpose, a separate organizational base is to be set up. In furtherance of such need, IGSI is to undertake such operations. An agreement was entered into for this purpose wherein it was agreed that the appellant will sell all its maintenance spares and accessories relating to IBM Computers for a sum of Rs. 28.6 crores. The said sum was offered as income and there is no dispute about the same. The appellant was also to facilitate transfer of its personnel to IGSI for a sum of Rs. 18.4 crores being consideration for value inherent in the human resources. The appellant has also to share the database relating to appellant’s clients and customers to IGSI and was to receive a sum of Rs. 5.3 crores for the transfer of the database. The sum of Rs. 18.4 crores and a sum of Rs. 5.3 crores is not towards any operation carried out by the assessee or its business activities, but are capital receipts. The amount received can neither be considered as fees for technical services within the meaning of Section 9(1)(vii) nor royalty within the meaning of Section 9(1)(vi). The appellant has not rendered any technical services to IGSI. The assessee is not in business of transferring these personnel after training them. The database accumulated by appellant over the years is an asset though an intangible one. It is one of the recognized accounting principle that intangible asset will not appear in the balance sheet unless paid for. The AO was therefore not correct to state that the amount is not for any asset since it is not appearing in the balance sheet. Similarly the amount received is not royalty. He strongly relied upon the decision of Hon’ble Bombay High Court in the case of Mehboob Productions Private Ltd. v. CIT 106 ITR 758, the relevant portion of which is extracted
hereunder:
As regards the amount of Rs. 10 lakhs odd, the first aspect for consideration is whether the various amounts received by the assessee and aggregating to Rs. 10 lakhs odd should be held to be income of the assessee as defined in Section 2 of the Act; and the second aspect whether such income is exempt from taxation on the ground that it falls Under Section 4(3)(vii) of the Act. The onus to establish a claim as one falling within this exemption would be on the assessee and it would be for the assessee to establish that these receipts cannot be considered to be receipts arising from its business and further that such receipts are of a casual and non-recurring nature.
Income is a monetary return expected by the assessee for the labour and/or skill bestowed, and/or
capital invested by him; coming in from a definite source, which need not be a legal source, in the sense that the failure to pay the same need not be enforceable in a court of law; and excluding a receipt “in the nature of” a mere windfall, which would mean a windfall in regard to its very nature and not in regard to its extent or quantum.
When talking of a windfall receipt in connection with the consideration of the question whether such receipt would be income or not, one has to restrict the concept of such a windfall to a case where the unexpectedness of the advantage pertains to the factual of receipt and not to the quantum of receipt. What we are considering as “windfall” is some unexpected receipt not in the contemplation of the assessee and not directly attributable to or occurring by way of its business profits. On the other hand, where there was clear expectation, though small, of receiving such advantage or profit, then it cannot be properly regarded as windfall merely because the advantage of receipt is much more than could have been reasonably anticipated.
On the materials available in this case, there was nothing to show that the assessee-company had produced the picture, Mother India, with the slightest expectation that the same would be exempt from entertainment duty and that the amounts collected by the exhibitors as and by way of such duty would be directed to be paid over to it by the Government of Bombay. These receipts did not partake of that element of a return which is necessary for them to constitute income, and further it was of the nature of a windfall-a windfall as to the factum and not a windfall as to mere quantum. On both the counts, therefore, the answer to the question whether these receipts constitute income of the assessee must be in the negative and in favour of the assessee.
On the basis of above, he submitted that the disputed sum be treated as capital receipt not chargeable to tax or alternatively as capital gain on transfer of certain assets, the cost of which is not ascertainable and hence not chargeable to tax. For the alternate proposition, he relied upon the decision of Hon’ble Supreme Court in the case of CIT v. BC Srinivasa Setty 128 ITR 294 and the decision of the Tribunal in the case of Voltas Ltd. v. DCIT 64 ITD 232 and in the case of Coromandel Fertilizers Ltd. v. DCIT 90 ITD 344 (Hyd.).
