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2015 DIGILAW 537 (JHR)

Mecon Limited v. Dy. Commissioner of Income-Tax

2015-04-27

D.N.PATEL, RATNAKER BHENGRA

body2015
JUDGMENT : D.N. PATEL, J. 1. This appeal has been preferred by the appellant (appellant of Tax Appeal No. 37 of 2013) against the judgment and order dated 7.5.2013 delivered by the Income Tax Appellate Tribunal, Circuit Bench, Ranchi (Hereinafter to be referred to as ITAT. Ranchi) in the Income Tax Appeal No. 05-Ran/2013 for the Assessment Year 2007-08, whereby the appeal preferred by the appellant-assessee being Tax Appeal No. 05-Pan/ 2013 has been allowed partly. Submissions made on behalf of the appellant-assessee:- 2. Counsel for the appellant submitted that this appeal is decided against this appellant-assessee to the following extent:- ITDS certificates which are receivable from different clients have not been received by this appellant and therefore, this appellant has claimed consideration of a sum of Rs. 12,19,000/- pertaining to ITDS not received as bad debt written off in computation of total income for the Accounting Year 2006-07. The submissions made by the assessee regarding ITDS certificates before the CIT (Appeals) (Annexure 2 to the Tax Appeal No. 37 of 2013) is quoted hereunder:- 2.1 Disallowance of Rs. 12,19,000/- for ITDS Certificate Receivable written off. Several Income Tax TDS Certificates (ITDS Certificates) were lying due from various clients for a long period and the appellant could not collect those certificates from clients owing to various reasons. Hence, the decision to write off this claim of receivable was taken by the management during the financial year 2006-07. The details of (ITDS Certificate Receivable written off is enclosed as per Annexure-2. However, the appellant had inadvertently shown it under the head Adjustment relating to the earlier years. In the case of appellant there were no errors or omissions in the past. The management decision of adjustment/write off Rs. 12,19,000/- during the current period is necessitated by circumstances only. Hence, as per Accounting Standard-5 this expenditure should not be treated as Prior Period items. In view of the above, this expenditure should not be disallowed by the Ld. In the case of appellant there were no errors or omissions in the past. The management decision of adjustment/write off Rs. 12,19,000/- during the current period is necessitated by circumstances only. Hence, as per Accounting Standard-5 this expenditure should not be treated as Prior Period items. In view of the above, this expenditure should not be disallowed by the Ld. AO all the mere ground of Prior Period Expenditure even though it is recorded in the books of accounts inadvertently under the head Adjustment relating to the earlier years." It is submitted by the counsel for the appellant that the ITDS certificates, which were receivable, have not been received from several clients, who are refereed to in Annexure- 2 to the memo of the appeal and therefore, this amount should be treated as revenue expenditure or loss in business in ordinary course and it has been inadvertently recorded in the books of accounts under the head Adjustment relating to the earlier years. The Assessing Officer wrongly disallowed the same for the Assessment Year 2007-08 as Prior Period Expenditure not allowable during the relevant financial year for the reason that these expenditures are related to earlier financial years. This aspect of the matter has not been properly appreciated by the ITAT. Ranchi and it has confirmed the order of Commissioner of Income Tax (Appeals) (hereinafter to be referred to as the CIT (Appeals) passed in Appeal No. 151/Ran/Co/2009-10 filed by the assessee against the Assessment order for the Assessment Year 2007-08. Submission made on behalf of the respondent-Department 3. Counsel appearing for the respondent-Department submitted that there is a sustained finding of fact by the Assessing Officer, thereafter by the CIT (Appeals) as well as by the ITAT, Ranchi and therefore, this Court may not interfere with the said findings regarding ITDS in this Tax appeal preferred by the appellant-assessee. It is further submitted by the counsel for the respondents that there is no evidence either before the Assessing Officer or before the CIT (Appeals) or before the ITAT, Ranchi that this ITDS certificates, which were receivable, have not been received. Moreover, non-receipt of ITDS certificates can neither be treated as Revenue Expenditure nor it is a loss in ordinary course of business and there fore, rightly it has been held by the Assessing Officer, CIT (Appeals) as well as ITAT, Circuit Bench, Ranchi that this amount of Rs. Moreover, non-receipt of ITDS certificates can neither be treated as Revenue Expenditure nor it is a loss in ordinary course of business and there fore, rightly it has been held by the Assessing Officer, CIT (Appeals) as well as ITAT, Circuit Bench, Ranchi that this amount of Rs. 12.19 Lacs is rightly disallowed for the Assessment Year 2007-08 as Prior Period Expenditure not allowable during the relevant financial year for the reason that these expenditures are related to earlier financial years and therefore, this appeal may not be entertained by this Court. 