NCR Corporation India Private Limited, Bangalore v. ACIT, Bangalore

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A BEFORE SMT. P.MADHAVI DEVI JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY ACCOUNTANT MEMBER ITA NO.353(BANG)/2010 (ASSESSMENT YEAR: 2003-04) M/S.NCR CORPORATION PVT. LTD. 11 3 RD FLOOR NITON BUILDING PALACE ROAD BANGALORE-56042. VS. APPELLANT ASST. COMMISSIONER OF INCOME-TAX CIRCLE 12(1) BANGALORE. RESPONDENT APPELLANT BY: SHRI SRIRAM SESHADRI. RESPONDENT BY : SHRI G.V.GOPALA RAO. O R D E R PER SMT. P.MADHAVI DEVI JM: THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER OF THE CIT(A)-III BANGALORE DATED 10-12-2009 FOR THE ASSESSMENT YEAR 2003-04. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GRO UNDS OF APPEAL: 1. THE LEARNED CIT(A) HAS ERRED IN PASSING AN ORDER WHICH IS BAD IN LAW AND ON FACTS. ITA NO.353(BANG)/2010 PAGE 2 OF 18 2. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN REGARDING THE EXPENDITURE INCURRED BY THE APPELLANT ON WORKSTATIONS IMPROVEMENT OF INTERIORS AND ELECTRICAL WORKS CABLING AND NETWORKING OF COMPUTERS OTHER MISCELLANEOUS WORK ETC ON THE LEASEHOLD PREMISES AS CAPITAL EXPENDITURE AND THEREFORE DISALLOWING THE CLAIM OF REVENUE EXPENDITURE IN THE COMPUTATION OF INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. THE LEARNED CIT(A) HAS ERRED IN LAW IN NOT FOLLOWING THE BINDING JUDICIAL DECISIONS RELIED UPON BY THE APPELLANT WITHOUT PROVIDING ANY REASONS. 3. WITH PREJUDICE TO GROUND NUMBER 2 THE LEARNED CIT(A) HAS ERRED IN LAW IN RESTRICTING THE DEPRECIATION UNDER SECTION 32 ON THE SUM OF RS.8 923 817 AT 15 PER CENT ONLY INSTEAD OF GRANTING THE ALLOWANCE OF THE EXPENDITURE OF RS.8 923 817 PROPORTIONATELY OVER THE LEASE PERIOD. 4. ON GRANT OF DEPRECIATION UNDER SECTION 32 OF THE ACT ON THE AUTOMATED TELLER MACHINES (ATMS) AND ENCODERS THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN GRANTING A GENERAL DEPRECIATION RATE OF 25% UNDER MACHINERY AND PLANT AS AGAINST THE SPECIFIC RATE OF 60% AS APPLICABLE TO THE COMPUTERS UNDER THE HEAD PLANT AND MACHINERY. 5. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN REJECTING THE APPELLANTS CLAIM FOR DEDUCTION ON ACCOUNT OF SHORTAGE IN STOCK ON PHYSICAL VERIFICATION WRITE OFFS ETC AMOUNTING TO RS.136 700 515 IN COMPUTING THE INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. 6. WITHOUT PREJUDICE TO GROUND NUMBER 5 ABOVE THE LEARNED CIT(A) HAS ERRED IN NOT GIVING APPROPRIATE DIRECTIONS TO THE ASSESSING OFFICER THAT THE AMOUNT OF RS.136 700 515 SHOULD BE MADE PART OF THE OPENING STOCK OF THE IMMEDIATELY SUCCEEDING FINANCIAL YEAR AS THE SAME HAS BEEN CONSIDERED TO BE PART OF THE CLOSING STOCK IN THE ASSESSMENT OF THE SUBJECT FINANCIAL YEAR BY NOT ALLOWING THE DEDUCTION FOR LOSS OF STOCK. ITA NO.353(BANG)/2010 PAGE 3 OF 18 7. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN UPHOLDING THE DISALLOWANCE BY THE ASSESSING OFFICER OF MISCELLANEOUS EXPENSES INCURRED AMOUNTING TO RS.4 023 567. 8. THE LEARNED CIT(A) HAS ERRED IN LAW ON FACTS IN REJECTING THE CLAIM OF THE APPELLANT IN CONNECTION WITH THE CHANGE IN REVENUE RECOGNITION POLICY AND UPHOLDING THE ACTION OF THE ASSESSING OFFICER OF ASSESSING THE AMOUNT OF RS.115 738 979 AS INCOME FOR THE SUBJECT FINANCIAL YEAR. 3. AT THE TIME OF HEARING SHRI SRIRAM SESHADRI L EARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT DUE TO SMA LLNESS OF THE AMOUNT HE DOES NOT WISH TO PRESS GROUND NO.7 AND IT IS ACCORDINGLY REJECTED AS NOT PRESSED. 