Appeal details
Counselvise Citation
[2021] 107 COUNSELVISE.COM (IT) 7368 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
3 year(s) 4 month(s) 28 day(s)
Appellant
Respondent
Appeal Type
Cross Objection
Pronouncement Date
18-08-2021
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
G
Assessment Year
2005-2006
Appeal Filed On
21-03-2018
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI I-2 BENCH: NEW DELHI (THROUGH VIDEO CONFERENCING ) BEFORE SHRI R.K.PANDA, ACCOUNTANT MEMBER & SHRI KUL BHARAT, JUDICIAL MEMBER ITA NO.4774/DEL/2017 ASSESSMENT YEAR : 2005-06 ADDL. CIT, SPECIAL RANGE-8, NEW DELHI. VS ST MICRO ELECTRONICS PVT.LTD., 202-206,TOLSTOY HOUSE, 15, TOLSTOY MARG, NEW DELHI-110001. PAN-AAACS3406M APPELLANT RESPONDENT C.O.NO.-54/DEL/2018 [ARISING OUT OF ITA NO.4774/DEL/2017] ASSESSMENT YEAR : 2005-06 ST MICRO ELECTRONICS PVT.LTD., 202-206,TOLSTOY HOUSE, 15, TOLSTOY MARG, NEW DELHI-110001. PAN-AAACS3406M VS ADDL. CIT, SPECIAL RANGE-8, NEW DELHI. APPELLANT RESPONDENT APPELLANT BY SH. AJAY VOHRA, SR.ADV., SH. NEERAJ JAIN, ADV. & SH. RAMIT KATIYAL, ADV. RESPONDENT BY SH. SHASHI BHUSAN SHUKLA, CIT DR DATE OF HEARING 15.07.2021 DATE OF PRONOUNCEMENT 18 .0 8 .2021 ORDER PER KUL BHARAT, JM : THIS APPEAL FILED BY THE REVENUE FOR THE ASSESSMENT YEAR 2005-06 IS DIRECTED AGAINST THE ORDER OF LD. CIT(A)-38, NEW DE LHI DATED 19.05.2017. THE ASSESSEE HAS ALSO FILED CROSS-OBJECTION AGAINST THE APPEAL FILED BY THE REVENUE FOR THE ASSESSMENT YEAR 2005-06. FOR THE S AKE OF CONVENIENCE, THESE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF F BY THIS COMMON ORDER. ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 2 | P A GE 2. THE REVENUE HAS RAISED FOLLOWING GROUNDS OF APPE AL:- 1. 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN EXCLUDING EXENSYS SOFTW ARE SOLUTIONS LTD, THIRDWARE SOLUTIONS LTD, VISUAL SOFT TECHNOLOGIES L TD, SANKHYA INFOTECH LTD, FROM THE FINAL LIST OF COMPARABLES BY WRONGLY RELYING ON THE DECISION OF THE LD. ITAT IN THE CASE OF COLT TE CH. I. PVT. LTD IN ITA NO.609/DEL/2011, WHERE THE FACTS AND CIRCUMSTANCES TOTALLY DIFFERENT. 2. 'ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND ALSO IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE AO TO ALLOW THE C LAIM OF DEPRECIATION ON SOFTWARE OF RS. 7,69,371/- BY HOLDING THAT THE S AME WOULD HAVE BEEN PUT TO USE BY THE ASSESSEE IN FY 2004-05 DESPI TE THE FACT THAT INVOICES IN RESPECT OF SUCH SOFTWARE WERE RECEIVED BY THE ASSESSEE FROM HP INDIA IN SUBSEQUENT YEAR AND THEREAFTER ASS ESSEE MADE PAYMENT OF SUCH SOFTWARE. 3. 'THE APPELLANT CRAVES TO AMEND MODIFY, ALTER, A DD OR FOREGO ANY GROUND OF APPEAL AT ANY TIME BEFORE OR DURING THE H EARING OF THIS APPEAL.' 3. THE FACTS GIVING RISE TO THE PRESENT APPEAL ARE THAT IN THIS CASE RETURN DECLARING AN INCOME OF RS.15,69,60,396/- WAS FILED ON 29.10.2005. SUBSEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY AN D THE ASSESSMENT U/S 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT) WAS FRAMED VIDE ORDER DATED 01.12.2008. THE ASSESSING OFFICER WHILE FRAMING TH E ASSESSMENT OBSERVED THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSES SE HAD UNDERTAKEN INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATE ENT ERPRISES (AES) OF RS.225 CRORES. THEREFORE, A REFERENCE WAS MADE TO THE TRAN SFER PRICING OFFICER (TPO) U/S 92CA OF THE ACT FOR DETERMINATION OF AR M'S LENGTH PRICE (ALP') ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 3 | P A GE FOR SUCH TRANSACTION. THE TPO THEREFORE, PASSED A DETAILED ORDER DATED 31.10.2008 U/S 92CA(3) OF THE ACT, THEREBY, HE FOUN D THAT THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AE WERE NOT A T ALP. THE TPO WORKED OUT THE DIFFERENCE OF RS.23,64,79,338/-. THE ASSES SEE FILED OBJECTIONS AGAINST THE FINDINGS OF THE TPO. REJECTING THE OBJ ECTIONS, THE ASSESSING OFFICER MADE ADDITION OF RS.23,64,79,338/- ON THE B ASIS OF FINDINGS OF THE TPO. FURTHER, THE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE REGARDING DEPRECIATION OF RS.7,69,371/-, SOFTWARE E XPENSES AS REVENUE EXPENDITURE OF RS.3,46,91,403/- TREATING SUCH EXPE NDITURE OF CAPITAL NATURE, THE ASSESSING OFFICER HOWEVER, ALLOWED DEP RECIATION @ 60% OF RS.1,56,11,134/- ON THIS, REGARDING LIABILITY WRIT TEN BACK OF RS.15,87,816/- AND LOSS ON ACCOUNT OF FOREIGN EXCHA NGE FLUCTUATION OF RS.39,48,559/-. HENCE, THE ASSESSING OFFICER COMPU TED THE INCOME OF ASSESSEE AT RS.41,88,25,752/- AGAINST THE TOTAL RET URNED INCOME OF RS.15,69,60,396/-. 4. AGGRIEVED AGAINST THIS, THE ASSESSEE PREFERRED A PPEAL BEFORE LD. CIT(A) WHO AFTER CONSIDERING THE SUBMISSIONS, PARTL Y ALLOWED THE APPEAL. THEREBY, LD.CIT(A) QUA TRANSFER PRICING ADJUSTMENTS DIRECTED THE ASSESSING OFFICER TO GRANT BENEFIT OF (+/-) 5% TO THE ASSESSE E AS PROVIDED IN RULE 10B(4) OF THE INCOME TAX RULES, 1962 (THE RULES) WHILE DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION AND EXCLUDING THE COMPARABLES AS DECIDED IN PARAS 3.1.1.1, 3.1.2.1, 3.1.3.1 AND 3.1. 4.1 OF THE IMPUGNED ORDER. HOWEVER, LD.CIT(A RULED AGAINST ASSESSEE IN RESPECT OF EXCLUSION OF BODHTREE CONSULTING LTD., WORKING CAPITAL ADJUSTMEN T AND ADOPTION OF MULTIPLE YEAR DATA ANALYSIS. FURTHER, LD.CIT(A) IN RESPECT OF DEPRECIATION ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 4 | P A GE ALLOWED THE CLAIM OF THE ASSESSEE AND REGARDING TRE ATMENT OF SOFTWARE EXPENSES OF RS.3,46,91,403/- FOLLOWING THE DECISION OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07, AL LOWED THE CLAIM OF THE ASSESSEE. HOWEVER, LD. CIT(A) IN RESPECT OF LIABIL ITY WRITTEN BACK OF RS.15,87,816/- SUSTAINED THE ADDITION AND REGARDING FOREIGN EXCHANGE FLUCTUATION CLAIM OF ASSESSEE WAS ALLOWED. 