4. Having heard counsel for both sides and looking to the facts and circumstances of the case, it appears that this appellant-assessee has claimed that Rs. 12.19 Lacs which is the total amount of ITDS certificate not received (as referred to in Annexure-2 of this appeal) should be treated as Revenue Expenditure or loss in ordinary course of business. We are not inclined to accept this proposition propounded by the counsel for the appellant mainly for the following reasons: REASONS: (a) This appellant has mentioned the details of TDS certificates receivable from the following clients:- DETAILS OF ITDS CERTIFICATES RECEIVABLE (TO BE WRITTEN OFF) (A/C Code 031700) AS ON 31.3.2007 S. No. Work Item Client's Name Amount (Rs.) Remarks 1. 09B8 OPG 2,975.000 Related to Before FY 01-02 2. 0912 SAI 2,426.00 Related to Before FY 01-02 3. 09K8 TIF 4,645.00 Related to FY 02-03 4. 09M9 GOJ 3,36,775.00 Related to FY 01-02 & 02-03 5. 09N8 PHS 2,220.00 Related to FY 01-02 6. 7358 HZL 189.00 Related to Before FY 01-02 7. 7569 RIN 1,632.00 Related to Before FY 01-02 8. 8897 GOI 26,611.00 Related to FY 01-02 & 02-03 9. 8925 SIS 2,768.00 Related to FY 01-02 10. C332 BSP 4,590.00 Related to FY 01-02 11. E207 BSL 4,590.00 Related to FY 01-02 12. E227 BSP 1,797.00 Related to FY 02-03 13. P356 GAI 1,612.50 Related to Before FY 01-02 14. P367 IIC 172.00 Related to Before FY 01-02 15. P384 IOC 13,706.00 Related to Before FY 01-02 16. P414 JSL 3,763.00 Related to FY 01-02 17. P505 ESS 3,915.00 Related to FY 01-02 18. P515 ONG 1,84,579.00 Related to FY 01-02 19. P522 HCL 12,731.00 Related to FY 01-03 20. P524 IDC 15,750.00 Related to FY 01-03 21. P536 PPT 19,398.00 Related to FY 03-04 & Before FY 01-02 22. P414 JSL 3,763.00 Related to FY 01-02 17. P505 ESS 3,915.00 Related to FY 01-02 18. P515 ONG 1,84,579.00 Related to FY 01-02 19. P522 HCL 12,731.00 Related to FY 01-03 20. P524 IDC 15,750.00 Related to FY 01-03 21. P536 PPT 19,398.00 Related to FY 03-04 & Before FY 01-02 22. P621 IOC 9,075.00 Related to Before FY 01-02 23. P631 RPL 8,640.00 Related to Before FY 01-02 24. P670 MSL 2,500.00 Related to Before FY 01-02 25. P691 TIS 2,750.00 Related to Before FY 01-02 26. P715 SER 4,950.00 Related to Before FY 01-02 27. P740 SIS 2,750.00 Related to Before FY 01-02 28. P746 JNL 12,375.00 Related to Before FY 01-02 29. P753 BSC 13,125.00 Related to Before FY 01-02 30. P776 UMI 416.00 Related to Before FY 01-02 31. P796 ONG 31,179.00 Related to FY 01-02 32. P867 BSS 6,353.00 Related to Before FY 01-02 33. P932 IGC 973.00 Related to Before FY 01-02 34. P960 GAI 12.804.00 Related to Before FY 01-02 35. P980 IPC 3,353.00 Related to FY 02-03 36. Q037 OCF 7,425.00 Related to Before FY 01-02 37. Q044 DVC 3,252.00 Related to FY 01-02 38. Q164 BSN 72,999.00 Related to FY 02-03 39. Q241 JSP 1,313.00 Related to FY 02-03 40. Q242 ESC 2,625.00 Related to FY 02-03 41. 244 SI 2,350.00 Related to FY 02-03 42. Q273 HIL 6,197.00 Related to FY 02-03 43. Q326 VSL 8,506.00 Related to FY 02-03 44. 347.924.50 Related to FY 03-04 & Before From the aforesaid table it is dear that several amounts arc relating to year 2001-02 and some are of earlier years even and it is purely an averment and allegation that the TDS certificates have not been received by the Company. There was neither any proof before the Assessing Officer nor before the err (Appeals) nor before ITAT, Ranchi that in fact this appellant has not received these TDS certificates for several financial years as stated in the aforesaid table. In absence of evidence the claim as made by the appellant-assessee cannot be allowed. The amount of TDS certificate, which is not received by the appellant-assessee cannot be treated as a bad debt written off in computation of the total income for the relevant assessment year and should be treated as Prior Period Expenditure because the ITDS certificates (not received) not only pertains to the year 2001-02, but even prior to that. The amount of TDS certificate, which is not received by the appellant-assessee cannot be treated as a bad debt written off in computation of the total income for the relevant assessment year and should be treated as Prior Period Expenditure because the ITDS certificates (not received) not only pertains to the year 2001-02, but even prior to that. (b) Even if such TDS certificates have been received, then also it cannot be labeled either as Revenue Expenditure or as a loss in