4.4 Learned CIT Shri D K Gupta strongly relied upon the appellate order. He submitted that the assessee himself treated the amount received as income in its books of accounts. The same was also offered as income initially but claimed as exempt later on. Though the entry in books of accounts or nomenclature given thereto is not material, the same is relevant for considering the nature thereof. For this proposition he relied upon the decision of Hon’ble Supreme Court in the case of Siddheshwar Sahakari Sakhar Karkhana Ltd. v. CIT 270 ITR 1. When the assessee recites in the agreement that the consideration is by reason of training, skills, practical experience and work culture for the transfer of personnel, it is clear that since the assessee has incurred the expenses on such training and gaining practical experience by employees, the receipt on transfer of such employees is to be considered as revenue receipt. The assessee has not lost any source of income. Even though the payments, which are voluntarily made, may still constitute income. There is no requirement that there should be a legal source or the party should have enforceable right to treat the sum as income. The voluntary payment connected with office or occupation may constitute income, as they are referable to definite source. The trading structure of appellant is not affected. As per the agreement, the assessee is merely to share the database and there is no provision that the database available to the appellant cannot be used by the appellant subsequently, even though it is shared with the IGSI. The assessee has in fact incurred expenditure on training the personnel and on preparation of database and hence any amount received in consideration for transferring its employees or sharing the database, will be in the course of business and hence chargeable to tax. The same is chargeable even under the provisions of Section 41(1) or 28(iv) of the Act, apart from under the definition of income itself same is chargeable to tax. He also submitted that the decision in following cases be considered to arrive at the conclusion on the facts of the case:
Atlas Cycle Industries Ltd. v. CIT 128 ITR 60 (P&H)
CIT v. Manoranjan Pictures Corporation (P) Ltd. 228 ITR 202
Blue Star Ltd. v. CIT 217 ITR 514
Parry and Co. Ltd. v. DCIT 269 ITR 177
CIT v. Ralliwolf Ltd. 143 ITR 720
4.4 In reply, learned Counsel for assesses submitted that the assessee has to record the receipt in books of accounts. However, it is settled law that entry in books of accounts is not conclusive evidence to show that the amount received is chargeable to tax. Section 41(1) will not apply, as the said section is only in case where the assessee has obtained any amount in respect of expenditure. Since there is no nexus between the expenses incurred on the” employees and the amount received on transfer of such employees, Section 41(1) will not apply to such receipt. Similarly for sharing the database, the amount is received and the same is not in respect of expenses incurred earlier. Section 28(iv) will not apply, as it is not the value of any benefit or perquisite. Section 28(iv) will apply to no cash transaction in the nature of benefit or perquisite but not to the monetary transaction itself. For this proposition he relied upon the decision of Hon’ble Gujarat High Court in the case of CIT v. Alchemic Pvt. Ltd. 130 ITR 168 and in the case of CIT v. Mafatlal Gangabhai and Co. (P) Ltd. 219 ITR 644. The amount received is not in the course of carrying on any business and hence Under Section 28, the same cannot be brought to tax.
4.5 We have carefully considered the relevant facts, arguments advanced and the decisions cited. To understand the controversy, it is necessary to consider the terms of agreement, extracted hereunder:
This agreement is made and entered into as of this twenty fifth day of August, 1997, by and between:
(A) Tata IBM Limited (Tata IBM), a company duly established under the laws of the republic of India, having its registered office at Golden Enclave, Airport Road, Bangalore-560 017 (which expression shall unless it be repugnant to the context or meaning therefore be deemed to mean and include its successors and assigns) and
(B) IBM Global Services India Private Limited (IBM Global), a company duly established under the laws of the Republic of India, having its principal office at Ground Floor, Golden Enclave, Airport Road, Bangalore-560017 (which expression shall unless it be repugnant to the context or meaning thereof be deemed to mean and include its successors and assigns)
(Tata IBM and IBM Global being sometimes referred to herein as the “Parties”).
RECEITALS
1) IBM World Trade Corporation (IBM), Tata Industries Limited and Tata Engineering and Locomotive Company Limited (Tata Industries Limited and its associated company are hereinafter referred to as “Tata”) have cooperated with each other in undertaking joint venture operations in India through TATA IBM, for manufacturing and marketing of certain information technology products in India:
2) India is emerging as a major market for IBM products and services in trade and industry particularly in view of increasing recognition of the importance of information technology to the overall economic development of India:
3) IBM and Tata recognize that Tata IBM’s existing highly skilled human resource base needs fuller utilization for meeting the emerging demands for services in India and abroad”.
4) The emerging trends in the international information technology market have underlined the need to set up an independent entity to undertake services activity and in line with IBM’s world-wide practices, IBM and Tata have jointly agreed to set up, along with Tata IBM, the IBM Global as a separate organizational base for services subject to the requisite permissions, consents and approvals of the competent authorities in India:
5) IBM, Tata IBM and Tata have arrived at an understanding with respect to the formation and management of IBM Global, the transferability of their respective interests therein, and other matters.