5. AGGRIEVED AGAINST THIS, BOTH THE REVENUE AND THE ASSESSEE HAVE FILED APPEAL AND CROSS-OBJECTION RESPECTIVELY. 6. GROUND NO.1 OF THE REVENUES APPEAL IS AGAINST T HE EXCLUSION OF THE COMPARABLES DIRECTED BY LD.CIT(A) I.E. EXENSYS SOFT WARE SOLUTIONS LTD.; THIRDWARE SOLUTIONS LTD., VISUALSOFT TECHNOLOGIES ( SEG.); SANKHYA INFOTECH LTD. FROM THE FINAL LIST OF THE COMPARABLES. 7. LD.CIT DR VEHEMENTLY ARGUED THAT LD.CIT(A) WAS N OT JUSTIFIED IN DIRECTING THE EXCLUSION OF THE COMPARABLES SELECTED BY THE TPO. HE SUPPORTED THE ORDERS OF THE TPO & ASSESSING OFFICER . HE TOOK US THROUGH THE ORDER OF THE TPO TO BUTTRESS THE CONTENTIONS TH AT THE COMPARABLES SELECTED BY THE TPO ARE CORRECTLY SELECTED AND ARE IN ACCORDANCE WITH SETTLED PRINCIPLES OF LAW. 8. ON THE CONTRARY, LD. COUNSEL FOR THE ASSESSEE OP POSED THE SUBMISSIONS OF LD. CIT DR AND SUBMITTED THE LD.CIT( A) HAS RIGHTLY EXCLUDED THE COMPARABLES. IN RESPECT OF THIRDWARE SOLUTIONS LTD. , LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE COMPANY OWNED SOFTWARE PRODUCTS AND EARNED INCOME FROM SALE OF LICENSES AN D SUBSCRIPTION. HE ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 5 | P A GE CONTENDED THAT AS PER SCHEDULE 14 TO THE AUDITED FI NANCIAL STATEMENTS, IT WAS STATED THAT THE COMPANY HAD PURCHASED SOFTWARE LICENSES AMOUNTING TO RS.2.11 CRORES. IN ANNUAL REPORT OF THE COMPANY , IT WAS FURTHER STATED THAT THE COMPANY WAS ENGAGED IN TRADING AND DEVELO PMENT OF SOFTWARE. IN VIEW OF THE AFORESAID, IT WAS SUBMITTED THAT SINCE THIS COMPANY WAS ENGAGED IN TRADING OF SOFTWARE AND EARNED INCOME FR OM LICENSING OF SOFTWARE, THE COMPANY COULD NOT BE REGARDED AS AN APPROPRIATE COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANS ACTION OF PROVISION OF SOFTWARE SERVICES UNDERTAKEN BY THE ASSESSEE. HE F URTHER SUBMITTED THAT THE COMPANY HAS ALSO INVESTED IN R&D ACTIVITIES REL ATED TO SOFTWARE ENGINEERING AND TECHNOLOGIES. HE SUBMITTED THAT LD .CIT(A) HAS RIGHTLY EXCLUDED THIS COMPANY RELYING ON THE DECISION OF CO -ORDINATE BENCH OF THIS TRIBUNAL RENDERED IN THE CASE OF COLT TECHNOLOGY SERVICES INDIA PVT.LTD. (ITA NO.609/DEL/2011). HE CONTENDED THAT IN THE CASE OF 3DPLM SOFTWARE SOLUTIONS IN ITA NO.1576/BANG/2013 (ASSESSMENT YEA R 2005-06) THE COMPANY WAS REJECTED AS COMPARABLE. HE SUBMITTED I N OTHER CASES ALSO, THIS COMPANY WAS REJECTED AS COMPARABLE. IN RESPEC T OF SANKHYA INFOTECH LTD., HE FURTHER SUBMITTED THAT THE COMPANY IS INTER ALIA ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND TRAINING. IN THE ANNUAL REPORT OF THE COMPANY, IT WAS STATED THAT THE COMPANY HAD A SEPAR ATE R&D WING AND DURING THE YEAR, THE COMPANY UNDERTOOK MULTIFOLD RE SEARCH ACTIVITIES AND THE DEVELOPMENTS RESULTED IN BRINGING EFFICIENCY IN PRODUCT DEVELOPMENT. IT WAS FURTHER SUBMITTED THAT THE COMPANY WAS ENGAGED IN DEVELOPMENT OF NICHE PRODUCTS FOR THE AVIATION INDUSTRY. HE SUBMI TTED THAT THE COMPANYS REVENUE RECOGNITION POLICY WAS DIFFERENT FROM THE A SSESSEE. THEREFORE, HE ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 6 | P A GE SUPPORTED THE ORDER OF LD.CIT(A) FOR EXCLUSION OF T HIS COMPARABLE. IN RESPECT OF VISUALSOFT TECHNOLOGIES (SEG.) , HE SUBMITTED THAT IN THIS COMPANY ALSO DURING THE RELEVANT FINANCIAL YEAR, TH E COMPANY HAD UNDERTAKEN EXTENSIVE R&D ACTIVITY. HE SUBMITTED T HAT AS PER THE ANNUAL REPORT, VISUALSOFT TECHNOLOGIES (SEG.) CONTINUED TO FOCUS ON DEVELOPMENT OF VARIOUS FRAMEWORKS IN DIFFERENT TECHNOLOGIES AS WEL L AS BRINGING IN EXCELLENCY IN PROCESSES AND METHODOLOGIES. IN RESP ECT OF EXENSYS SOFTWARE SOLUTIONS LTD. , IT WAS SUBMITTED THAT THE COMPANY OWNED VALUABLE INTANGIBLE ASSET IN THE FORM OF BRAND AMO UNTING TO RS.5,00,00,000/- OUT OF TOTAL ASSET BASE OF RS.7,9 5,58,105/-. THE ASSESSEE ON THE OTHER HAND WAS A CAPTIVE SERVICE PR OVIDER AND NEITHER OWNED NOR EXPLOITED ANY NON-ROUTINE INTANGIBLE. HE FURTHER SUBMITTED THAT THE HONBLE DELHI HIGH COURT IN THE CASE OF PR.CIT VS ORACLE (OFSS) BPO SERVICES PVT.LTD. (ITA NO.124/2018) HELD THAT COMPANIES HAVING BRAND PRESENCE COULD NOT BE REGARDED AS APPROPRIATE COMPA RABLE FOR THE PURPOSE OF BENCHMARKING THE INTERNATIONAL TRANSACTIONS UNDE RTAKEN BY A CAPTIVE SERVICE PROVIDER. LD. COUNSEL FOR THE ASSESSEE FUR THER REITERATED THE SUBMISSIONS AS MADE IN THE CHART SUPPLIED DURING TH E COURSE OF HEARING. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE REVENUE IS AGGRIEVED BY TH E EXCLUSION OF FOLLOWING COMPARABLES BY THE LD.CIT(A):- [1]. EXENSYS SOFTWARE SOLUTIONS LTD.; [2]. THIRDWARE SOLUTIONS LTD.; [3] VISUALSOFT TECHNOLOGIES (SEG.); AND ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 7 | P A GE [4] SANKHYA INFOTECH LTD. BY EXCLUDING THESE COMPARABLES, LD.CIT(A) PLACED RE LIANCE UPON THE JUDGEMENT OF THE HONBLE DELHI HIGH COURT AND THE D ECISION OF TRIBUNAL IN THE CASE OF COLT TECHNOLOGY SERVICES INDIA PVT.LTD. (ITA NO.609 /DEL/2011). WE FIND THAT THE LD.CIT(A) AFTER CONSIDERING THE MA TERIAL PLACED ON RECORDS AND HAS GIVEN FINDING ON FACTS IN RESPECT OF THE FU NCTIONAL COMPARABILITY OF THE COMPARABLES SELECTED BY THE TPO. THE REVENUE H AS FAILED TO EFFECTIVELY REBUT THE FINDING OF LD.CIT(A). MOREOVER, THIS ISS UE HAS ALREADY BEEN EXAMINED IN THE CASE OF COLT TECHNOLOGY SERVICES INDIA PVT.LTD. (SUPRA) BY THE TRIBUNAL AS WELL AS HONBLE JURISDICTIONAL HIGH COURT. THEREFORE, WE DO NOT SEE ANY REASON TO INTERFERE IN THE FINDINGS OF LD.CIT(A). THUS, ORDER OF LD.CIT(A) IS HEREBY AFFIRMED. THE GROUND OF APPEAL NO.1 RAISED BY THE REVENUE IS DISMISSED. 