ordinary course of business. Both these terms, i.e. Revenue Expenditure and Loss in ordinary course of business are absolutely different from the event of non-receipt of TDS certificates. (c) Paragraph 8 (page 72) of order dated 7.5.2013 passed by the ITAT Ranchi reads as under:- "8. We heard the rival submissions and carefully considered the same. It is not denied that this amount relates to the prior period. As per the accounting standard No. 1 as notified under Section 145(2), it is mandatory for the assessee to be followed. The accrual has been denied under clause 6(b) to the assumption that revenues and costs are accrued that is, recognized as they arc earned or incurred and arc recorded in the financial statement of the period to which they relate. Clause 5 of the said accounting standard clearly states that fundamental accounting assumption relating to the going concern consistency and accrued are to be followed. It is not denied that the assessee was following the mercantile system of accounting. In view of the mercantile accounting as well as definition of the accrual given under clause 6 we are of the view that since the TDS certificate written off did not relate to the period i.e. accounting year 2006-07, therefore, we do not find any illegality or infirmity in the order or the CIT (A) in sustaining the disallowance. Thus, the ground Nos. 1 and 2 stand dismissed." (Emphasis supplied) Thus, in the circumstances, that it has not been denied that this amount relates to the prior period and the assessee was following the mercantile system of accounting and as per definition of the accrual given under Clause 6, it is rightly held by the ITAT. Circuit Bench, Ranchi that TDS certificate written off. did not relate to Accounting year 2006-07. 5. Circuit Bench, Ranchi that TDS certificate written off. did not relate to Accounting year 2006-07. 5. As a cumulative effect of the aforesaid facts and reasons, there is no substantial question of law involved in this appeal and we find no error in the order dated 7.5.2013, passed by the ITAT. Ranchi in disallowing the claim made by this appellant so far as the amount pertaining to TDS certificates (not received) is concerned. 6. This appeal is, therefore, dismissed. Tax Appeal No. 38 of 2013 with Tax Appeal No. 39 of 2013 7. Both these appeals have been preferred by the Department of Income Tax against the judgment and order delivered by the ITAT, Ranchi in Income Tax Appeal No. 17/Ran/2013 filed by the Appellant-Department for the Assessment Year 2007-08 and Income Tax Appeal No. 05/Ran/13 (Cross objection of the respondent-assessee before ITAT, Ranchi) for the Assessment Year 2007-08. Submissions made on behalf of the appellant-Department: 8. Submissions made regarding Unabsorbed Depreciation – Appellant has mainly submitted that the amount found eligible for deduction covering Unabsorbed Depreciation is absolutely against the provisions of the Income Tax Act, 1961. 9. Submissions regarding expenditure coveting up-gradation of software – Secondly it has been submitted that this appeal has been preferred because amount of expenditure covering up-gradation of software has been treated as a Revenue Expenditure. In fact, this expenditure should be treated as Capital Expenditure. 10. Submissions regarding Earnest Money – It is further submitted by the counsel for the Appellants that unreturned amount of Earnest Money is of earlier year. Therefore in the Financial Year 2006-07 this amount of Rs. 40.62 Lacs should be added to the income. This aspect of the matter has not been appreciated by ITAT. Submissions made on behalf of the respondent company: 11. Submissions, regarding unabsorbed depreciation – Counsel for the respondent company has submitted that concept of unabsorbed depreciation has been properly appreciated by the ITAT Ranchi and the said amount has been rightly reduced from the calculation of the Book Profit as per Section 115-JB of the Income Tax Act, 1961. If the amount of unabsorbed depreciation is less than the amount of loss brought forward the amount of the unabsorbed depreciation in that situation should be reduced from the calculation of the Book profit for the purposes of calculation of Minimum Alternate Tax. 12. If the amount of unabsorbed depreciation is less than the amount of loss brought forward the amount of the unabsorbed depreciation in that situation should be reduced from the calculation of the Book profit for the purposes of calculation of Minimum Alternate Tax. 12. Submissions regarding up-gradation of software – So far as up-gradation of software is concerned, it is submitted by the counsel for the respondents that this up-gradation expenditure is not incurred for the first time for acquiring the said software and therefore, rightly it has been treated by ITAT, Ranchi as Revenue Expenditure and