4. AS REGARDS THE GROUNDS NO.2 & 3 BRIEF FACTS OF THE CASE ARE AS UNDER: THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF SALE AND MAINTENANCE OF ATM COMPUTER APPLIANCES AUTOMATED PRODUCTS SOLUTION AND RELATED SERVICES. IT FIELD ITS RETURN OF INCOME ON 1-12-2003 DECLARING TAXABLE INCOME OF RS.4 66 32 670/-. DURNG THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE INCOME -TAX ACT 1961 [HEREINAFTER REFERRED TO AS 'THE ACT'] THE AO OBSERVED THAT THE ASSESSEE HAS CLAIMED EXPENDITURE ON ACCOUNT OF LEASEHOLD IMPROVEMENT AS REVENUE EXPENDITURE IN THE COMPUTATI ON OF INCOME. HE OBSERVED THAT THE AMOUNT OF RS.89 23 817/- IS CL AIMED AS IMPROVEMENT PERTAINING TO LEASEHOLD PREMISES OF THE 3 RD 5 TH AND 6 TH FLOORS OF LANDMARK BUILDING WHICH IS THE MUMBAI OFF ICE OF THE ASSESSEE AND THIS EXPENDITURE IS INCURRED TOWARDS P URCHASE OF ITA NO.353(BANG)/2010 PAGE 4 OF 18 WORKSTATIONS IMPROVEMENT OF THE INTERIORS AND ELEC TRICAL WORKS FEES PAID TO ARCHITECT CABLING WORK FOR NETWORKING OF COMPUTERS IN CONNECTION WITH THE SETTING UP OF THE OFFICE ETC. HE OBSERVED THAT THIS AMOUNT IS A HUGE EXPENDITURE BY ITSELF AND THE ASSESSEE IS GETTING AN ADVANTAGE OF ENDURING BENEFIT. THUS HE HELD THAT THIS EXPENDITURE IS CAPITAL IN NATURE AND NOT ALLOWABLE. THEREAFTER HE ALLOWED DEPRECIATION AT 15% AS ALLOWABLE FOR FURNI TURE AND FITTINGS. AGGRIEVED THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WHO CONFIRMED THE ORDER OF THE AO AND THE ASSESSEE IS I N SECOND APPEAL BEFORE US. 5. LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE LEASE OF THE PREMISES AT WHICH MUMBAI OFFICE IS SITUATED IS FOR A PERIOD OF THREE YEARS ONLY AND THE ASSESSEE HAD TO INCUR THIS EXPENDITURE TO MAKE THE LEASED PREMISES WORKABLE AND FIT FOR CONTI NUING THE BUSINESS OPERATIONS AS PER THE STANDARDS OF THE ASS ESSEE-COMPANY. HE PLACED RELIANCE UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. VS. C IT REPORTED IN 225 ITR 802 WHEREIN IT HAS BEEN OBSERVE D THAT : SECTION 37 OF THE ACT ENJOINS THAT ANY EXPENDITURE NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIO NS 30 TO 36 LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OR PROFESSION AND IF IT NOT CAPITAL EXPENDITURE HAS TO BE ALLOWED AS REVENUE EXPENDITUR E. ITA NO.353(BANG)/2010 PAGE 5 OF 18 THE HONBLE SUPREME COURT HAS ALSO HELD THAT : THE QUESTION WHETHER A PARTICULAR EXPENDITURE IS REVENUE EXPENDITURE INCURRED FOR THE PURPOSE OF BUS INESS MUST BE DETERMINED ON A CONSIDERATION OF ALL THE FA CTS AND CIRCUMSTANCES AND BY THE APPLICATION OF THE PRINCIPLES OF COMMERCIAL EXPEDIENCY. THE QUESTION MUST BE VIEWED IN THE PARTICULAR CONTEXT OF BUSINESS NEC ESSITY OR EXPEDIENCY. IF THE OUTGOING OR EXPENDITURE IS S O RELATED TO THE CARRYING ON OR CONDUCT OF THE BUSIN ESS THAT IT MAY BE REGARDED AS AN INTEGRAL PART OF THE PROFIT MAKING AND NOT FOR ACQUISITION OF AN ASSET OR A RI GHT OF A PERMANENT CHARACTER THE POSSESSION OF WHICH IS A CONDITION OF THE CARRYING ON OF THE BUSINESS THE EXPENDITURE MAY BE REGARDED AS REVENUE EXPENDITURE. THUS THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTE D THAT THE EXPENDITURE INCURRED BY THE ASSESSEE TO MAKE THE LE ASED PREMISES FIT FOR CARRYING ON THE BUSINESS IS REVENUE EXPENDI TURE AND ALLOWABLE AS SUCH. SHRI G.V.GOPALA RAO THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND SUPPORTED THE OR DERS OF THE AUTHORITIES BELOW AND ALSO PLACED RELIANCE UPON THE DECISIONS RELIED ON BY THE AO. 6. HAVING HEARD BOTH THE PARTIES WE FIND THAT THE EXPENDITURE IS MAINLY ON IMPROVEMENT OF INTERIORS A ND ELECTRICAL WORKS MODELING AND NETWORKING OF COMPUTERS OTHER MISCELLANEOUS WORKS WORK STATION ETC. THESE MAY GIVE SOME BENEF IT TO THE ITA NO.353(BANG)/2010 PAGE 6 OF 18 ASSESSEE BUT THE PREMISES BEING LEASED PREMISES AND THAT TOO FOR A PERIOD OF THREE YEARS ONLY IT CANNOT BE SAID THAT I T IS GIVING ENDURING BENEFIT. FURTHER THE ENDURING BENEFIT IS NOT THE ONLY TEST FOR DETERMINING THE NATURE OF THE EXPENDITURE. AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. (CITED SUPRA) IF THE EXPENDITURE IS SO RELATED TO T HE CARRYING ON OF OR THE CONDUCT OF THE BUSINESS IT H AS TO BE TREATED AS REVENUE EXPENDITURE. UNDOUBTEDLY THE ASSESSEE CANN OT CARRY ON THE BUSINESS IN THE LEASED PREMISES WITHOUT MAKING IMPROVEMENT TO THE INTERIORS AND ELECTRICAL WORKS CABLING AND NETWORKING ETC. IN VIEW OF THE SAME WE HOLD THAT THE EXPENDITURE IS T O BE ALLOWED U/S 37 AS REVENUE EXPENDITURE. THUS GROUND NO.2 OF THE ASSESSEES APPEAL IS ALLOWED. 7. GROUND NO.3 WHICH IS AN ALTERNATIVE GROUND TO G ROUND NO.2 IS REJECTED. 8. AS REGARDS GROUND NO.4 BRIEF FACTS ARE THAT TH E ASSESSEE WHO IS ENGAGED IN THE BUSINESS OF SALE AND MAINTENA NCE OF (AUTOMATED TELLER MACHINES) COMPUTER APPLIANCES ETC . HAD CAPITALIZED ATMS AND ENCODERS WHICH ARE USED FOR TH E PURPOSE OF DEMONSTRATION. THE ASSESSEE CLASSIFIED THESE ITEMS UNDER THE HEAD COMPUTERS AND CLAIMED DEPRECIATION AT THE RATE OF 60% AMOUNTING TO RS.50 18 427/- ON THE WDV. THE AO WAS OF THE OP INION THAT THESE ARE NOT COMPUTERS BUT ARE PLANT AND MACHINER Y AND THEREFORE WAS OF THE OPINION THAT DEPRECIATION AT THE RATE OF 25% ITA NO.353(BANG)/2010 PAGE 7 OF 18 ONLY SHOULD BE ALLOWED. THE AO HELD THAT THE ATMS C OMPRISE CERTAIN BASIC COMPONENT IN THE NATURE OF COMPUTER MONITOR PROCESSOR AND PRINTER CASH DISPENSER A VIDEO SURVEILLANCE SYSTE M AND CARD READER ETC. AND THEREFORE IT IS NOT ONLY AN ELECTRONIC DE VICE BUT HAS CERTAIN MECHANICAL FUNCTIONS ALSO. HE THEREFORE HELD THAT IT CANNOT BE CLASSIFIED AS A COMPUTER AND DEPRECIATION AT THE RA TE OF 60% CANNOT BE ALLOWED. AS REGARDS ENCODERS ALSO HE HELD THAT ENCODERS ARE BASICALLY USED FOR ENCODING CHEQUES WHEREBY THE DAT A IS ENTERED INTO THE ENCODER AND THEREFORE CANNOT BE CLASSIFIED AS A COMPUTER AND DEPRECIATION HAS TO BE RESTRICTED AT 25% AND NO T 60% AS CLAIMED BY THE ASSESSEE. AGGRIEVED THE ASSESSEE P REFERRED AN APPEAL BEFORE THE CIT(A) WHO CONFIRMED THE ORDER OF THE AO AND THE ASSESSEE IS IN SECOND APPEAL BEFORE US. 9. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ATM MACHINES ARE NOTHING BUT COMPUTERS AS THEY DEAL WITH THE FUNCTIONS OF DECODING THE INFORMATION PROCESSING T HE SAME AND GIVING THE OUTPUT. HE SUBMITTED THAT ATM IS A COMP UTER TERMINAL ACTIVATED BY A MAGNETICALLY ENCODED DEBIT CARD THAT ALLOWS YOU TO MAKE DEPOSITS TO AND WITHDRAWAL FROM YOUR ACCOUNT PAY BILLS TRANSFERS MONEY BETWEEN YOUR ACCOUNTS AT ANY TIME. IT ALSO ALLOWS YOU TO ACCESS YOUR FINANCIAL EXPENDITURE ACCOUNT AN D TO TRANSFER FROM ON ACCOUNT TO ANOTHER OR TO CHECK YOUR ACCOUNT BALANCES. THUS ATM IS A COMPUTER THAT LET US ACCESS YOUR FINA NCIAL INSTITUTION ACCOUNTS TO WITHDRAW OR DEPOSIT MONEY TRANSFER FUN DS FROM ONE ACCOUNT TO ANOTHER OR CHECK YOUR ACCOUNT BALANCES. HE SUBMITTED ITA NO.353(BANG)/2010 PAGE 8 OF 18 THAT A COMPUTER SYSTEM IS THE SYNTHESIS OF HARDWARE AND SOFTWARE AND THUS EVEN AN ATM IS A SYNTHESIS OF A HARDWARE A ND SOFTWARE. HE SUBMITTED THAT A TYPICAL COMPUTER SYSTEM EMPLOYS A COMPUTER THAT USES PROGRAMMABLE DEVICES TO STORE RETRIEVE A ND PROCESS DATA AND THE PERSONAL COMPUTER OR PC EXEMPLIFIES ONE EXA MPLE OF A COMPUTER SYSTEM. LIKEWISE ATM IS AN EXAMPLE OF ANOT HER COMPUTER SYSTEM. HE SUBMITTED THAT INSIDE EVERY ATM THERE I S A COMPUTER WHICH IS NOT VERY DIFFERENT FROM ANY OTHER PERSONAL COMPUTER BUT THE BASIC FUNCTION OF CONNECTING YOU TO THE BANK AT M NETWORK AND ACCESSING YOUR ACCOUNT INFORMATION ARE DONE BY THE ATM AND THE SOFTWARE USED IN THE ATM IS ALSO THE SAME SOFTWARE WHICH IS USED IN THE COMPUTER. FOR THE PURPOSE OF STATING THAT THE ROUTERS CAN ALSO BE CONSIDERED AS COMPUTERS HE PLACED RELIANCE UPON THE DECISION OF THE SPECIAL BENCH (MUMBAI) IN THE CASE OF DCIT VS. DATACRAFT INDIA LTD. REPORTED IN (2010) 40 SOT 295 WHEREIN THE ISSUE HAS BEEN DISCUSSED AT LENGTH INCLUDING THE DEFINITION OF CO MPUTER GIVEN BY THE INFORMATION TECHNOLOGY ACT 2000 AND IT HAS BEE N HELD THAT THE COMPUTER IS TO PERFORM LOGICAL ARITHMETICAL AND ME MORY FUNCTIONS ON DATA ETC. AND IT IS NOT ONLY THE EQUIPMENT WHIC H PERFORMS SUCH FUNCTIONS THAT COULD BE CALLED AS COMPUTER BUT INCL UDES ALL IN PUT AND OUTPUT DEVICES WHICH ARE CONNECTED TO OR RELATE D TO IT. THE SPECIAL BENCH ACCORDINGLY HELD THAT ROUTERS AND SW ITCHES ARE ALSO TO BE INCLUDED IN THE BLOCK OF COMPUTERS ENTITLED T O DEPRECIATION AT THE RATE OF 60%. LEARNED COUNSEL FOR THE ASSESSEE ALSO DREW OUR ATTENTION TO THE MEANING OF THE WORD COMPUTER GIV EN IN THE DICTIONARY IN SUPPORT OF HIS CONTENTION THAT ATM MA CHINE IS ALSO A ITA NO.353(BANG)/2010 PAGE 9 OF 18 COMPUTER. HE SUBMITTED THAT MERELY BECAUSE ATM MAC HINE ALSO PERFORMS CERTAIN OTHER MECHANICAL FUNCTIONS SUCH AS DISPENSING OF CASH AT THE TIME OF WITHDRAWAL ETC. IT CANNOT BE CA LLED AS PLANT AND MACHINERY. LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND S UBMITTED THAT ATM MACHINES ARE PERFORMING MECHANICAL FUNCTIONS SU CH AS PERMITTING DISPENSATION OF CASH ETC . AND THEREFOR E THEY ARE NOTHING BUT PLANT AND MACHINERY. 10. HAVING HEARD BOTH THE PARTIES AND HAVING GONE THROUGH THE MATERIAL ON RECORD WE FIND THAT THIS ISSUE IS MORE OR LESS COVERED BY THE DECISION OF THE SPECIAL BENCH IN THE CASE OF DATACRAFT INDIA LTD. (CITED SUPRA) WHEREIN IT HAS BEEN HELD THAT AS LONG AS THE FUNCTIONS OF THE COMPUTER ARE PERFORMED ALONG WITH OTHER FUNCTIONS AND THE OTHER FUNCTIONS ARE DEPENDE NT UPON THE FUNCTIONS OF THE COMPUTER IT IS A COMPUTER ENTITLED TO THE HIGHER RTE OF DEPRECIATION. THE SPECIAL BENCH HAS ALSO STATED THAT ALL THE INPUT AND OUTPUT DEVICES OF THE COMPUTER SUCH AS KEY BOAR D MOUSE MONITOR ETC ARE TO