10. NOW COMING TO GROUND NO.2 RAISED BY THE REVENUE IN THIS APPEAL, IS AGAINST THE ALLOWING THE CLAIM OF DEPRECIATION ON S OFTWARE OF RS.7,69,371/- BY HOLDING THAT THE SAME HAS BEEN PUT TO USE BY THE ASSESSEE IN FINANCIAL YEAR 2004-05. DESPITE THE FACT THAT INVOICES IN R ESPECT OF SUCH SOFTWARE WERE RECEIVED BY THE ASSESSEE FROM HP INDIA IN SUBS EQUENT YEAR. THEREAFTER, THE ASSESSEE MADE PAYMENT OF SUCH SOFTW ARE. 11. LD.CIT DR FOR THE REVENUE SUBMITTED THAT LD.CIT (A) WAS NOT JUSTIFIED IN ALLOWING THE CLAIM OF THE ASSESSEE WHERE ADMITTE DLY THE ASSESSEE COULD NOT PROVE THE DELIVERY AND INSTALLATION OF THE SOFT WARE. HE FURTHER CONTENDED THAT THE ASSESSING OFFICER HAS CATEGORICA LLY BROUGHT ON RECORD ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 8 | P A GE THAT THE INVOICES WERE RAISED AFTER 15 MONTHS WHICH GOES AGAINST THE NORMAL PRACTICE. HE TOOK US THROUGH THE ASSESSMENT ORDER. LD.CIT DR POINTED OUT THAT IN PARA 4.8 OF THE ASSESSMENT ORDE R. THE ASSESSING OFFICER HAS CATEGORICALLY ANALYZED THE DELIVERY DATE. 11.1. HE FURTHER CONTENDED THAT MERELY STATING THAT SOFTWARE WAS PUT TO USE WOULD NOT BE SUFFICIENT FOR ALLOWABILITY OF CLA IM OF DEPRECIATION. 12. ON THE CONTRARY, LD. COUNSEL FOR THE ASSESSEE O PPOSED THESE SUBMISSIONS AND SUPPORTED THE ORDER OF LD.CIT(A). HE SUBMITTED THAT DURING THE RELEVANT PREVIOUS YEAR 2005, THE ASSESSE E HAD PURCHASED SOFTWARE AMOUNTING TO RS.25,64,570/- FROM HEWLETT P ACKARD INDIA SALES PVT.LTD., (HP INDIA). THE SOFTWARE WAS DOWNLOADE D BY THE ASSESSEE IN AUGUST 2004. HOWEVER, THE INVOICES IN RESPECT OF T HE ABOVE WERE RECEIVED IN THE SUBSEQUENT YEAR FROM HP INDIA. THE ASSESSE E HAD CAPITALIZED THE SOFTWARE ON THE BASIS OF ACTUAL RECEIPT AND USE OF SOFTWARE BEFORE 31.03.2005. THE ASSESSEE ACCORDINGLY IN THE RETURN AS INCOME CLAIMED DEPRECIATION FOR HALF YEAR ON THE AFORESAID SOFTWAR E. THE ASSESSING OFFICER DISALLOWED THE CLAIM OF DEPRECIATION ON SOFTWARE AM OUNTING TO RS.7,69,371/- ON THE BASIS THAT THE ASSESSEE HAD MA DE A WRONG AND INCORRECT CLAIM OF DEPRECIATION. HE SUBMITTED THAT THE ASSESSEE HAD PURCHASED THE SOFTWARE DEVELOPED BY MICROSOFT THROU GH HP INDIA. AS PER THE POLICY OF MICROSOFT, ALL LICENSED SOFTWARE ARE TO BE DOWNLOADED FROM THE MICROSOFT VOLUME LICENSING SERVICES (MVLS) WEBSIT E AND NO PHYSICAL GOODS WERE SHIPPED. FOR ACQUIRING THE LICENSE, THE ASSESSEE ISSUED TWO PURCHASE ORDERS (PO) I.E [PO NO.4000099387 AND 40 000099388] ON ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 9 | P A GE 13.07.2004 AND ONE PO [PO NO.4000105723] ON 05.10.2 004 TO HP INDIA. THE ASSESSEE COMPANY HAD SENT AN E-MAIL ON 21.07.20 04 TO HP INDIA FOR CONFIRMATION OF RECEIPT OF PO, WHICH WAS DULY ACKNO WLEDGED BY HP INDIA ON 22.07.2004. HE SUBMITTED THAT THE LICENSE KEYS FOR SECURED PRODUCTS WERE PROVIDED TO THE ASSESSEE ON 17.08.2004. THE ASSES SEE ACTIVATED THE SECURED SOFTWARE DOWNLOADED FROM MVLS WEB SITE THRO UGH THE LICENSE KEY PROVIDED ON 17.08.2004. THEREFORE, THE ASSESSEE HA D ACQUIRED AND PUT TO USE THE SOFTWARE MUCH BEFORE 31.03.2005. HE CONTE NDED THAT THE ASSESSEE DOWNLOADED THE SOFTWARE IN AUGUST 2004 I.E. DELIVER Y OF GOODS WAS TAKEN PRIOR TO THE ISSUE OF INVOICE AND THE SAME WAS PUT TO USE BY THE ASSESSEE IN THE RELEVANT PREVIOUS YEAR. THEREFORE, IT IS CO NTENDED THAT LD.CIT(A) HAS RIGHTLY DELETED THE ADDITION. 13. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT LD.CIT(A) HAS DE LETED THE ADDITION BY OBSERVING AS UNDER:- 4.2.5. I HAVE GIVEN CAREFUL CONSIDERATION TO THE S UBMISSIONS OF THE APPELLANT AND ORDER OF ASSESSING OFFICER. IN THIS CASE, THE APPELLANT DOWNLOADED THE SOFTWARE PURCHASED FROM HP INDIA IN AUGUST 2004. HOWEVER, THE INVOICES IN RESPECT OF SUCH SOFTWARE W ERE RECEIVED IN THE SUBSEQUENT YEAR FROM HP INDIA. THE CLAIM OF DEPRECI ATION ON SUCH SOFTWARE WAS DENIED BY THE AO ON THE GROUND THAT TH ERE IS NO EVIDENCE OF DELIVERY OF SOFTWARE TO THE APPELLANT. ALSO, THE RE IS A SIGNIFICANT DELAY IN RAISING THE INVOICE BY HP INDIA WHICH SUGG EST THAT THE SOFTWARE WAS NOT ACTUALLY USED BY THE APPELLANT IN FY 2004-05. IT WAS ALSO OBSERVED THAT WITHOUT INVOICE AND CHARGING OF SALES TAX SALE COULDN'T HAVE BEEN TAKEN PLACE IN THE EYES OF LAW. THEREFORE, THE APPELLANT WAS NOT THE OWNER OF SOFTWARE IN FY 2004- 05 AND ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 10 | P A GE ACCORDINGLY, THE APPELLANT IS NOT ENTITLED TO CLAIM DEPRECATION IN SAID YEAR. IN SUPPORT OF ITS CLAIM, THE APPELLANT CONTENDED TH AT THE SOFTWARE IN QUESTION WAS DEVELOPED BY MICROSOFT WAS PURCHASE D THROUGH HP INDIA. SUCH SOFTWARE WAS DOWNLOADED BY THE APPELLAN T FROM MICROSOFT WEBSITE AND NO PHYSICAL DELIVERY WAS MADE FOR SUCH SOFTWARE. THE APPELLANT HAS ISSUED FOLLOWING THREE PO TO HP I NDIA (A) PO NO. 4000099387 - 13 JULY 2004 (B) PO NO. 4000099388 - 13 JULY 2004 (C) PO NO A000105723 - 5 OCTOBER 2004 FOR PURCHASING SUCH LICENSE, THE APPELLANT HAD SENT AN E-MAIL ON 21 JULY 2004 TO HP INDIA FOR