once it is treated as Revenue Expenditure the said amount should be treated as deductable. Up-gradation of software is an unavoidable necessity, especially in an Engineering Company like this respondent. In fact, total amount towards purchase of the software is very high, i.e. more than 10 crores, whereas the up-gradation cost for which the claim is made by the respondent company is only Rs. 25,19,000/-. This is a very meager amount compared to expenditure for purchase of the software and therefore, it is rightly treated as Revenue Expenditure by the ITAT, Ranchi. Counsel appearing for the respondent has placed reliance upon the following decisions:- (1) Decision rendered by the Hon'ble High Court of Madras in the case of Commissioner of Income Tax vs. Southern Roadways Limited, (2007) 288 ITR 15 (Mad). (2) Decision rendered by Hon'ble Bombay High Court in the case of the Commissioner of Income Tax, City-VII, Mumbai vs. M/s. Sonata Software Limited, (2012) 343 ITR 397 (Bom). Learned counsel for the respondents has submitted that in the light of the aforesaid decisions, the amount of expenditure incurred covering up-gradation of the software should be treated as Revenue Expenditure and not as capital expenditure. 13. Submissions regarding Earnest Money – It is further submitted by the counsel for the respondent-assessee that unreturned earnest money was written off in the Financial Year 2006-07 as per decision of the respondent company as this amount of Rs. 40.62 Lacs was not possible to be obtained from the customers of respondent company. 13. Submissions regarding Earnest Money – It is further submitted by the counsel for the respondent-assessee that unreturned earnest money was written off in the Financial Year 2006-07 as per decision of the respondent company as this amount of Rs. 40.62 Lacs was not possible to be obtained from the customers of respondent company. Therefore, it was written of as a loss incidental to the business during the Financial Year 2006-07 though recorded under the head Adjustment relating to the earlier years it has further been submitted that as per Accounting Standard-5 issued by the Institute of Chartered Accountants of India the term Prior Period items refer only to income or expenses which arise in the errant period as a result of errors or omissions in the preparation of the financial statements of one or more prior periods. The term does not include other adjustments necessitated by circumstances, which though related to prior periods, are determined in the current period. This aspect of the matter has been correctly appreciated by the ITAT, Ranchi and hence this appeal may not be entertained by this Court. 14. Having heard counsel for both sides and looking to the facts and circumstances of the case and also looking to the judicial pronouncements as referred to hereinabove we see no ground to entertain both these appeals for the following facts and reasons. REASONS (1) As per Section 115-JB of the Income Tax Act, 1961, unabsorbed depredation, if less than the loss carried forward, is to be added while calculation taxable income – Section 115-JB of the Income tax Act, 1961 is a special provision for the payment of Tax by certain companies whose taxable income, as computed under the Income Tax Act of 1961, is less than 18½% of the Book Profit. This is also known as Minimum Alternate Tax (MAT). The current MAT regime, viz. Section 115-JB has been introduced in Income Act, 2000. At the relevant time rate of MAT was 10%. For the ready reference Section 115-JB(1) and (2) reads as under:- "115-JB. Special provision of payment of tax by certain companies – (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company. At the relevant time rate of MAT was 10%. For the ready reference Section 115-JB(1) and (2) reads as under:- "115-JB. Special provision of payment of tax by certain companies – (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company. the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after (the 1st day of April, 2012), is less than eighteen and one-half per cent of its book profit (such book profit shall be deemed to be total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of (eighteen and one-half per cent). (2) Every assessee:- (a) Being a company, other than a company referred to in clause 9(b), shall, for the purpose of this section, prepare its front and loss account for the relevant previous year in accordance with the provisions of Part II of Schedule VI to the Companies Act, 1956 (1 of 1956). (b) Being a company, to which the proviso to sub-section (2) of Section 211 of the Companies Act, 1956 (1 of 1956) is applicable shall for the purposes of this Section prepare its profit and loss account fur the relevant previous year in accordance with the provisions of the Act governing such company:- Provided that while preparing the annual accounts including profit and loss account.