FORM PART OF THE BLOCK OF COMP UTERS. IN THE CASE BEFORE US ALSO THE ATM MACHINE IS DOING BOTH THE LOGICAL ARITHMETIC AND MEMORY FUNCTIONS BY MANIPUL ATIONS OF ELECTRONIC MAGNETIC OR OPTICAL IMPULSES GIVING DEBI T OR CREDIT CASH AND THEREAFTER DISPENSES THE CASH AND GIVES A PRINT ED RECEIPT. THUS AS CAN BE SEEN THE COMPUTER IS AN INTERGRAL PART O F THE ATM MACHINE AND ON THE BASIS OF THE INFORMATION PROCESS ED BY THE ITA NO.353(BANG)/2010 PAGE 10 OF 18 COMPUTER IN THE ATM MACHINE ONLY THE MECHANICAL FU NCTIONS OF THE DISPENSATION OF CASH OR DEPOSIT OF CASH IS DONE. ITS FUNCTIONS ARE NOT LIMITED TO THE LOCATION AT WHICH IT IS PLACED B UT IT ALSO RECORDS THE INCREASE OR DECREASE OF THE BALANCE IN THE ASSE SSEES ACCOUNT IN THE BANK CONSEQUENT TO SUCH DEPOSIT OR WITHDRAWAL A ND ALL THIS IS DONE INSTANTLY. THUS IT INVOLVES THE USE OF INTERN ET FACILITIES ALSO TO DISCHARGE THE ABOVE FUNCTIONS. HOWEVER AS REGARDS THE ENCODERS ARE CONCERNED WE FIND THAT THEY ARE USED FOR ENCOD ING THE CHEQUES BUT WHETHER ANY PROCESSING ACTIVITY IS INVOLVED IS NOT CLEAR FROM THE ORDERS OF THE AUTHORITIES BELOW. THEREFORE WE DIR ECT THE AO TO CONSIDER IF THE ENCODERS ALSO INVOLVE ANY PROCESSIN G ACTIVITY SUCH AS THE ATM MACHINE AS MENTIONED ABOVE AND IF IT IS FOU ND TO BE INVOLVING SUCH ACTIVITY THE AO IS DIRECTED TO ALLO W DEPRECIATION AT 60% OTHERWISE AT 25%. THIS GROUND IS ACCORDINGLY P ARTLY ALLOWED. IN VIEW OF THE SAME WE ARE INCLINED TO HOLD THAT T HE ATM MACHINES ARE COMPUTERS AND THE ASSESSEE IS ENTITLED TO DEPRE CIATION AT THE RATE OF 60%. 11. AS REGARDS GROUND NO.5 BRIEF FACTS ARE THAT THE ASSESSEE IN SCHEDULE 14 TO THE PROFIT & LOSS ACCOUNT HAD MAD E A FOOT NOTE TO THE EFFECT THAT CONSUMPTION INCLUDES ADJUSTMENT TOWARDS SHORTAGE ON PHYSICAL VERIFICATION WRITE OFFS ETC. AGGREGAT ING TO RS.136 700 515/-. THE AO OBSERVED THAT THE AUDITORS REPORT ALSO MENTIONS THAT DISCREPANCY BETWEEN PHYSICAL STOCK AN D BOOKS STOCK AS REVEALED BY THE PHYSICAL VERIFICATION IS CONSIDE RED TO BE MATERIAL AND ACCORDINGLY AN AMOUNT OF RS.11 94 54 466/- (DEB IT) HAS BEEN ITA NO.353(BANG)/2010 PAGE 11 OF 18 PROPERLY DEALT WITH IN THE BOOKS OF ACCOUNT. THERE FORE DETAILS OF THESE WRITE OFF HAVE BEEN CALLED FOR. THE ASSESSEE VIDE LETTERS DATED 3-3-2006 AND 6-3-2006 STATED THAT DURING THE RELEVANT FINANCIAL YEAR THE COMPANY UNDERTOOK AN EXERCISE F OR PHYSICAL VERIFICATION OF ITS INVENTORY AT ITS OWN WAREHOUSES AS WELL AS WAREHOUSES OF ITS TRANSPORT/LOGISTIC SERVICE PROVID ERS DURING WHICH THE COMPANY IDENTIFIED CERTAIN DAMAGED INVENTORY AS WELL AS CERTAIN SHORTAGES IN THE INVENTORY. TO THIS EXTENT THE CO MPANY WROTE OFF AN AMOUNT OF RS.13 67 00 515/- IN ITS BOOKS OF ACCO UNT AND THE SAME SHOULD BE ALLOWED AS A TRADING LOSS. HOWEVER THE AO CALLED FOR CERTAIN OTHER DETAILS REGARDING THE DISCREPANCY BUT THE ASSESSEE COULD NOT FURNISH ANY DETAILS EXCEPT SAYING THAT TH E DAMAGED STOCK WRITTEN OFF WAS AMOUNTING TO RS.1 72 46 049/- AND T HE REST WERE WRITTEN OFF ON FINDING THE SHORTAGE ON PHYSICAL VER IFICATION. THE AO WAS NOT SATISFIED WITH THE CONTENTION OF THE ASSESS EE AND HELD THAT THE ASSESSEE HAS NOT BEEN ABLE TO FURNISH ANY DETAI LS AS TO HOW THE SHORTAGE HAS ARISEN AND DISALLOWED THE CLAIM OF THE ASSESSEE FOR SHORTAGE OF STOCK AND MADE