6) IBM and Tata have agreed to carry out the following activities through IBM Global: (a) Managed Operations, (b) Processing Services; (c) Desktop Systems Management, (d) Business Recovery Services; (e) Custom Software Training; (f) Systems Integration Services; (g) Project Management; (h) Application Software Services; (i) Network Related Services; (j) Site Services, and (k) Information Kiosk Services, and it is the understanding of IBM, Tata and IATA IBM that such services include but is not limited to (I) software design, (m) hardware design, (n) professional services, (o) information technology consulting (p) international procurement operations, (r) value added network, (s) fee based education, (t) systems integration, (u) availability services, and (v) hardware maintenance and software support:
(C) THEREFORE, for and in consideration of the premises and the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1) Tata IBM agrees to do the following:
a) Sell all maintenance spares and accessories compring inventory of TATA IBM relating to IBM computers;
b) Facilitate transfer of its personnel of TATA IBM set out in Annexure I; and
c) Share the database relating to TATA IBM’s clients and customers, list whereof is set out in Annexure III hereto.
2) The transfer aforesaid shall be effective from the twenty fifth day of August, 1997.
3) In consideration of the transfer aforesaid IBM Global shall pay to TATA IBM a sum of:
a) Rs. 28.6 crores for the transfer of the maintenance spares and accessories set out in Annexure I;
b) Rs. 18.4 crores, being consideration for the value which inheres in the human resources, by reason of training, skills practical experience and work culture for the transfer of the personnel listed in Annexure II hereto, to be remitted within ninety (90) days of the date of receipt of GOI approvals of the application as proposed; and
c) Rs. 5.3 crores for the transfer of the database relating to TATA IBM’s clients and customers, including installation and warranty data, the list of which is maintained in the files of TATA IBM, to be remitted within ninety (90) days of the date of receipt of GOI approvals of the application as proposed.
Based on the above agreement, it is the contention of appellant that the amount received on transfer of its personnel and sharing of the database is capital receipt and not revenue receipt. Alternatively, it is contended that the amount for transfer of capital asset and since there is no cost of acquisition/improvement, which can be computed, the same is not chargeable to tax.
4.6 All receipts by assessee would not necessarily be deemed to be the income for the purpose of Income Tax Act and the question whether any particular receipt is income or not will depend on the nature of the receipt and the true scope and effect of the relevant taxing provision. It is for the revenue to prove that the receipt is chargeable to tax under the provision of Income Tax Act. Once it is shown that the receipt is income under the Income Tax Act, it is for the assessee to prove that the same is either exempt or the assessee is eligible for deduction of the same.
The definition of ‘income’ in Section 2(24) is an inclusive definition. It adds several artificial categories to the concept of income but on that account the expression ‘income’ does not lose its natural connotation. Anything which can properly be described as income is taxable under the Act unless of course it is exempted under one or the other provisions of the Act. Even if a receipt does not fall within the ambit if any of the sub-clauses in Section 2(24), it may still be income if it partakes of the nature of the income. The idea behind providing inclusive definition in Section 2(24) is not to limit its meaning but to widen its net. The word ‘income’ is of widest amplitude, and it must be given its natural and grammatical meaning. The scheme of Section 2(24) read with Sections 4 and 10, seems to be that given its ordinary natural meaning the word ‘income’ will take in any monetary return “coming in’. It will take in voluntary and gratuitous payments, which are connected or linked with the office, vocation or occupation.
4.7 Income under the Act connotes a periodical monetary return coming in with some sort of regularity or definite source. The source is not necessarily one, which is accepted to be continuously productive but it must be one whose object is the production of a definite return. At the same time, it cannot be said that the receipt, which is not periodical or which is not regulated but of one time receipt, cannot be considered as income. The source need not be continuously productive and it is sufficient if the income is flowing from some exercise or operation by the appellant and in ordinary parlance, which can be considered as income. To constitute income, the receipt need not necessarily have their origin in business activity or investment or under an enforceable obligation. The conclusion in construing the word ‘income’, one has to ask whether having regard to all the circumstances surrounding the particular payment and receipt in question, what is relevant is of the character of income according to the ordinary meaning of that word in the common language or whether it is merely a casual receipt. The word “income” is of elastic import and it is extended meaning are not controlled or limited by the use of the words “profit and gains”. The diverse forms which income may assume cannot exhaustively be enumerated and so in each case the decision of the question as to whether any number of receipt is income or not must depend upon the nature of the receipt and the scope of relevant taxing provision.