- (i)………………… (ii)………………… (iii)………………… Provided further that where the company has adopted or adopts the financial year under the. Companies Act 1956 (1 of 1956) which is deferent from the previous year under this Act:- (i)………………… (ii)………………… (iii)………………… Explanation I – For the purpose 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 (2) as increased by:- (a)………………… (b)………………… (c)………………… (d)………………… (e)………………… (f)………………… (g)………………… (h)………………… (i) ………………… (j) The amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset if any amount referred to in clauses (a) to (i) is debited to the profit and loss account or if any amount referred to in clause (j) is not credited to the profit and loss account and as reduced by:- (i)………………… (ii)………………… (ii-a)………………… (ii-b) ………………… (iii) The amount of loss brought forward or unabsorbed depreciation whichever is less as per books of account. Explanation – For the purposes of this clause:- (a) The loss shall not include depreciation. (b) The provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is net. (Emphasis supplied) In view of the aforesaid provisions what is to be seen by the Assessing Officer is if the total income is less than 10% of the book profit the mechanism of Minimum Alternate Tax will be applicable. In the facts of the present case it appears that respondent company claimed depreciation. The total amount of depreciation was more than the taxable income. Therefore it has remained unabsorbed years after years. In view of the aforesaid facts as per the provisions of Section 115-JB if the amount of unabsorbed depreciation is less than the amount of loss carried forward, then the amount of unabsorbed depreciation will be deducted from the calculation of the Book Profit. This methodology of the calculator of the Book Profit has been correctly appreciated by the ITAT, Ranchi. This claim has been allowed even by the err (Appeal). In the facts of the present case the loss carried forward is Rs. 265,13,33,852/- whereas unabsorbed depreciation is at Rs. 16,59,64,000/-. Thus, out of the aforesaid two carried forward amounts unabsorbed depreciation is less than the amount of the loss brought forward and rightly therefore the said amount will be reduced from the Book Profit. In the facts of the present case the loss carried forward is Rs. 265,13,33,852/- whereas unabsorbed depreciation is at Rs. 16,59,64,000/-. Thus, out of the aforesaid two carried forward amounts unabsorbed depreciation is less than the amount of the loss brought forward and rightly therefore the said amount will be reduced from the Book Profit. No error has been committed by the (Appeals) as well as by ITAT, Ranchi in allowing the claims of the respondents in both the appeals. The logic and reasoning given by the Assessing Officer in the order of assessment for disallowing the unabsorbed depreciation from the calculation of book profit is quoted hereunder:- "8. On perusal of the computation of MAT in the revised return it was found that the assessee has deducted a sum of Rs. 16,59,64,100/- on account of Unabsorbed Depreciation. The assessee was required to furnish the details and calculation of the Unabsorbed Depreciation as on 1.4.2006. But, in compliance to the same no details were furnished. Therefore, in absence of the same, the amount of Rs. 16,59,64,100/- is not liable to be deducted and therefore disallowed." The aforesaid logic arid the reasoning advanced by the Assessing Officer is absolutely wrong. The calculation of the unabsorbed depreciation was already with the Assessing Officer when the income tax return was failed by the respondent for the previous financial year. Unabsorbed depreciation is nothing but carried forward depreciation. If proper care had been taken by the assessing officer to look at the income tax returns of the previous assessment year he would have noticed that there is already a depreciation claimed by the respondent and as the said depreciation amount more than the taxable income it can be forward also and it is know unabsorbed depreciation. Therefore the details and calculations were available to the assessing officer. Unabsorbed depreciation is not a matter of one year. It is accumulation of the depreciation of the previous years. Therefore, CIT (Appeals) has rightly decided this aspect ill favour of the respondent company and we see no reason to interfere with the reasons given by the CIT (Appeals) as well as ITAT, Ranchi for allowing unabsorbed depreciation amount to be reduced from book profit as per Section 115-JB of the Income Tax Act, 1961. Therefore, CIT (Appeals) has rightly decided this aspect ill favour of the respondent company and we see no reason to interfere with the reasons given by the CIT (Appeals) as well as ITAT, Ranchi for allowing