THE ADDITION OF RS.13 67 00 515/-. AGGRIEVED BY THE SAME THE ASSESSEE PREFERRED AN AP PEAL BEFORE THE CIT(A) REITERATING THE SUBMISSIONS MADE BEFORE THE ASSESSING AUTHORITY AND ALSO THAT THE AMOUNT OF RS.8 06 49 02 4/- REPRESENTING THE LIABILITY TOWARDS SOFTWARE WHICH W AS WRITTEN OFF AND DISALLOWED BY THE AO HAS ACTUALLY BEEN WRITTEN BACK TO THE PROFIT & LOSS ACCOUNT OF THE FINANCIAL YEAR 2003-04 AND OFFERED TO TAX IN THE ASSESSMENT YEAR 2004-05. THE CIT(A) UPH ELD THE ORDER OF THE AO THAT THE ONUS WAS ON THE ASSESSEE TO ESTA BLISH THE CLAIM ITA NO.353(BANG)/2010 PAGE 12 OF 18 OF DAMAGE AND WRITE OFF BUT HOWEVER HE GRANTED RELI EF OF RS.8 06 49 024/- IN THE ASSESSMENT YEAR 2003-04 AFT ER VERIFICATION OF THE CLAIM OF THE ASSESSEE THAT THE SAME HAS BEEN OFFERED TO TAX IN ASSESSMENT YEAR 2004-05. AGGRIEVED THE ASSESSE E IS IN SECOND APPEAL BEFORE US. 12.AT THE TIME OF HEARING THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THOUGH THE ASSESSEE IS AGGR IEVED BY THE CONFIRMATION OF THE ADDITION OF RS.5 60 51 491/- TH E ASSESSEE HAS ERRONEOUSLY MENTIONED THE ENTIRE ADDITION OF RS.13 67 00 515/- MADE BY THE AO IN THE GROUNDS OF APPEAL. THEREFORE THE CORRECT FIGURE OF RS.5 60 51 491/- IS TAKEN. LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUB MISSIONS MADE BEFORE THE AUTHORITIES BELOW WHILE THE LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDERS OF THE AUTHORIT IES BELOW. 13. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD WE FI ND THAT THE ASSESSEE HAS CLAIMED AN EXORBITANT AMOUNT OF RS.13 CRORES AND ODD AS DAMAGE IN STOCK OR SHORTAGE IN STOCK AND WROTE I T OFF AND HAS BY ITSELF OFFERED AN AMOUNT OF RS.8 06 49 024/- FOR TH E NEXT ASSESSMENT YEAR. IT IS THE DUTY OF THE ASSESSEE TO PROVE ITS CLAIM WITH EVIDENCE BUT IT HAS NOT BEEN ABLE TO SUBSTANTI ATE ITS CLAIM BEFORE THE AUTHORITIES BELOW AS TO THE COMPONENTS O F SHORTAGE OF STOCK AND WHAT STEPS WERE TAKEN BY IT TO IDENTIFY T HE SHORTAGE OF STOCK AND AS TO HOW THERE IS SHORTAGE OF STOCK. EV EN BEFORE US THE ITA NO.353(BANG)/2010 PAGE 13 OF 18 ASSESSEE HAS NOT BEEN ABLE TO PRODUCE ANY EVIDENCE AS TO THE REASONS FOR THE SHORTAGE OF STOCK. IN VIEW OF THE S AME WE ARE NOT INCLINED TO ACCEPT THE CONTENTION OF THE ASSESSEE A ND THEREFORE WE CONFIRM THE ADDITION CONFIRMED BY THE CIT(A). THIS GROUND OF APPEAL IS ACCORDINGLY REJECTED. 14. GROUND NO.6 IS AN ALTERNATIVE GROUND TO GROUND NO.5 AND AS WE HAVE REJECTED GROUND NO.5 WE DIRECT THE AO T O CONSIDER THE GROUND OF APPEAL NO.6 OF THE ASSESSEE AND DISPOSE O F THE SAME IN ACCORDANCE WITH LAW. 15. AS REGARDS GROUND NO.8 BRIEF FACTS ARE THAT FR OM THE ASSESSMENT RECORDS OF THE EARLIER ASSESSMENT YEARS 2001-02 AND 2002-03 AS WELL AS THE RELEVANT ASSESSMENT YEAR TH E AO OBSERVED THAT IN THE EARLIER ASSESSMENT YEARS THE ASSESSEE WAS RECOGNIZING THE REVENUE IMMEDIATELY ON THE DISPATCH OF THE ATM TO THE CUSTOMER WHILE IN THE RELEVANT ASSESSMENT YEAR IT W AS RECOGNIZING THE REVENUE AFTER THE ATM HAS BEEN INSTALLED AT THE CUSTOMER SITE. THUS THE ASSESSEE HAS EXCLUDED THE SALE OF RS.52 6 9 13 636/- STATING THAT THERE IS CHANGE IN THE REVENUE RECOGNI TION METHOD. TO SUBSTANTIATE ITS CLAIM THE ASSESSEE ALSO FURNISHED THE SALE AGREEMENT WITH THE INDIAN OVERSEAS BANK AND PUNJAB NATIONAL BANK