Hon’ble Bombay High Court in the case of H H Maharani Shri Vijaykuverba Saheb of Morvi (supra) held thus:
There is no doubt that under the Indian Income Tax Act even payments, which are voluntarily made may constitute “income” of the person receiving them. It is not necessary that in order that the payments may constitute “income”, they must proceed from a legal source: in that if the payments are not made the enforcement of the payments could be sought by the payee in a court of law. It does not, however, mean that every voluntary payment will constitute “income”. Thus, voluntary and gratuitous payments, which are connected with the office, profession, vocation or occupation may constitute “income” although if the payments were not made the enforcement thereof cannot be insisted upon. These payments constitute “income” because they are referable to a definite source, which is the office, profession, vocation or occupation. It could, therefore, be said that such a voluntary payment is taxable as having an origin in the office, profession or vocation of the payee, which constitutes a definite source for the income. What is taxed under the India Income Tax Act is income from every source (barring the exceptions provided in the Act itself) and even a voluntary payment, which can be regarded as having an origin, which a practical man can regard as a real source of income, will fall in the category of “income”, which is taxable under the Act. Where, however, a voluntary payment is made entirely without consideration and is not traceable to any source, which a practical man may regard as real source of his income, but depends entirely on the whim of the donor, cannot fall in the category of “income”.
In the case before Hon’ble Pubjab and Haryana High Court in Atlas Cycle Industries Ltd. v. CIT 128 ITR 60, three employees entered into an agreement with the assessee for serving it for an agreed period and deposited a sum by way of security deposit. As these employees left the service before the stipulated period, the assessee company forfeited the security deposit. On the question whether such sum is revenue receipt or capital receipt, Hon’ble High Court held thus:
That the assessee had incurred the expenditure on the training of the three employees which had been allowed as business expense. When part of the expense had been realized by the assessee by way of forfeiture of the security deposits, in essence the amounts of the security deposits resulted in the reduction of the expenditure of the company on the training of its personnel and was to be included in the total income of the assessee”
Hon’ble Bombay High Court in the case of CIT v. Railiwolf Ltd. 143 ITR 720 held thus:
That the Tribunal had recorded a finding that the effect of the transaction was that the assessee had parted with its property being its connection or goodwill in India. The facts showed that India was the assessee’s largest export market outside countries where it maintained its own branches and as this business was given up as a part of the arrangements arrived at under the agreements the transaction had to be regarded as being of a capital nature. Hence the value of 3,625 shares in RW of Rs. 100 each issued to the non-resident assessee in consideration of supplying the drawings and information was of a capital nature and not of revenue nature.
In the case of Blue Star Ltd. v. CIT 217 ITR 514, the Head Note read as under:
The question whether a particular income arising from termination of a contract is a capital receipt or revenue receipt is a difficult question to answer. Where, on a consideration of the circumstances, a payment is made to compensate a person for cancellation of a contract, which does not affect the trading structure of the recipient’s business nor deprive the recipient of what in substance is the source of income, termination of the contract being a normal incident of the business, and such cancellation leaving the recipient of the amount free to carry on his trade, the receipt is revenue. However, where by cancellation of agency the trading structure of the assessee is impaired or such cancellation results in the loss of what may be regarded as the source of the assessee’s income, payment made to compensate for such cancellation of agency is normally a capital receipt.