CONFIRMATION OF RECEIP T OF PO. IT WAS DULY ACKNOWLEDGED BY HP INDIA ON THE NEXT DAY I.E. 22 JU LY 2004. HP INDIA HAS PROVIDED THE LICENSE KEYS FOR SECURED PRODUCTS TO THE APPELLANT VIDE EMAIL DATED 17 AUGUST 2004. AS PER APPELLANT, SOFTWARE WAS DOWNLOADED FROM THE WEB SITE BY USING THE LICENSE K EY PROVIDED ON 17 AUGUST 2004. SUCH EMAIL WAS ADDRESSED TO THE OFFICI AL EMAIL ID OF THE EMPLOYEE OF THE APPELLANT. IT IS SUBMITTED BY THE APPELLANT THAT IT IS USUAL PRACTICE WHERE SOFTWARE ARE DOWNLOADED FROM W EBSITE AND THEN SAME IS ACTIVATED FOR USE THROUGH LICENSE KEYS. ONC E THE LICENSE KEY IS AVAILABLE, SOFTWARE CAN BE USED WITHOUT ANY FURTHER REGISTRATION. IN THE INSTANT CASE AS WELL, SIMILAR PROCESS WAS ADOPTED. FURTHER, IT IS SUBMITTED THAT NO GOODS WERE PHYSICALLY SHIPPED TO THE APPELLANT BY HP INDIA. ACCORDINGLY, NO FURTHER DOCUMENTATION IS AVAILABLE FOR REGISTRATION OF SUCH LICENSE KEY OR SOFTWARE. EMAIL SENT BY HP INDIA TO THE APPELLANT SHARING THE LICENSE KEY ITSELF SUBSTA NTIATES THAT IT HAS BEEN REGISTERED FOR THE USE OF THE APPELLANT. TO SU PPORT THESE FACTS, VARIOUS DOCUMENTARY EVIDENCES SUCH AS COPY OF PURCH ASE ORDERS, EMAIL CORRESPONDENCES, CHEQUE ISSUED TO HP INDIA AN D INVOICES HAS BEEN SUBMITTED BY THE APPELLANT. FURTHER, A RECONCI LIATION BETWEEN THE ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 11 | P A GE NUMBERS OF LICENSES PURCHASED AS PER THE PURCHASE O RDER AND INVOICES RAISED BY HP INDIA WAS ALSO SUBMITTED. FROM THE PERUSAL OF THE DETAILS AND DOCUMENTS SUBMI TTED BY THE APPELLANT, IT IS CLEAR THAT THE APPELLANT HAS INDEE D PURCHASED THE SOFTWARE FROM HP INDIA AND HAS MADE PAYMENT FOR THE SAME. THE REAL ISSUE IN THIS CASE IS THAT WHETHER THE APPELLANT HA S ACTUALLY PURCHASED AND USED THE SOFTWARE IN THE FY 2004-05 AND THEREBY IS ELIGIBLE FOR CLAIMING THE DEPRECIATION THEREON OR NOT. THE AO HA S DENIED SUCH CLAIM PRIMARILY DUE TO THE SIGNIFICANT DELAY IN RAISING O F INVOICE BY HP INDIA AND PAYMENT MADE BY THE APPELLANT WHICH HAVE BEEN MADE IN SUBSEQUENT YEAR. HP INDIA HAS ACKNOWLEDGED THE PO R AISED BY THE APPELLANT VIDE ITS EMAIL DATED 22 JULY 2004. FURTHE R, HP INDIA HAS PROVIDED THE LICENCE KEY TO USE SOFTWARE VIDE EMAIL DATED 17 AUGUST 2004. IT HAS ALSO BEEN MENTIONED THAT THE APPELLANT THAT CAN DOWNLOAD THE SOFTWARE FROM THE WEB PORTAL OF MICROS OFT AND IT CAN BE ACTIVATED BY ENTERING THE LICENSE KEY MENTIONED IN THE EMAIL. THESE DOCUMENTS SUBSTANTIATES THAT THE APPELLANT HAS ACTU ALLY PURCHASED THE SOFTWARE IN AUGUST 2004. IT IS A USUAL PRACTICE THAT SOFTWARE ARE DOWNLOADED FROM ONLINE PORTAL AND THEN ARE ACTIVATE D FOR USE USING THE LICENSE KEY PROVIDED BY THE SOFTWARE DEVELOPER. THE REFORE, IT SEEMS LOGICAL THAT ONCE THE SOFTWARE IS PURCHASED AND LIC ENSE KEY IS MADE AVAILABLE TO APPELLANT IN AUGUST 2004, THE SAME WOU LD HAVE BEEN PUT TO USE BY THE APPELLANT IN FY 2004-05. DELAY IN GEN ERATION OF INVOICE AND MAKING THE PAYMENT DOES NOT HAVE ANY IMPACT ON SUCH PURCHASE OR USE OF SOFTWARE. IN VIEW OF THE SAME THE DEPRECA TION CLAIMED BY THE APPELLANT SHOULD BE ALLOWED IN THE FY 2004-05. IN VIEW OF THE ABOVE, THE AO IS DIRECTED TO ALLOW T HE CLAIM OF DEPRECIATION ON SOFTWARE OF RS 769,371. AS A RESULT GROUND OF APPEAL 2 IS ALLOWED. 14. WE ARE UNABLE TO SUSTAIN THE FINDING OF LD.CIT( A). UNDISPUTEDLY IN THIS CASE, THE INVOICES WERE RAISED AFTER 15 MONTHS AS OBSERVED BY THE ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 12 | P A GE ASSESSING OFFICER. FURTHER, THE ASSESSING OFFICER HAS CATEGORICALLY OBSERVED THAT INVOICES REFLECTED THAT SALES TAX/VAT HAS BEE N CHARGED ON SALE OF GOODS. SUCH TAXES HAVE BEEN CHARGED IN AUGUST 2005 . HE OBSERVED THAT WITHOUT INVOICES AND CHARGING OF SALES TAX, SALE CO ULD HAVE NOT BEEN AFFECTED. THE ASSESSEE HAD NOT BECOME THE OWNER OF THE SOFTWARE WHOLLY OR PARTLY BEFORE 31.03.2005 HENCE, ON ACCOUNT OF OWNER SHIP CLAIM OF THE ASSESSEE IS FAILED. WE ARE IN AGREEMENT WITH THE V IEW EXPRESSED BY THE ASSESSING OFFICER IN OUR CONSIDERED VIEW MERELY DOW NLOADING OF SOFTWARE AND PROVIDING KEY TO USE BY THE VENDOR WOULD NOT IPSO FACTO ENTITLE THE ASSESSEE FOR CLAIMING DEPRECIATION. SECTION 32 OF T HE ACT PROVIDES DEPRECIATION ON THE ELIGIBLE ASSETS OWNED WHOLLY OR PARTLY BY THE ASSESSEE AND USED FOR THE BUSINESS OR PROFESSION. HENCE, TH E LAW IS CLEAR. THERE IS NO AMBIGUITY UNDER THE LAW. WITHOUT PROPER SALE, T HE ASSESSEE COULD NOT HAVE OWNED WHOLLY AND PARTLY THE ASSETS ON WHICH DE PRECIATION HAVE BEEN CLAIMED. WE, THEREFORE, SET ASIDE THE FINDING OF L D.CIT(A) ON THIS ISSUE AND RESTORE THE FINDING OF THE ASSESSING OFFICER. GROU ND NO.2 RAISED BY THE REVENUE IN THIS APPEAL IS THEREFORE, ALLOWED. 15. NOW, COMING TO CROSS-OBJECTION FILED BY THE ASS ESSEE PERTAINING TO ASSESSMENT YEAR 2005-06. THE ASSESSEE HAS RAISED F OLLOWING GROUNDS IN CROSS-OBJECTION:- 1. THAT THE CIT(A) HAVE ERRED IN LAW AND ON FACTS, IN ARBITRARILY UPHOLDING THE ACTION OF THE LD. TRANSFER PRICING OF FICER FOR RETAINING BODHTREE CONSULTING LTD AS FUNCTIONALLY VALID COMPA RABLE ON THE GROUND THAT THE SAME WAS INCLUDED BY THE RESPONDENT IN THE TRANSFER PRICING REPORT. ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 13 | P A GE 2. THAT THE CIT(A) HAVE ERRED IN LAW AND ON FACTS, IN UPHOLDING THE ACTION OF THE TPO IN NOT ALLOWING THE RISK ADJUSTME NT ON ACCOUNT OF DIFFERENCES IN THE RISK PROFILE OF THE RESPONDENT V IS-A-VIS THE COMPARABLE COMPANIES. 