WHERE CERTAIN CLAUSES TALK ABOUT TRANSFER OF O WNERSHIP. BUT THE AO HELD THAT THE ASSESSEE HAS FAILED TO SUBSTAN TIATE ITS CLAIM BY WAY OF PRODUCING THE DETAILS ABOUT CHANGE IN THE NA TURE OF CONTRACT FROM THE CONTRACTS ENTERED INTO IN EARLIER YEARS AN D THE CHANGE IN ITA NO.353(BANG)/2010 PAGE 14 OF 18 METHOD OF EXECUTION OF THE CONTRACT. HE THEREFORE REJECTED THE ASSESSEES CLAIM AND MADE ADDITION TO THE INCOME OF THE ASSESSEE. AGGRIEVED THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WHO CONFIRMED THE ORDER OF THE AO AND THE ASSESSEE IS I N SECOND APPEAL BEFORE US. 16. LEARNED COUNSEL FOR THE ASSESSEE WHILE REITERA TING THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AUTHORI TIES BELOW SUBMITTED THAT THE ASSESSEE HAS AN OPTION TO CHANGE ITS METHOD OF ACCOUNTING FROM ONE SYSTEM TO ANOTHER AND ALSO TO A DOPT ANOTHER SYSTEM OF ACCOUNTING WITH RESPECT TO DIFFERENT SOUR CES OF INCOME PROVIDED THE AO IS ABLE TO COMPUTE THE INCOME OF TH E ASSESSEE FOR THE RELEVANT ASSESSMENT YEAR. FOR THIS PROPOSITION HE PLACED RELIANCE UPON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. SYNDICATE BANK (261 ITR 528). HE ALSO DREW OUR ATTENTION TO THE PURCHASE ORDER COPY FOR ATM ISSUED BY INDIAN OVERSEAS BANK AND ALSO BY PUNJAB NATIONAL BANK PLAC ED AT PAGES 52 TO 61 OF THE PAPER BOOK AND TO THE RELEVANT CLAU SES AT PAGE 53 OF THE PAPER BOOK WHEREIN TERMS OF PAYMENT ARE ME NTIONED AS UNDER: 2) TERMS OF PAYMENT: ATM A. ON DELIVERY : 20% OF HARDWARE COST B. ON TRANSFER OF OWNERSHIP : 60% OF HARDWARE COST C. BALANCE IN ONE MONTH AFTER TRANSFER OF OWNERSHIP : 20% SITE PREPARATION A. ON DELIVERY OF MATERIALS : 50% OF THE INFRASTRUCTURE COST B. ON COMPLETION OF SITE : 50% ITA NO.353(BANG)/2010 PAGE 15 OF 18 THUS HE SUBMITTED THAT ONLY 20% OF THE HARDWARE CO ST IS PAID ON DELIVERY WHILE 60% IS PAID ON TRANSFER OF OWNERSHIP AND 20% AFTER ONE MONTH OF TRANSFER OF OWNERSHIP. HE ALSO DREW O UR ATTENTION TO CLAUSE 8 OF THE SAID AGREEMENT WHERE THE TRANSFER O F OWNERSHIP OF THE PROPERTY IS MENTIONED TO BE EFFECTIVE AS SOON A S THE EQUIPMENT IS BROUGHT TO THE SITE OF THE BANK PREMISES INSTAL LED THERE AND ACCEPTED BY THE BANK AFTER CONDUCTING ACCEPTANCE TE ST. CLAUSE 7 OF THE SAID AGREEMENT MENTIONS THAT THE INSPECTION/ACC EPTANCE TEST WILL BE CARRIED OUT TO THE SATISFACTION OF THE BANK AT THE SITE FOR A MAXIMUM PERIOD OF 7 WORKING DAYS FOR THE COMPLETE S YSTEM AND THIS PERIOD MAY BE EXTENDED IF FOUND NECESSARY. T HUS ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE THE ASSESS EE IS ENTITLED TO RECEIVE THE PAYMENT ONLY AFTER THE ASSESSEE INSTALL S THE MACHINERY AT THE PREMISES OF THE BANK AND IS ACCEPTED BY THE BANK AFTER THE INSPECTION OR ACCEPTANCE TEST IS PERFORMED. THEREF ORE THE ASSESSEE HAS CHANGED THE METHOD OF RECOGNIZING THE REVENUE A FTER THE MACHINE IS INSTALLED. SIMILAR AGREEMENT IS ALSO WI TH THE OTHER BANK. HE ALSO DREW OUR ATTENTION TO NOTE 17 OF THE AUDITO RS REPORT WHICH IS NOTES ON ACCOUNTS AND CLAUSE (D) THEREOF DEALS WITH REVENUE RECOGNITION WHEREIN IT IS CLEARLY MENTIONED THAT REVENUE FROM PRODUCT SALES ARE RECOGNIZED ON INSTALLATION OF THE PRODUCT AND ARE INCLUSIVE OF EX CISE DUTY SALES TAX/WORKS CONTRACT TAX AS MAY BE APPLIC ABLE. OTHER REVENUES ARE RECOGNIZED RATEABLY OVER THE