unabsorbed depreciation amount to be reduced from book profit as per Section 115-JB of the Income Tax Act, 1961. The eligible book profit under Section 115-JB is to be computed after increasing the profit or loss as per profit and loss account by the items mentioned below Explanation-1 being (a) to (i) and as reduced by items (i) to (viii). (ii) Expenditure incurred for up-gradation of software to be treated as Revenue Expenditure. So far as the expenditure incurred by the respondents for up-gradation of software is concerned, it is not a first time purchase of the software. Therefore, it should be treated as a revenue expenditure. Up-gradation of the software is sometimes may become unavoidable for an Engineering Company like the respondents. In fact, first time purchase value of the software is more than approximately 10 crores, whereas the amount paid by the respondents for up-gradation of the software is Rs. 25,09,000/- only and therefore, rightly appeal preferred by the respondents was allowed by the ITAT, Ranchi. The up-gradation of the software is a necessity and therefore, expenditure incurred by the respondents covering up-gradation of the software is correctly created as a Revenue Expenditure and whole amount of expenditure should be allowed while calculating the taxable income. (iii) It has been held by the Hon'ble, Madras High Court in the case of Commissioner of Income Tax vs. Southern Roadways Limited, (2007) 288 IIR 15 (Mad) in para 6 as under:- "6. With regard to the 2nd question, viz. whether the expenditure incurred on the up-gradation of software is revenue expenditure, the assessee did not claim any expenditure for installation of new computers, but claimed the expenditure for up-gradation of existing computers. Further, the expenditure was incurred for improving efficiency of the existing system with a view to keep pace with improvement of technology and no machinery was brought into existence. Further, the expenditure was incurred for improving efficiency of the existing system with a view to keep pace with improvement of technology and no machinery was brought into existence. Such expenses incurred by the assessee for enhancement of efficiency, in our considered opinion is nothing but an up-gradation of computers for achieving the desired result and therefore, the same has to be treated as revenue expenditure." (Emphasis supplied) In view of the aforesaid decision, expenditure incurred for improving the efficiency of the existing system, with a view to keep pace with the technology, should be treated as a revenue expenditure and this is true for software technology also. We are in full agreement with the decision rendered by the Hon'ble Madras High Court. In fact, in the present case also the expenditure incurred is not for the first time purchase of the software and therefore, it cannot be treated as capital expenditure. It has been held by the Bombay High Court in The Commissioner of Income Tax, City-VII, Mumbai vs. M/s. Sonata Software Limited, (2012) 343 ITR 397 (Bom) in para 16 as under:- "16. In so far as the sixth question is concerned, the Tribunal has noted that the assessee had undertaken expenditure for indigenization of software. The Tribunal noted that software is a product subject to high obsolescence. Having regard to the aforesaid position the expenditure incurred on indigenization has correctly been held to be allowable as revenue expenditure. Hence no substantial question of law will arise on this finding." (Emphasis supplied) In view of this decisions also, amount of expenditure incurred by the respondents in up-gradation of the software should be treated as revenue expenditure. Sometimes it may happen that software is being purchased in the form of a compact disc and that expenditure may be treated as a capital expenditure after sometime, the said software requires up-gradation. The up-gradation cannot be done without purchase of second compact disc. Therefore, up-gradation in the form of a second compact disc cannot be treated as a capital expenditure. Ostensibly, it is the first time purchase of a second compact disc but, in fact it is meant for up-gradation of the first compact disc. Therefore, purchase of a second compact disc cannot be treated as a capital expenditure because it is in fact meant for up-gradation of the first compact disc. Ostensibly, it is the first time purchase of a second compact disc but, in fact it is meant for up-gradation of the first compact disc. Therefore, purchase of a second compact disc cannot be treated as a capital expenditure because it is in fact meant for up-gradation of the first compact disc. Sometimes, second compact disc also becomes obsolete with passage of time and therefore, third compact disc may also be required to be purchased and it is also not the first time purchase of a