3. THAT THE LD. ASSESSING OFFICER/ LD. TRANSFER PRI CING OFFICER HAVE ERRED IN LAW AND ON FACTS, IN NOT PROVIDING WORKING CAPITAL ADJUSTMENT TO THE RESPONDENT THOUGH THE SAME WAS DIRECTED BY THE CIT(A). 4. THAT THE LD. CIT(A) AND THE LD. ASSESSING OFFICE R HAVE ERRED IN LAW AND ON FACTS, IN TREATING THE LIABILITIES WRITT EN BACK IN RELATION TO ACQUISITION OF FIXED ASSETS AMOUNTING TO INR 1,587, 816 AS REVENUE IN NATURE. 4.1. THAT THE LD.CIT(A) AND THE LD. ASSESSING OFFIC ER HAVE ERRED IN LAW AND ON FACTS BY HOLDING THE LIABILITIES WRITTEN BACK IN RELATION TO ACQUISITION OF FIXED ASSETS AS CHARGEABLE TO TAX UN DER SECTION 41(1) OF THE ACT. 16. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE SUB MITTED THAT HE DOES NOT WISH TO PRESS GROUND NO.2. HENCE, GROUND NO.2 RAISED BY THE ASSESSEE IN THE CROSS-OBJECTION IS DISMISSED, AS N OT PRESSED. 17. GROUND NO. 1 RAISED BY THE ASSESSEE IS RELATED TO TRANSFER PRICING ADJUSTMENT. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT LD.CIT(A) HAD RETAINED THIS COMPANY IN THE FINAL SET OF COMPARABL E COMPANIES ON THE BASIS THAT THE COMPANY WAS SELECTED BY THE ASSESSEE IN THE TP DOCUMENTATION. LD. COUNSEL FOR THE ASSESSEE FURTHE R SUBMITTED THAT EVEN THOUGH THE SAID COMPANY WAS SELECTED AS COMPARABLE BY THE ASSESSEE IN THE TRANSFER PRICING DOCUMENTATION, THERE IS NO ES TOPPELS IN LAW AGAINST THE ASSESSEE IN REQUESTING FOR EXCLUSION OF SUCH CO MPANY. RELIANCE WAS PLACED ON THE DECISION RENDERED IN THE CASES OF CIT VS C.PAREKH & CO.(INDIA) ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 14 | P A GE LTD. 229 ITR 661; BHARAT GENERAL REINSURANCE CO.LTD . 81 ITR 303. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT BODHTREE CO NSULTING LTD. CANNOT BE AN APPROPRIATE COMPARABLE FOR THE REASONS THAT THE COMPANY HAD NOT SHOWN ANY SIGNIFICANT RELATED PARTY TRANSACTIONS. FURTHER, IT WAS CONTENDED THAT THE COMPANY WAS FUNCTIONALLY DIFFERE NT. IT WAS CONTENDED THAT THE COMPANY ENGAGED IN SERVICE RELATED TO E-PA PER AND DATA CLEANSING SOLUTIONS. 18. ON THE CONTRARY, LD.CIT DR OPPOSED THESE SUBMIS SIONS AND SUPPORTED THE FINDINGS OF LD.CIT(A). 19. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THERE IS NO DISPUTE WITH REGAR D TO THE ASSESSEE HIMSELF ADOPTED THIS COMPANY AS ONE OF THE COMPARABLES IN I TS TRANSFER PRICING STUDY. BEFORE US, THE ASSESSEE HAS TAKEN ALTOGETHE R DIFFERENCE TIME PRAYING FOR EXCLUSION OF THIS COMPARABLE. HOWEVER, THE ASS ESSEE COULD NOT POINT OUT AS TO HOW THE TP STUDY UNDERTAKEN BY IT, IS ERR ONEOUS AND ADOPTING THE SAME WAS BY MISTAKE. IN ABSENCE OF SUCH AVERMENT O R ANY EVIDENCE SUPPORTING THE DECISION, WE DO NOT SEE ANY REASONS TO DEFER FROM THE FINDINGS OF LD. CIT(A). THE SAME IS HEREBY CONFIRM ED. GROUND NO.1 RAISED BY THE ASSESSEE IN THE CROSS-OBJECTION IS THUS, REJ ECTED. 20. NOW, COMING TO GROUND NO.3 RAISED BY THE ASSESS EE IN THE CROSS- OBJECTION IS AGAINST NOT GIVING THE APPEAL EFFECT T O THE DIRECTION OF THE LD.CIT(A). LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT LD.CIT(A) HAD DIRECTED THE TPO TO ALLOW WORKING CAPITAL ADJUSTMEN T WHILE BENCHMARKING ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 15 | P A GE THE INTERNATIONAL TRANSACTION OF PROVISION OF SOFTW ARE SERVICES. HOWEVER, WHILE GIVING EFFECT TO THE ORDER OF LD.CIT(A), THE TPO DID NOT ALLOW WORKING CAPITAL ADJUSTMENT TO THE ASSESSEE. HE THEREFORE, SUBMITTED THAT TPO MAY BE DIRECTED TO GIVE EFFECT TO THE DIRECTION OF LD.C IT(A) AND ALLOW WORKING CAPITAL ADJUSTMENT WHILE COMPUTING THE OPERATING MA RGINS OF THE COMPARABLE COMPANIES. THE ASSESSEE HAS ALSO FILED A CHART DEMONSTRATING THE OPERATING MARGINS OF THE COMPARABLE COMPANIES A FTER ALLOWING ADJUSTMENT FOR WORKING CAPITAL. THE CONTENTS OF TH E CHART ARE REPRODUCED FOR READY-REFERENCE:- SL.NO. NAME OF THE COMPANY COMPARABLES AS PER TPO COMPARABLES AS PER CIT(A) AFTER EXCLUDING BODHTREE CONSULTING 1. BODHTREE CONSULTING LTD. 22.34% 22.34% EXCLUDED 2. AKSHAY SOFTWARE TECHNOLOGIES LIMITED 6.08% 6.08% 6.08% 3. LANCO GLOBAL SYSTEMS LIMITED 8.81% 8.81% 8.81% 4. SASKEN NETWORK SYSTEMS LIMITED 15.26% 15.26% 15.26% 5. GEBBS INFOTECH LIMITED 13.88% 13.88% 13.88% 6. V J I L CONSULTING LIMITED - 2.43% - 2.43% - 2.43% 7. SASKEN COMMUNICATION TECHNOLOIGES LIMITED (SEG.) 12.82% 12.82% 12.82% 8. L&T INFOTECH LIMITED 10.09% 10.09% 10.09% 9. EXENSYS SOFTWARE SOLUTIONS LTD. 6.69% REJECTED BY CIT(A) REJECTED BY CIT(A) 10. THIRDWARE SOLUTIONS LTD. 64.19% REJECTED BY CIT(A) REJECTED BY CIT(A) 11. VISUALSOFT TECHNOLOGY LTD. (SEGMENTAL) 20.17% REJECTED BY CIT(A) REJECTED BY CIT(A) 12. SANKHYA INFOTECH LIMITED 23.06% REJECTED BY CIT(A) REJECTED BY CIT(A) ARITHMETIC MEAN 16.81% 10.86% 9.22% 21. PER CONTRA, LD.CIT DR OPPOSED THESE SUBMISSIONS AND SUPPORTED THE FINDINGS OF THE ASSESSING OFFICER. ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 16 | P A GE 22. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT LD.CIT(A) IN PAR A 3.1.6.1 HAS GIVEN DIRECTION AS UNDER:- 3.1.6.1. WORKING CAPITAL ADJUSTMENT SHOULD BE ALLOW ED TO STM IN THE COURSE OF APPELLATE PROCEEDINGS, ARGUMENT F OR ALLOWANCE OF WORKING CAPITAL ADJUSTMENT WAS MADE BY THE APPELLAN T VIDE SUBMISSION DATED 17 APRIL 2014. WITH RESPECT TO ALL OWANCE OF WORKING CAPITAL ADJUSTMENT TO THE APPELLANT REMAND REPORT W AS CALLED FROM THE ASSESSING OFFICER, WHICH WAS RECEIVED VIDE LETTER D ATED 30 SEPTEMBER 2016, AND FORWARDED TO APPELLANT. THE AO SUBMITTED THAT IN VIEW OF THE FACT THAT WORKING CAPITAL ADJUSTMENT WAS ALLOWE D TO THE APPELLANT BY THE TPO AND DRP IN AY 2010-11, AY 2011-12 AND AY 2007 -08 RESPECTIVELY, WORKING CAPITAL ADJUSTMENT SHOULD BE ALLOWED TO THE APPELLANT. HENCE, ASSESSING OFFICER IS DIRECTED TO GRANT WORKING CAPITAL ADJUSTMENT TO APPELLANT WHILE GIVING EFFECT TO THIS ORDER. 