CONTRACTUAL PERIOD OR AS THE SERVICES ARE PERFORMED EXCEPT IN RESPECT OF (A) INDIVISIBLE CONTRACTS WHER E REVENUE IS RECOGNIZED ON THE PERCENTAGE COMPLETION METHOD THE RELEVANT COST IS RECOGNIZED IN ACCOUNTS IN THE ITA NO.353(BANG)/2010 PAGE 16 OF 18 YEAR OF RECOGNITION OF THE REVENUE AND (B) TOTAL IMPLEMENTATION SERVICES WHERE REVENUE IS RECOGNIZED BASED ON COMPLETION OF THE SERVICES. THUS ACCORDING TO THE LEARNED COUNSEL FOR THE ASSE SSEE CHANGE IN THE REVENUE RECOGNITION IS TO BRING IT IN TUNE WITH THE ACCOUNTING STANDARDS AND THE ASSESSEE HAS BEEN RECOGNIZING THE REVENUE SIMILARLY IN ALL THE SUBSEQUENT ASSESSMENT YEARS AN D THE METHOD IS SUCH THAT THE AO CAN EASILY AND REASONABLY COMPUTE THE INCOME OF THE ASSESSEE. LEARNED DEPARTMENTAL REPRESENTATIVE HOWEVER SUPPOR TED THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE ASSESSEE HAS NOT SHOWN AS TO HOW THE CONTRACT FOR THE RELEVANT A SSESSMENT YEAR WAS DIFFERENT FROM THE CONTRACTS IN EARLIER ASSESSM ENT YEARS AND THE NECESSITY TO CHANGE THE METHOD OF REVENUE RECOGNITI ON. THUS ACCORDING TO HIM THE ORDERS OF THE AUTHORITIES BEL OW HAVE TO BE CONFIRMED. 17. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THE RIVAL CONTENTIONS WE FIND THAT THE ASSESSEE HAS CH ANGED THE METHOD OF REVENUE RECOGNITION ON THE BASIS OF THE C ONTRACT ENTERED INTO BY THE INDIAN OVERSEAS BANK AND PUNJAB NATIONA L BANK RESPECTIVELY. AS SEEN FROM THE SAID PURCHASE ORDER WE FIND THAT THE REVENUE IS RECEIVED BY THE ASSESSEE ONLY AFTER THE ATM MACHINES ARE INSTALLED AND ACCEPTANCE TEST ARE COND UCTED THEREAFTER. THEREFORE THE METHOD ADOPTED BY THE A SSESSEE EARLIER BY RECOGNIZING THE REVENUE IMMEDIATELY ON THE DISPA TCH OF THE ATM ITA NO.353(BANG)/2010 PAGE 17 OF 18 MACHINE WOULD NOT SHOW THE CORRECT PICTURE AS ONLY 20% OF THE SALE PRICE WOULD HAVE BEEN RECEIVED AT THAT TIME AND THE CORRECT INCOME OF THE ASSESSEE COULD NOT HAVE BEEN COMPUTED. THE PRESENT SYSTEM BEING FOLLOWED BY THE ASSESSEE ON RECOGNIZIN G THE REVENUE ONLY AFTER THE ATM MACHINES HAVE BEEN PROPERLY INST ALLED AT THE PREMISES IN OUR VIEW IS THE CORRECT METHOD OF REC OGNIZING THE REVENUE AS IT WOULD BE IN ACCORDANCE WITH THE MATCH ING PRINCIPLE AND THE CORRECT INCOME OF THE ASSESSEE CAN BE COMPU TED. THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE HAS FOLLOWED THIS METHOD AFTER THE RELEVANT ASSESSM ENT YEAR AND AS LONG AS THE AO IS ABLE TO COMPUTE THE CORRECT INCOM E OF THE ASSESSEE FROM THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE THE ASSESSEE IS ENTITLED TO CHANGE THE METHOD OF AC COUNTING FROM THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE AS THE ASSESSEE IS ENTITLED TO CHANGE THE METHOD OF ACCOUNTING. TO TAKE THIS VIEW WE DRAW STRENGTH FROM THE DECISION OF THE JURISDICT IONAL HIGH COURT IN THE CASE OF SYNDICATE BANK (CITED SUPRA). IN VIEW OF THE SAME WE ALLOW THIS GROUND OF APPEAL. 18. IN THE RESULT THE ASSESSEES APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH FEBRUARY 2011. SD/- SD/- (A. MOHAN ALANKAMONY) ACCOUNTANT MEMBER (SMT. P.MADHAVI DEVI) JUDICIAL MEMBER EKS ITA NO.353(BANG)/2010 PAGE 18 OF 18 COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) CONCERNED 4. CIT 5. DR ITAT BANGALORE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT BANGALORE