During the accounting year relevant to the assessment year 1977-78, the assessee was engaged in manufacture of air-conditioning products and was undertaking job contracts in air-conditioning. The assessee was also trading in electronics and engineering goods and was also exporting its products. On June 10, 1973, the assessee entered into an agreement with a foreign trade enterprise, BME, under which the assessee was appointed as the agent of BME for marketing and selling their products in India. The said agreement stated that it was, in the first instance, valid up to December 31. 1976, and thereafter it was to be considered as automatically renewed for one calendar year at a time unless one or the other party thereto gave notice of its wish to terminate the same. By a letter dated June 4, 1976, BME intimated to the assessee that BME was agreeable to extension of the agreement for a further period of one year and accordingly the said agreement stood renewed up to June, 10 1977. But, in the meanwhile, the Government of India sponsored a company C and on October 6, 1976, BME wrote a letter to the assessee stating that since a lot of technical know-how and organization potentialities were needed to handle the date process plan made by BME, the assessee might assign its rights under the said agreement to C which was specializing in the particular line. BME agreed to pay to the assessee a lump sum as consideration for the assessee assigning its rights in favour of C. The agreement between the assessee and BME stood terminated on a payment of Rs. 5 lakhs. The Income Tax Officer held that the amount was assessable and this was upheld by the Tribunal. On a reference:
Held, that the agency agreement was entered into by the assessee in the normal course within the framework of the normal business of the assessee and the termination thereof could be treated as a normal incident of the business. Even with the termination of the agreement, the assessee was left free to carry on its normal trading activities. By cancellation of the agency, the trading structure of the assessee was not impaired. The compensation amount of Rs. 5 lakhs received by the assessee was not in the nature of a capital receipt. It was in the nature of a revenue receipt.
Hon’ble Delhi High Court in the case of CIT v. Manoranjan Pictures Corporation (P) Ltd. 228 ITR 202 held thus:
It is not possible to lay down any single or exhaustive test, as infallible or any single criterion as decisive, for determination of the question whether a receipt is capital or revenue in nature. Broadly stated, to determine the character of a receipt what has to be seen is whether the venture in which an assessee is giving up its rights was by itself the profit earning apparatus and such an action would disrupt the entire profit earning structure of the assessee. If that be so, anything received would partake of the character of a capital receipt. But, where, however, the venture is only for the purpose of carrying on the existing business by taking the help of another, compensation received for relinquishing a right in such a venture would be a revenue receipt.
Hon’ble Madras High Court in the case of Parry and Co. Ltd. v. DCIT 269 ITR 177 held thus:
The Tribunal took note of the fact that when the compensation was determined the parties concerned must have definitely considered the very old agency which the assessee had lost and came to the conclusion that a substantial portion of the compensation became payable on account of the loss to the assessee of a lucrative agency. The Tribunal rightly pointed out that for a proper understanding of the intentions of the parties concerned, it was necessary to read the agreement as a whole and that in understanding the nature of the payment Clause 1 to the premature termination of the selling agency could not be ignored. The Tribunal rightly did not accept the plea that as the agencies continued only for a limited period on an ad hoc basis the assessee ceased to have any right to compensation on termination. It was rightly held by the Tribunal that the parties viewed it as a case of premature termination of selling agency for which the assessee was required to be compensated. The Tribunal fixed twenty per cent of the total compensation amount as attributable to the restrictive covenant and obligations, taking note of the fact that the restrictive covenants were in force for a short period of two years. The Tribunal was right in its finding that out of the sum of Rs. 25 lakhs received by the assessee during the year 1988-89 and again Rs. 15 lakhs during the year 1989-90 only a sum of Rs. 5 lakhs was a capital receipt and not liable to tax as income Under Section 28(ii)(c) of the Income Tax Act, 1961.
4.8 Applying the principles laid down above by us as well as by the various courts extracted herein above, we examine the facts of present case before us. The appellant received a sum of Rs. 18.4 crores being consideration for the value which inheres in the human resources by reason of training, skill, practical experience and work culture for transfer of the personnel. To facilitate such transfer, the amount was paid. Undisputedly, the training, skills and experience as well as work culture was imparted by the assessee. Because of the employment of such personnel with the appellant company, the personnel acquire such skills, experience and work culture. Acquisition of such training, skill, experience and work culture was at the cost of appellant company. Thus, the same can be connected with the office or occupation, which the assessee carries on. The sum is referable to the source, which is office or occupation of the appellant. The amount is therefore the income of appellant and not a capital receipt dehorses such office or occupation. The amount received is not dehorse the operation of appellant company or as a windfall but can be linked to the activities carried on by appellant company and hence chargeable to tax.
4.9 As regards the sum of Rs. 5.3 crores, the appellant agreed to share the database of its clients and customers. Though it is said to be for transfer of database, there is no prohibition that such database becomes the absolute property of the transferee and assessee cannot utilize the database for its own purpose. The assessee has merely shared the database without transferring of such rights in the database. The sum therefore can be attributed to the activities carried on by the assessee and hence is to be considered as revenue receipt and not capital receipt. By sharing such database, there is no impairment in the trading structure or there is no loss of source of income and hence, the amount received is to be classified as revenue receipt chargeable to tax. The ground raised in ground No. 4 and 5 therefore fails.