23. LD.CIT DR COULD NOT REBUT THE CONTENTIONS OF TH E ASSESSEE. THEREFORE, IN VIEW OF THE DIRECTION GIVEN BY LD.CIT (A), WE HEREBY DIRECT THE TPO TO ALLOW WORKING CAPITAL ADJUSTMENT TO THE ASSE SSEE. GROUND NO.3 RAISED BY THE ASSESSEE IN THIS CROSS-OBJECTIONS IS THUS, ALLOWED. 24. GROUND NOS.4 & 4.1 RAISED BY THE ASSESSEE IN TH IS CROSS-OBJECTION IS AGAINST SUSTAINING THE ADDITION OF RS.15,87,816/- ON ACCOUNT OF LIABILITIES RETURNED BACK IN RELATION TO ACQUISITION OF FIXED A SSETS. 25. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD GIVEN A CHART RELEVANT TO PREVIOUS YEAR REGARDING LIABILITY , WRITTEN BACK A SUM OF RS.15,87,816/- BEING THE LIABILITY IN RESPECT OF PU RCHASE OF FIXED ASSETS ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 17 | P A GE WHICH WAS CAPITALIZED IN THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2003-04. 26. LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUB MISSIONS AS MADE IN THE WRITTEN SUBMISSIONS. LD. COUNSEL FOR THE ASSES SEE SUBMITTED THAT THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR HAD RETU RNED BACK A SUM OF RS.15,87,816/-. 27. THE ASSESSEE IN ITS RETURN OF INCOME REDUCED TH E AFORESAID AMOUNT FROM THE PROFIT AS PER THE P&L A/C BEING TRANSACTIO N OF CAPITAL NATURE. THE ASSESSING OFFICER HOWEVER, MADE DISALLOWANCE OF THE SAID AMOUNT AND ADDED BACK THE SAME TO THE TAXABLE INCOME OF THE AS SESSEE. HE SUBMITTED THAT THE REASONS FOR DISALLOWING THE CLAIM WAS ON THE BASIS THAT AS PER THE ASSESSING OFFICER, THE ASSESSEE HAD CLAIMED AND AL LOWED DEPRECIATION ON THE SAID AMOUNT IN THE PREVIOUS YEARS AND THE SAME AMOUNTS TO WRITING BACK OF A TRADING LIABILITY WHICH WAS REQUIRED TO BE TAXED AS PER SECTION 41(1) OF THE ACT. LD.CIT(A) AFFIRMED THE VIEW OF T HE ASSESSING OFFICER. 28. LD. SR. COUNSEL FOR THE ASSESSEE, SH. AJAY VOHR A TOOK US THROUGH THE PROVISION OF THE ACT. HE SUBMITTED THAT SECTION 41 (1) OF THE ACT CAN BE INVOKED IN THE EVENT FIRSTLY, IF IN THE ASSESSMENT OF THE ASSESSEE AN ALLOWANCE OR DEDUCTION HAS BEEN MADE IN RESPECT OF ANY LOSS, EXPENDITURE OR TRADING LIABILITY INCURRED BY HIM; SECONDLY, ANY AMOUNT IS OBTAINED IN RESPECT OF SUCH LOSS OR EXPENDITURE; THIRDLY, OR ANY BENEFIT IS OBTAINED IN RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISSI ON OR CESSATION THEREOF. HE SUBMITTED THAT APPLYING THE PROVISION OF SECTION 41(1) OF THE ACT TO THE ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 18 | P A GE FACTS OF THE PRESENT CASE, IT WAS SUBMITTED THAT IN THE CASE IN HAND, THE INITIAL EXPENDITURE WAS INCURRED FOR PURCHASE OF FI XED ASSETS WHICH WAS CAPITALIZED IN THE BOOKS AND NO ALLOWANCE OR DEDUCT ION WAS CLAIMED IN THE EARLIER YEARS IN RESPECT OF SUCH EXPENDITURE AS ENV ISAGED UNDER SECTION 41(1) OF THE ACT. LD. COUNSEL FOR THE ASSESSEE PLA CED RELIANCE ON THE JUDGEMENT OF HONBLE SUPREME COURT IN THE CASE OF CIT VS MAHINDRA & MAHINDRA LTD. 404 ITR 1(SC). LD. COUNSEL FOR THE ASSESSEE ALSO PLACED RELIANCE ON THE JUDGEMENT OF THE HONBLE SUPREME CO URT IN THE CASE OF NECTAR BEVERAGES PVT.LTD. 314 ITR 314 (SC) TO BUTTRESS THE CONTENTION THAT DEPRECIATION IS NEITHER A LOSS, NOR AN EXPENDITURE , NOR A TRADING LIABILITY, REFERRED TO IN SECTION 41(1). HE CONTENDED THAT APPLYING THE RATIO LAID DOWN BY HONBLE SUPREME COURT IN THE CASE OF CIT VS MAHINDRA & MAHINDRA LTD. (SUPRA) AND NECTAR BEVERAGES PVT.LTD. (SUPRA) HENCE, THE AMOUNT WRITTEN BACK IN RESPECT OF PURCHASE OF FIXED ASSETS, BEING CAPITAL IN NATURE, IS NOT A WRITE BACK OF TRADING LIABILITY COVERED U/S 41(1) O F THE ACT. 29. LD.CIT DR OPPOSED THESE SUBMISSIONS AND SUPPORT ED THE ORDER OF LD.CIT(A). 30. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. LD.CIT(A) HAS DECIDED THE I SSUE IN PARA 5.5. THE SAME IS REPRODUCED HEREUNDER FOR READY-REFERENCE:- 5.5. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS O F THE APPELLANT AND THE ASSESSMENT ORDER OF AO. IT IS NOTED THAT WR ITE-BACK OF AMOUNTS DUE BY THE APPELLANT WOULD BE TAXABLE ONLY IF IT RE PRESENTS AN EXPENSE, LOSS OR TRADING LIABILITY, FOR WHICH A DEDUCTION HA S BEEN CLAIMED. ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 19 | P A GE SECTION 41 (1) STATES THAT WHEN AN ALLOWANCE DEDUCT ION HAS BEEN MADE IN ASSESSMENT FOR ANY YEAR IN RESPECT OF LOSS, EXPENDITURE, OR TRADING LIABILITY INCURRED BY THE ASSESSEE AND SUBS EQUENTLY DURING ANY PREVIOUS YEAR THE 1 ST MENTIONED PERSON HAS OBTAINED WHETHER IN CASH OR IN ANY OTHER MANNER WHATSOEVER ANY AMOUNT IN RES PECT OF SUCH LAWS ON EXPENDITURE OR SOME BENEFIT IN RESPECT OF S UCH TRADING LIABILITY BY WAY OF RENOVATION OR CESSATION THEREOF, THE AMOU NT OBTAINED BY SUCH PERSON OR THE VALUE OF BENEFIT ACCRUING TO HIM SHALL BE DEEMED TO BE PROFITS AND GAINS OF BUSINESS AND PROFESSION AND ACCORDINGLY CHARGEABLE TO INCOME TAX AS THE INCOME OF THAT PREV IOUS YEAR WHETHER THE BUSINESS OR PROFESSION IN RESPECT OF WHICH THE ALLOWANCE OR DEDUCTION HAS BEEN MADE IS IN EXISTENCE IN THAT YEA R NOT. ASSESSING OFFICER HAS CORRECTLY HELD THAT THE CLAIM OF THE AS SESSEE THAT THE LIABILITY IS ON CAPITAL ACCOUNT AND NO DEDUCTION OR ALLOWANCE HAS BEEN ALLOWED IN RESPECT OF THE SAME IS NOT CORRECT. THE LIABILITY PERTAINED TO THE FIXED ASSETS ON WHICH DEPRECIATION HAS BEEN CLA IMED BY THE ASSESSEE AND ALLOWED HIM. THEREFORE, THE CLAIM THAT THE AMOUNT HAS NOT IMPACTED THE PROFIT OR LOSS ACCOUNT IS NOT CORR ECT. THE ASSESSEE HAS INCLUDED THE RELEVANT ASSETS PURCHASED FROM THOSE P ARTIES IN THE GROSS BLOCK. DEPRECIATION THEREON HAS BEEN CLAIMED AND DU LY ALLOWED TO THE APPELLANT. THEREFORE, THE CLAIM OF APPELLANT THAT I T HAS NOT RECEIVED ANY ALLOWANCE IN RESPECT OF THE CORRESPONDING LIABILITY IN EARLIER YEARS IS LEGALLY INCORRECT. THUS, GROUND OF APPEAL 4 IS DISM ISSED. 