software. It may be first time purchase of three compact discs, but the second purchase is meant for up-gradation of the first software and purchase of the third compact disc is also for up-gradation of first and second soft ware. Therefore, expenditure incurred by the assessee for purchase of the third compact disc will also be treated as a revenue expenditure. In fact, it is an expenditure incurred for supplementing the earlier expenditure, which was treated as a capital expenditure. This aspect of the matter has been properly appreciated by the Income Tax Appellate Authority. Thus, the expenditure incurred covering up-gradation of the software has been rightly allowed and we see no reason to take any other view than what has been taken by the ITAT, Ranchi. (v) Earliest Money Deposit becomes bad during the relevant financial year, i.e. 2000-07 and therefore, rightly written off by the Assessee in the said financial year: So far as Earnest Money deposited with its client of Rs. 40.62 Lacs is concerned, the same has not been returned by those clients and a decision has been taken by the respondent company in the financial year 2006-07 for treating the unreturned amount of earnest money by its clients as written off as a loss incidental to the business, arisen during the relevant financial year. This has been rightly allowed by the Income Tax Appellate Tribunal, Circuit Bench, Ranchi mainly for the reason that though aforesaid unreturned amount of Earnest Money by the clients of the respondents was for a considerable long period but, it was in the Financial Year 2006-07 that the respondent company has taken final decision to treat the said unreturned amount of Earnest Money of Rs. 40.62 Lacs as written off during the financial year in question. 40.62 Lacs as written off during the financial year in question. The reasons given by the CIT (Appeals) in para 2 of the order passed by him under Section 250 of the Income Tax Act, 1961 is to the effect that at a much belated stage the assessee has treated the unreturned amount of Earnest Money of Rs. 40.62 Lacs as written off and therefore, the said amount was not for the financial year 2006-07 and therefore it was added while calculating the taxable income. This reason given by the CIT (Appeals) while passing the appellate order is absolutely wrong for the reason that though the Earnest Money in question could not be recovered in the earlier years, but, final decision to treat, the aforesaid unreturned amount of earnest money as written off is taken by the respondent company in the financial year 2006-07 (relevant financial year). The reasons given by ITAT, Circuit Bench, Ranchi at para-10 of the impugned order reads as under:- "10. We heard the rival submissions and carefully considered the same. In our view, earnest money deposited with the client does not represent the expenditure being incurred by the assessee. This in fact represents the money deposited by the assessee in the earlier year as earnest money for the purpose of business and during the course of the business. the assessee failed to recover the said amount. In view of this, the assessee had written off this amount during the year as recovery of the amount has become bad during the year accordingly the assessee has written of the amount during the year. The assesses has to show this amount under the head prior period items. In view of the accounting standard as issued by the Institute of Chartered Accountants, the amount has been written of during the year. Therefore, in our view, a loss incidental to the business has arisen during the year. We, therefore, delete the disallowance of Rs. 40.62 Lacs. Thus, the ground Nos. 3 and 4 are allowed. Thus, aforesaid amount has been written off during the financial year 2006-07 as it has not been possible for the respondents to recover the said amount from its clients and it has become a bad debt during that year. We, therefore, delete the disallowance of Rs. 40.62 Lacs. Thus, the ground Nos. 3 and 4 are allowed. Thus, aforesaid amount has been written off during the financial year 2006-07 as it has not been possible for the respondents to recover the said amount from its clients and it has become a bad debt during that year. We, therefore, are in full agreement with the reasons given by ITAT, Ranchi that though the assesses has to show this amount under the head prior period items, the amount actually has been written of during the relevant financial year and therefore, a loss incidental to the business has arisen during the year. 15. In view of the aforesaid facts, reasons and judicial pronouncements, no substantial question of law is involved in these appeals and therefore, there being no substance, both the appeals, i.e. Tax Appeal No. 38 of 2013 and Tax Appeal No. 39 of 2013 are, accordingly, dismissed. Appeals dismissed.