5. The next ground of appeal is against claiming credit of taxes paid in USA.
5.1 The assessee claimed deduction of a sum of Rs. 1,51,18,485/- being income tax paid in USA. At the time of hearing, both the counsels agreed that in view of the decision of the Hon’ble Karnataka High Court in the case of Kirloskar Electric Co. Ltd. v. CIT 228 ITR 676, the claim for deduction as expenses is not allowable. Learned DR Shri Gupta also pointed out that similar view has been adopted in the case of CIT v. Kerala Lines Ltd. 201 ITR 106 and in the case of South India Shipping Corporation Ltd. v. CIT 240 ITR 24. The limited claim of assessee now is that while computing tax liability, the credit in respect of such sum is to be allowed as per law and as per Article 25(2)(a) of Double Taxation Avoidance Agreement (DTAA) between India and USA.
5.1 The learned Counsel for assessee submitted that though learned CIT(A) directed the AO to allow the credit as per law, the same was with a rider that the claim is to be allowed if such claim is made in the return or during the course of assessment proceedings. The objection of Shri Pardiwala is that the claim is to be entertained whether or not such claim is made either in return or during assessment proceedings.
5.2 We are in agreement with the submission by Shri Pardiwala. The AO may allow the credit for the taxes paid in USA as per the provision of Section 90 of the Act r.w. Article 25(2)(a) of the DTAA between India and USA, whether or not such claim is made in the return or during the assessment proceedings. There cannot be any embargo on entertaining the claim even if such claim is not made in the return or during assessment proceedings.
6. The next ground of appeal relates to computation of income under the provision of Section 115JA of the Act. It is the contention of assessee that while computing “book profits” within the meaning of Section 15JA, provision made for doubtful debts should not be added as it do not amount to “Provision made for meeting liabilities other than ascertained liabilities” within the meaning of Explanation in Section 115JA(2).
6.1 The assessee in his profit and loss account debited a sum of Rs. 30,45,96,133/- as provision for bad and doubtful debts. The AO held that the provision is for unascertained liability. The AO held that by writing off a debt, the company in fact meets the liability vested in its debtors but hence a provision to meet such a write-off is a provision created on itself to square off some debts. Since it is merely a provision it is for unascertained liability and hence as per Clause (c) of Explanation to Section 115JA(2), the same cannot be reduced while computing the book profit Under Section 115JA of the Act. Learned CIT(A) held that in view of the decision of Hon’ble Madras High Court in the case of DCIT v. Beardsell Ltd. 244 ITR 256, the provision for doubtful debt is an unascertained liability and hence cannot be reduced while computing the book profit.
6.2 Learned Counsel for assessee Shri Pardiwala submitted that under Clause (c) of Explanation to Section 115JA(2), the amount should be a provision and it should be for meeting liabilities other than ascertained liabilities. If both the conditions are not fulfilled, Clause (c) of Explanation cannot be invoked. He submitted that the provision is made for diminution in the value of its debtors, which are assets and hence not for meeting any liabilities. Under Clause (c) of Explanation, all the provisions are not covered therein but only such provision, which is for meeting any liabilities, which is unascertained liability, is to be added to book profit. He relied upon the following decisions of Tribunal in support of his contention:
1) Maharashtra State Electricity Board v. JCIT 77 TTJ 33 (Mum)
2) ACIT v. J G Vaccuam Flasks Pvt. Ltd. 83 ITD 242
3) Vishwadeep Exports Pvt. Ltd. v. ACIT ITA No. 3927/Mum/2002 dt. 2.9.2003.
4) Rashtriya Chemicals & Fertilizers Ltd. v. DCIT ITA No. 5127/Bom/94 dt.29.11.97
6.3 Learned CIT Shri Gupta appearing for revenue submitted that for interpreting word ‘provision’ no reference is to be made to the word ‘provision’ contained in Part III of Schedule VI of the Companies Act, 1956. The issue is directly covered by the decision of Hon’ble Madras High Court in the case of DCIT v. Beardsell Ltd. 244 ITR 256.
6.4 In reply, learned Counsel for assessee submitted that before Hon’ble Madras High Court, the contention raised by assessee was that whether the sum being provision for doubtful debts is ascertained liability or unascertained liability and not whether it is provision being diminution in the value of asset. This aspect has been considered by ITAT, Pune in the case of ACIT v. J G Vaccum Flasks (P) Ltd.
6.5 We have carefully considered the relevant facts, arguments advanced and the decisions cited. Hon’ble Supreme Court in the case of Surana Steels Pvt. Ltd. v. DCIT 237 ITR 777 held that while computing book profit, one has to refer the provision of Companies Act, 1956. As per Part III of Schedule VI of Companies Act, 1956, the expression ‘provision’ shall mean “any amount written off or retained by way of providing for depreciation renewals or diminution in value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy”. Thus, as per the aforesaid definition, the provision can be for diminution in value of asset or for meeting any liability. Under Clause (c) of Explanation to Section 115JA, the amount to be increased is “the amount set aside to provision made for meeting liabilities other than ascertained liabilities”. Clause (c) of the said Explanation do not require to increase the book profit by all sorts of provision but only in respect of provision for meeting unascertained liabilities. The debts due to assessee are appearing as asset in the balance sheet. For certain debts which are doubtful, the assessee can provide for such debts by writing off such sum in respect of doubtful debts. By such provision, what is provided is reduction in the value of assets but not meeting any liability. The liability is on the debtors to pay and so far as assessee is concerned, the same is an asset If the amount is doubtful of recovery, to that extent, the value of asset is reduced but it cannot result into creating any liability on the assessee to pay. In making the provision, the assessee merely restated the value of asset but there is no setting aside any amount to meet any liability. As rightly contended by Shri Pardiwala, Hon’ble Madras High Court proceeded on assumption that provision for doubtful debt was provision for liability and that was the only contention before the High Court. The High Court never answered the question whether the diminution in value of asset is provision for liability or not. As per the view taken above and the decision relied by learned Counsel for assessee, we hold that the amount being provision made for bad and doubtful debts, cannot be considered as provision for meeting any liability, which is not an ascertained liability and hence the book profit is not to be increased by such amount provided for.
7. The next ground of appeal is against charging of interest Under Section 234B while computing the income under the provision of Section 115X4 of the Act.
7.1 The AO, after computing the tax payable Under Section 115JA, levied interest Under Section 234B for short payment of advance tax. Learned CIT(A) held that the decision rendered by Hon’ble Karnataka High Court is with reference to provision of Section 115J and not Section 115JA. Since there is material difference in as much as there is insertion of Sub-section (4) to Section 115JA, the decision of Hon’ble Karnataka High Court cannot be applied when income is computed Under Section 115JA. He also held that interest Under Section 234B is mandatory in view of the decision of Hon’ble Supreme Court in the case of Anjum Ghaswala 252 ITR 1.
7.2 Learned Counsel for assessee submitted that computation of income Under Section 115JA can be made only after the books of accounts are prepared at the end of the year. The assessee cannot compute its book profit before the end of the financial year. Thus, the assessee is not required to pay any advance tax as per provision of Section 208. In absence of any liability to pay advance tax, interest Under Section 234B is not chargeable. He also submitted that though the decision by Hon’ble Karnaka High Court is rendered with reference to Section 115J, the ratio laid down therein will apply even when income is computed under the amended provision of Section 115JA.
7.3 Learned DR strongly relied upon the appellate order. He submitted that interest Under Section 234B is mandatory in nature in view of the decision of Hon’ble Supreme Court in the case of Anjum Ghaswala 252 ITR 1, CIT v. Hindustan Bulk Carriers 259 ITR 449 and by Patna High Court in the case of Mrs. Prabha Lal v. CIT 269 ITR 212. The interest is compensatory in nature. In the case of CIT v. Kotak Mahindra Finance Ltd. 265 ITR 119, it is held that even when income is computed Under Section 115J, interest can be levied Under Section 234B. Similar view has been taken by Hon’ble Punjab and Haryana High Court in the case of CIT v. Upper India Steel Mfg. A Engg. Co. Ltd. 279 ITR 123. The Chandigarh Bench of ITAT has held in the case of JCIT v. Arihant Industries Ltd. 278 ITR (AT) page 254 that even when income is computed Under Section 115JA, interest Under Section 234B is mandatory and chargeable. Hon’ble Karnataka High Court in the case of Union Home Products 215 ITR 758 held that interest is compensatory in character and non-payment of advance tax will mandatorily invite interest Under Section 234B. He also submitted that even in the case of Kwality Biscuits Ltd. 243 ITR 519, Hon’ble Karnataka High Court held that when “a deeming fiction is brought under the statute, it is to be carried to its logical conclusion but without creating further deeming fiction so as to include other provisions of the Act, which are not specifically made applicable”.
As per Sub-section (4) of Section 115JA all other provisions of the Act shall apply. Accordingly, the provision of Section 234B is also to be applied.
7.4 In reply, learned Counsel for assessee submitted that insertion of Sub-section (4) in Section 115JA has not materially altered the situation. Even without Sub-section (4), all other provisions of the Act like provision to file return of income, provision for issuance of notice and assessment etc., are still applicable. What is relevant is the ratio laid down is by the jurisdictional High Court, the same has to be followed in preference to the ratio laid down by other High Courts or Tribunal.
7.5 We have considered the rival submissions and the case laws cited. At first, it is to be held that the decision of Hon’ble Supreme Court in the case of Anjum Ghaswala 251 ITR 1 and in the case of CIT v. Hindustan Bulk Carriers 259 ITR 449 is to the extent that if interest is chargeable as per provision of the Act, the same has to be mandatorily charged and unless an authority has power to wave it, no authority can wave the same. However, the first condition before charging is whether liability to pay advance tax arises or not. If there is no liability to pay the advance tax as per provision of Section 208, interest Under Section 234B is not chargeable. Hon’ble Karnataka High Court, being the jurisdictional High Court, in the case of Kwality Biscuits Ltd., at page 526 and 527 held as under-
Under Section 115J, where the total income of the company is less than 30% of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to 30% of such book profit. It is thus, by way of deeming fiction that this income has been considered to be the deemed income. The profit and loss account has to be prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies/Act. In the Explanation Under Section 115J(1A) it is provided that for the purposes of this section “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under Sub-section (1A) as increased by various amounts given in the section. Thus, for the purpose of assessing tax under Section 115J, firstly, the profit as computed under the Income-tax Act has to be prepared and thereafter the book profit as contemplated by the provisions of Section 115J are to be determined and then the tax is to be levied. The liability of the assessee for payment of tax Under Section 115J arises if the total income as computed under the provisions of the Act is less than 30% of its book profits. This exercise for determining the total income in accordance with the provisions of the Act and that of book profit can be only after the end of the relevant assessment year. It is only the deemed income for which the provisions of Section 115J have been incorporated. When a deeming fiction is brought under the statute it is top be carried to its logical conclusion but without creating further deeming fiction so as to include other provisions of the Act which are not specifically made applicable. Since the entire exercise of computing the income or that of book profit could be only at the end of the financial year, the provisions of Sections 207, 208, 209 or 210 cannot be made applicable, until and unless the accounts are audited and the balance sheet is prepared even the assessee may not know whether the provision of Section 115J would be applicable or not. The liability would be after the book profits are determined in accordance with the Companies Act. The words “for the purposes of this section” in the Explanation to Section 115J(1A) are relevant and cannot be construed to extend beyond the computation of liability of tax. Accordingly, we are of the view that the Income-tax Appellate Tribunal was not justified in directing to charge interest Under Section 234B and 234C of the Income-tax Act. This question No. 2 is therefore answered in favour of the assessee and against the revenue.
What is relevant is that whether income is computed Under Section 115JA or 115J, is the assessee competent to compute his book profit before the end of relevant financial year so as to pay the advance tax. Hon’ble High Court has held that since the entire exercise of computing book profit can be only at the end of financial year, the assessee cannot know whether Section 115J would be applicable or not. What is relevant is the ratio laid down in the case of Kwality Biscuits and not the section under which it is laid down. The operation of Section 115J was discontinued w.e.f. 1.4.1991 and Section 115JA was brought on the statute book from 1.4.97. Though as per Sub-section (4) of other provision of the Act shall apply, there is no specific mention to the provision of Section 208 or 234B of the Act. Since the assessee is not in a position to compute its book profit prior to closing of the financial year, the assessee cannot foresee its liability to pay advance tax Under Section 208. Consequently for failure to pay such advance tax, interest Under Section 234B cannot be levied. In view of the decision by the jurisdictional High Court, which is the binding decision upon this Tribunal, interest Under Section 234B cannot be levied, when income is computed even under the provision of Section 115JA of the Act.
In the result, the appeal is partly allowed.