31. THE HONBLE SUPREME COURT IN THE CASE OF NECTAR BEVERAGES PVT.LTD. 314 ITR 314 (SC) IN PARA 9 OF THE JUDGEMENT HELD AS UNDER:- 9. THE ENTIRE CONTROVERSY, THEREFORE, STANDS RESOL VED IF ONE UNDERSTANDS THE MEANING OF 'BALANCING CHARGE'. WHER E ANY ALLOWANCE OR DEDUCTION HAD EARLIER BEEN MADE IN RESPECT OF AN Y LOSS, EXPENDITURE OR TRADING LIABILITY AND SUBSEQUENTLY THE ASSESSEE HAS OBTAINED OR REALIZED ANY AMOUNT TOWARDS SUCH LOSS, EXPENDITURE OR TRADING LIABILITY, SECTION 41(1) DEEMS SUCH REALIZATION/REC OUPMENT AS ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 20 | P A GE ASSESSEE'S INCOME FOR THE YEAR IN WHICH IT IS REALI ZED. SECTION 41(2) AS IT STOOD AT THE MATERIAL TIME STATED THAT IF IN RES PECT OF ANY PLANT AND MACHINERY, ANY DEPRECIATION HAD BEEN ALLOWED AND SU BSEQUENTLY SUCH PLANT AND MACHINERY WAS SOLD, DISCARDED OR DESTROYE D, THE ASSESSEE MIGHT GET SOME VALUE EITHER AS A RESULT OF SALE OR INSURANCE OR FROM SALVAGE OR COMPENSATION THEREABOUT. THE NECESSITY T O KEEP SECTION 41(2) AS A PROVISION IN ADDITION TO SECTION 41(1) A ROSE FROM THE FACT THAT, IN ITS VERY NATURE, DEPRECIATION IS NEITHER A LOSS, NOR AN EXPENDITURE, NOR A TRADING LIABILITY, REFERRED TO I N SECTION 41(1). THE DEPRECIATION RECOVERED ON SALE OF THE CAPITAL ASSET WAS INCLUDIBLE IN THE TOTAL INCOME AS BALANCING CHARGE ONLY UNDER SEC TION 41(2). THAT CONCEPT WAS FOREIGN TO THE SCHEME OF SECTION 41(1). THE BALANCING CHARGE UNDER SECTION 41(2) AROSE ONLY WHERE ANY DEP RECIABLE ASSET (BUILDING, MACHINERY, PLANT OR FURNITURE) WAS SOLD. IN FACT, WHEN THE CONCEPT OF 'BLOCK OF ASSETS' STOOD INTRODUCED W.E.F . 1.4.1988, SECTION 41(2) STOOD DELETED. HOWEVER, EVEN AFTER 1.4.1988, THE PROVISO TO SECTION 32(1)(II) CONTINUED TILL 1.4.1996 WHEN BY T HE FINANCE (NO. 2) ACT, 1995 THE BOTTLES AND CRATES EVEN BELOW RS. 5,0 00/- CAME WITHIN THE 'BLOCK OF ASSETS' AS DEFINED UNDER SECTION 2(11 ) OF THE 1961 ACT. AS STATED, THIS JUDGMENT IS CONFINED TO DEPRECIABLE AS SETS COSTING LESS THAN RS. 5,000/- WHICH DID NOT ENTER THE BLOCK OF A SSETS DURING THE ASSESSMENT YEARS IN QUESTION (WHEN SECTION 41(2) ST OOD DELETED). 32. FURTHER, CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF JSW STEEL LTD. VS ACIT [2017] 82 TAXMANN.COM 210 (MUMBAI-TRI B.) IN PARA 12 OF THE DECISION HELD AS UNDER:- 12. BEFORE WE DWELL UPON THE CONTROVERSY INVOLVED , IT NEEDS TO BE FIRST DETERMINED, WHETHER THE AMOUNT OF WAIVER OF L OAN IS TAXABLE UNDER THE NORMAL PROVISIONS OF THE INCOME TAX ACT, 1961 OR NOT. IT IS AXIOMATIC THAT UNDER THE INCOME TAX ACT ONLY THOSE RECEIPTS WHICH ARE IN THE NATURE OF INCOME CAN ALONE BE SUBJECT TO TAX AND SUCH A NATURE ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 21 | P A GE OF INCOME SHOULD FALL WITHIN THE CHARGING SECTION A S PROVIDED UNDER THE ACT. ALL THE RECEIPTS BY AN ASSESSEE WOULD NOT NECE SSARILY BE DEEMED TO BE INCOME OF THE ASSESSEE FOR THE PURPOSE OF INC OME TAX AND THE QUESTION WHETHER THE PARTICULAR RECEIPT IS INCOME O R NOT WILL DEPEND UPON THE NATURE OF THE RECEIPT AS WELL AS THE SCOPE AND EFFECT OF THE RELEVANT TAXING PROVISION. THE HONBLE SUPREME COUR T IN THE CASE OF PARIMISETTI SEETHARAMAMMA VS. CIT (57 ITR 532) HAS OBSERVED AS UNDER: BY SECTIONS 3 AND 4, THE INDIAN INCOME-TAX ACT, 19 22, IMPOSES A GENERAL LIABILITY TO TAX UPON ALL INCOME. BUT THE ACT DOES NOT PROVIDE THAT WHATEVER IS RECEIVED BY A PERSON MUST BE REGARDED AS INCOME LIABLE TO TAX. IN ALL CASES IN WHICH A RE CEIPT IS SOUGHT TO BE TAXED AS INCOME, THE BURDEN LIES UPON THE DEP ARTMENT TO PROVE THAT IT IS WITHIN THE TAXING PROVISION. WHERE , HOWEVER, A RECEIPT IS OF THE NATURE OF INCOME, THE BURDEN OF P ROVING THAT IT IS NOT TAXABLE BECAUSE IT FALLS WITHIN AN EXEMPTION PR OVIDED BY THE ACT, LIES UPON THE ASSESSEE. WHERE THE CASE OF THE ASSESSEE IS THAT A RECEIPT DI D NOT FALL WITHIN THE TAXING PROVISION, THE SOURCE OF THE RECE IPT IS DISCLOSED BY THE ASSESSEE AND THERE IS NO DISPUTE ABOUT THE T RUTH OF THAT DISCLOSURE, THE INCOME-TAX AUTHORITIES ARE NOT ENTI TLED TO RAISE AN INFERENCE THAT THE RECEIPT IS ASSESSABLE TO INCOME- TAX ON THE GROUND THAT THE ASSESSEE HAS FAILED TO LEAD ALL THE EVIDENCE IN SUPPORT OF HIS CONTENTION THAT IT IS NOT WITHIN THE TAXING PROVISION. GENERALLY THE WAIVER OF REMISSION OF A LIABILITY CA NNOT BE REGARDED AS INCOME IN THE HANDS OF THE ASSESSEE UNLESS IT IS A TRADING LIABILITY AND IF THE WAIVER OF A LOAN IS ON CAPITAL ACCOUNT THEN CERTAINLY IT CANNOT BE RECKONED AS INCOME OR REVENUE, WHICH IS CLEARLY EVI DENT FROM THE RELEVANT PROVISIONS OF SECTION 41(1) WHICH READS AS UNDER: '(1) WHERE AN ALLOWANCE OR DEDUCTION HAS BEEN MADE IN THE ASSESSMENT FOR ANY YEAR IN RESPECT OF LOSS, EXPENDI TURE OR ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 22 | P A GE TRADING LIABILITY INCURRED BY THE ASSESSEE (HEREINA FTER REFERRED TO AS THE FIRST-MENTIONED PERSON) AND SUBSEQUENTLY DUR ING ANY PREVIOUS YEAR,- (A) THE FIRST-MENTIONED PERSON HAS OBTAINED, WHETHE R IN CASH OR IN ANY OTHER MANNER WHATSOEVER, ANY AMOUNT IN RESPECT OF SUCH LOSS OR EXPENDITURE OR SOME BENEFIT IN RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISSI ON OR CESSATION THEREOF, THE AMOUNT OBTAINED BY SUCH PERS ON OR THE VALUE OF BENEFIT ACCRUING TO HIM SHALL BE DEEME D TO BE PROFITS AND GAINS OF BUSINESS OR PROFESSION AND ACCORDINGLY CHARGEABLE TO INCOME- TAX AS THE INCOME OF THAT PREVIOUS YEAR, WHETHER THE BUSINESS OR PROFESS ION IN RESPECT OF WHICH THE ALLOWANCE OR DEDUCTION HAS BEE N MADE IS IN EXISTENCE IN THAT YEAR OR NOT;' FROM THE PLAIN READING OF ABOVE SECTION IT IS QUITE OSTENSIBLE THAT BEFORE THIS SECTION CAN BE INVOKED IT IS SINE-QUA-N ON THAT ASSESSEE SHOULD ESTABLISH THAT FIRST OF ALL AN ALLOWANCE OR DEDUCTION HAS BEEN GRANTED DURING THE COURSE OF ASSESSMENT FOR ANY YEA R IN RESPECT OF, (I) LOSS; (II) EXPENDITURE; OR (III)TRADING LIABILITY, WHICH IS INCURRED BY THE ASSESSEE; AND SUBSEQUENTLY DURING ANY PREVIOUS YEAR THE ASSESSEE OBTAINS, WHETHER IN CASH OR IN ANY OTHER MANNER, WH ATSOEVER; (I) ANY AMOUNT IN RESPECT OF SUCH LOSS OR EXPENDITURE, OR ( II) SOME BENEFIT IN RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISSI ON OR CESSATION OF SUCH LIABILITY. THUS, A REMISSION OR CESSATION OF L IABILITY WHICH CAN BE DEEMED TO BE AS AN INCOME MUST BE A TRADING LIABILI TY FOR WHICH AN ALLOWANCE OR DEDUCTION HAS BEEN MADE IN THE ASSESSM ENT FOR AN EARLIER YEAR. A COMPANIES LIABILITY ON ACCOUNT OF T HE PRINCIPAL AMOUNT OF LOAN BORROWED BY IT ON A CAPITAL ACCOUNT, I.E., FOR ACQUISITION OF A CAPITAL ASSET CANNOT BE RECKONED AS A NATURE OF TRA DING LIABILITY AS ENVISAGED IN SECTION 41(1), THEREFORE, ITS REMISSIO N CANNOT BE DEEMED AS INCOME UNDER THE SAID PROVISION. WHEN A REMISSIO N OF A PARTICULAR LIABILITY CANNOT EVEN BE DEEMED AS INCOME PURSUANT TO A PROVISION ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 23 | P A GE WHICH HAS BEEN ENACTED SPECIFICALLY FOR THE PURPOSE OF TREATING IT AS A DEEMING INCOME, THEN HOW CAN IT BE TREATED AS INCOM E FOR THE PURPOSE ANY OTHER PROVISIONS OF THE ACT, UNLESS SPECIALLY P ROVIDED TO BE TAXED UNDER ANY PROVISION. HERE, IN THIS CASE ADMITTEDLY THE PRE-REQUISITE CONDITION FOR INVOKING THE PROVISION OF SECTION 41( 1) HAS NOT BEEN SATISFIED/FULFILLED AT ALL FOR THE REASON THAT THE PRE-COMPONENT OF THE BORROWING FOR ACQUISITION OF CAPITAL ASSET HAS NEIT HER BEEN ALLOWED AS ALLOWANCE NOR AS DEDUCTION IN THE EARLIER YEARS AND BEING FOR THE PURPOSE OF ACQUISITION OF A CAPITAL ASSET ANY WAIVE R THEREOF WILL NOT CONSTITUTE INCOME UNDER SECTION 41(1). 13. THE AFORESAID PROPOSITION IS ALSO WELL SUPPORT ED BY HONBLE BOMBAY HIGH COURT IN THE CASE OF MAHINDRA & MAHINDR A VS. CIT, REPORTED IN 261 ITR 501. SIMILARLY, IN A LATER JUDG MENT HONBLE COURT IN THE CASE OF CIT VS. SOFTWORKS COMPUTERS PVT. LTD., REPORTED IN 354 ITR 16, AFTER CONSIDERING THE SAID JUDGMENT AND ALSO TH E JUDGMENT OF SOLID CONTAINERS LTD., REPORTED IN 308 ITR 417, OBSERVED AND HELD AS UNDER:- 7. WE FIND THAT THE DECISION OF THIS COURT IN THE MATTER OF SOLID CONTAINERS LTD. (SUPRA) HAS ALSO CONSIDERED THE EAR LIER DECISION IN THE MATTER OF MAHINDRA AND MAHINDRA LTD. (SUPRA) AND DISTINGUISHED THE SAME BY HOLDING THAT IN THAT CASE THE LOAN WAS GIVEN FOR PURCHASE OF CAPITAL ASSETS UNLIKE IN THE CASE OF SOLID CONTAINERS LTD. (SUPRA) WHERE WAIVER WAS OF A LOAN TAKEN FOR TRADING ACTIVITY AND THUS CONSIDERED TO BE OF A REVENUE NATURE. IN THE PRESENT CASE, THE AMOUNT WHICH WAS A DVANCED AS A LOAN TO THE RESPONDENT-ASSESSEE WAS FOR THE PURPO SES OF RELOCATING ITS OFFICE PREMISES. THE LOAN TAKEN WAS UTILIZED FOR THE PURPOSES OF ACQUIRING A OFFICE AT GODREJ SOAP COMPL EX, VIKROLI, MUMBAI. THEREFORE, THE LOAN IN THE PRESENT FACT WAS TAKEN FOR ACQUISITION OF CAPITAL ASSET AND NOT FOR THE PURPOS ES OF TRADING ACTIVITY AS IN THE CASE OF SOLID CONTAINERS LTD. (S UPRA). THE PRESENT CASE IS, THEREFORE, COVERED IN FAVOUR OF TH E RESPONDENT- ITA NO. 4774/DEL/2017 & C.O-54/DEL/2018 24 | P A GE ASSESSEE BY THE DECISION OF THIS COURT IN THE MATTE R OF MAHINDRA AND MAHINDRA LTD. (SUPRA). THUS, WAIVER OF LOAN TAKEN FOR ACQUISITION OF A CAP ITAL ASSET AND ON CAPITAL ACCOUNT CANNOT BE TAXED U/S 41(1), AS IT IS NEITHER ON REVENUE ACCOUNT NOR A REMISSION OF A TRADING LIABILITY SO A S TO ATTRACT TAX IN THE YEAR OF REMISSION. 33. IN THE LIGHT OF THE ABOVE BINDING PRECEDENTS, W E FIND MERIT IN CONTENTIONS OF THE ASSESSEE. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION MADE ON ACCOUNT OF LIABILITY W RITTEN BACK AMOUNTING TO RS.15,87,816/- RELATED TO CAPITAL ASSETS. THUS, GR OUND NO.4 RAISED BY THE ASSESSEE IN THE CROSS-OBJECTION IS ALLOWED. 34. IN THE RESULT, THE APPEAL OF THE REVENUE AND TH E CROSS-OBJECTION OF THE ASSESSEE ARE PARTLY ALLOWED. ABOVE DECISION WAS PRONOUNCED ON CONCLUSION OF VIRT UAL HEARING IN THE PRESENCE OF BOTH THE PARTIES ON 18 TH AUGUST, 2021. SD/- SD/- (R.K.PANDA) (KUL BHARAT) ACCOUNTANT MEMBER JUDICIA L MEMBER *AMIT KUMAR* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI
