The ACIT, Circle-4, Ahmedabad V. Jupiter Corporate Services Ltd., Ahmedabad

ITA 1187/AHD/2005

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 7728 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 2 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-07-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 16-07-2009
• Assessment Year: 2001-2002
• Appeal Filed On: 25-04-2005
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D S CHAUDHARY
• Keywords: Depreciation; Revenue expenditure; Capital expenditure; TDS; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME_TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD BEFORE SHRI T.K.SHARMA AND SHRI D.C.AGRAWAL ITA NO.1187/AHD/2005 (ASSESSMENT YEAR : 2001-02) THE ACIT, CIR-4, AHMEDABAD. VS JUPITER CORPORATE SERVICES LTD., AMBUJA TOWER, OPP: MEMNAGAR FIRE STATION, P.O. NAVJIVAN, AHMEDABAD. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI D,S,CHAUDHARY, D.R. RESPONDENT BY : SHRI TUSHAR HEMANI, A.R. ( (( ( )/ )/)/ )/ ORDER PER AGRAWAL, AM: THIS IS AN APPEAL FILED BY THE REVENUE RAISING FOLLOWI NG GROUNDS: 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS OF T HE CASE IN DELETING ADDITION OF RS.3847939/- MADE BY THE A.O. O N ACCOUNT OF CAPITALIZATION OF EXPENDITURE RELATED TO SIT E AND PORTAL DEVELOPMENT. 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS OF T HE CASE IN DELETING ADDITION OF RS.8342846/- MADE BY WAY OF DISALLOWANCE OF INTEREST EXPENSES FOR MAKING ADVANCES TO O NE OF THE DIRECTORS WITHOUT APPRECIATING THE FACT THAT SO F AR AS RELEVANT ASSESSMENT YEAR IS CONCERNED THE INTEREST LIABILIT Y OF ASSESSEE HAS GONE UP DUE TO SUCH ADVANCE. 3. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS OF THE CA SE IN DELETING THE ADDITION MADE BY WAY OF DISALLOWANCE OF INTEREST U/S 14A OF THE ACT DISREGARDING THE FACT THAT THE ASSESSEE FAI LED TO SUBSTANTIATE THAT ONLY INTEREST FREE FUNDS HAD BEEN USE D FOR MAKING INVESTMENT IN SHARES/MUTUAL FUNDS AND THEREFOR E, A.O. WAS JUSTIFIED IN CONSIDERING THE FUNDS AS MIXED. 2 2. THE FACTS OF THE CASE ARE THAT ASSESSEE COMPANY IS ENGAGE D IN THE BUSINESS OF CORPORATE CONSULTANCY, FINANCING, SOFTWARE DEVE LOPMENT AND SHARE TRANSFER AGENCY. THE FIRST ISSUE RELATES TO DELETI NG AN ADDITION OF RS.38,47,939/- BEING THE EXPENDITURE RELATING TO LEA SE RENT CHARGES, TRAVELING, STATIONERY, PROFESSIONAL CHARGES, ADVERTISEMEN T AND PORT DEVELOPMENT CHARGES. DURING THE ASSESSMENT PROCEEDINGS, TH E ASSESSING OFFICER FOUND THAT ASSESSEE (JCS) HAD ENTERED INTO AN AG REEMENT WITH VISHWA GUJARATI SANGH (VGS IN SHORT) FOR DEVELOPMENT OF THE SITE ON THEIR BEHALF FOR WHICH THESE EXPENSES WERE INCURRED. THE ASSESSING OFFICER DID NOT ACCEPT THE CLAIM OF THE ASSESSEE THAT IT IS A REVENUE EXPENDITURE BUT HELD IT TO BE THE CAPITAL EXPENDITURE FOR THE FOLLOW ING REASONS: 1. THE ASSESSEE HAS ACQUIRED ENDURING ADVANTAGE BY DEVELOPIN G SITE AND ACQUIRING EXCLUSIVE RIGHTS FOR THE CONNECTION OF LEASE LINES AND RELATED EXPENSES. 2. ACQUIRING ACCESS TO LEASE LINES, DOMAIN NAMES ARE RIGHT OF ENDURING NATURE. 3. EXPENDITURE INCURRED ON PORTAL DEVELOPMENT IS AN ASSE T OF ENDURING NATURE 4. THE LEASE LINE CHARGES, INTEREST, SECURED FEES, AND DOMAIN NAME CHARGES ETC. ARE PAID AS PER PRE-DETERMINED AGREEMENT. NO TDS HAS BEEN DEDUCTED ON THE PAYMENTS SO MADE. 3. BEFORE THE LD. CIT(A) IT WAS SUBMITTED THAT REVEN UE GENERATED FROM THE USE OF WEBSITE WAS TO BE DIVIDED IN THE RATIO OF 7 0% WITH THE ASSESSEE COMPANY AND 30% WITH VGS AS PER CLAUSE 5 OF THE AG REEMENT BETWEEN JCS AND VGS OWNERSHIP OF THE WEBSITE RESTED WI TH VGS AND RIGHT OVER TECHNICAL KNOW-HOW VESTED WITH THE ASSESSEE COM PANY. THE LD. CIT(A) DECIDED IN FAVOUR OF THE ASSESSEE ON THE GROU ND THAT OWNERSHIP OF THE PORTAL DID NOT VEST WITH THE ASSESSEE AND EXPEND ITURE WAS INCURRED 3 BY THE ASSESSEE FOR EARNING REVENUE FROM MEMBERS WHO WOU LD VISIT THE SITE. ACCORDING TO HIM, THE EXPENDITURE WAS INCURRED FO R MAKING THE WEBSITE FUNCTIONAL AND FOR PROMOTING AND ENROLLING NE W MEMBERS. AGAINST THIS, THE LD. D.R. SUBMITTED THAT THE ASSET SO CREATED WAS TO BE DIVIDED BETWEEN THE ASSESSEE AND VGS IN THE SENSE THAT RIGHT OVER TECHNICAL KNOW-HOW WOULD VEST WITH THE ASSESSEE, THEREFORE, A PART OF THE EXPENDITURE CERTAINLY WOULD BE CAPITAL. AGAINST THIS, THE LD. A.R. SUBMITTED THAT THE EXPENDITURE INCURRED ON DEVELOPMEN T OF PORTAL IS REVENUE EXPENDITURE AS HELD IN DCIT V. CORE HEALTH CA RE LTD. (2009) 308 ITR 263 (GUJ.) WHEREIN IT IS HELD THAT NATURE OF ADV ANTAGE HAS TO BE CONSIDERED IN A COMMERCIAL SENSE AND ROLE OF ENDURING BEN EFIT WILL NOT BE A CONCLUSIVE TEST AND COULD NOT BE APPLIED BLINDLY. HE SUB MITTED THAT ASSESSEE IS ALREADY IN THE BUSINESS OF DEVELOPMENT OF SOFT WARE AND DEVELOPMENT OF PORTAL IS NOTHING BUT A SOFTWARE USED B Y VARIOUS PERSONS VISITING THE SITE. THE ASSESSEE DID NOT GET ANY OWNERSHIP RIGHT OVER THE PORTAL, THEREFORE, IT COULD NOT BE HELD TO BE A CAPIT AL EXPENDITURE. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE UNDISPUTED FACTS ARE THAT THE ASSESSEE IS ALREAD Y IN THE BUSINESS OF DEVELOPMENT OF SOFTWARE AND PORTALS SITES AN D EARNING REVENUE THEREFROM. IN THE PRESENT CASE, THE ASSESSEE HAS IN CURRED EXPENDITURE ON LEASE RENTAL, TRAVELING, STATIONERY, P ROFESSIONAL CHARGES, ADVERTISEMENTS ETC. FOR DEVELOPING PORTAL, RIGHT OVER WHICH IS TRANSFERRED TO VGS AS PER AGREEMENT WITH THEM AND IN LIEU THEREO F 70% OF REVENUE WOULD COME TO COFFERS OF THE ASSESSEE. ONCE, THE ASSESSEE IS IN THE BUSINESS OF DEVELOPING SOFTWARE AND PORTALS THEN DEVELOP MENT OF THE PORTAL FOR VGS WOULD ONLY BE AN EXTENSION OR A PART OF THE EXISTING BUSINESS OF THE ASSESSEE. THEREFORE, EXPENDITURE INCURRED T HEREON WOULD ONLY BE OF REVENUE IN NATURE. THE HONBLE SUPREME C OURT IN THE CASE OF DCIT V. ALKALI CHEMICALS LTD. (2008) 299 ITR 85(SC) H ELD THAT WHERE 4 EXPENDITURE IS INCURRED FOR THE EXTENSION OF ITS BUSINES S ACTIVITIES, IT WOULD BE ALLOWABLE U/S 37(1). SIMILAR VIEW WAS HELD B Y THE HONBLE DELHI HIGH COURT IN CIT V. USHA IRON AND FERRO METAL CORPOR ATION (2008) 296 ITR 14)(DEL.). THE HONBLE SUPREME COURT IN VEECUNSEES V. CIT (1996) 220 ITR 185 (SC) HELD THAT EXPENDITURE INCURRED IN CO NNECTION WITH THE EXISTING BUSINESS WOULD BE REVENUE EXPENDITURE. IN THAT CASE, LOAN WAS OBTAINED FOR RUNNING A CINEMA THEATRE THOUGH ASSESSEE W AS IN THE BUSINESS OF JEWELLERY. IT WAS HELD THAT IT WAS A COMPOSI TE BUSINESS AND, THEREFORE, INTEREST PAID ON SUCH LOAN WOULD BE ALLOWA BLE. THE HONBLE SUPREME COURT IN CIT V. MADRAS AUTO SERVICES PVT. LTD. (1998) 233 ITR 468 LAID DOWN GENERAL PRINCIPLES IN DETERMINING WHETH ER A PART OF EXPENDITURE IS CAPITAL OR REVENUE IN NATURE. IT IS HEL D THAT AN EXPENDITURE WOULD BE REVENUE IN NATURE IF IT IS INCURRED FOR INIT IATION OF THE BUSINESS OR EXTENSION OF BUSINESS OR FOR A REPLACEMENT OF EQUIPMENT. AN EXPENDITURE WOULD BE CAPITAL IF IT IS INCURRED ONCE FOR ALL WITH A VIEW TO BRING INTO EXISTENCE AN ASSET FOR AN ADVANTAGE FOR ENDURING BENEFI T OF THE TRADE AND FURTHER TO SEE WHETHER EXPENDITURE WAS INCURRED AS A PA RT OF THE FIXED CAPITAL OR AS PART OF CIRCULATING CAPITAL. IT IS CLEAR IN THE PRESENT CASE THAT ASSESSEE HAS NOT ACQUIRED ANY ASSET AND EXPENDITURE WAS INCUR RED IN CONNECTION WITH THE BUSINESS OF THE ASSESSEE WHICH RESULTED IN REVENUE GAIN FROM THE MEMBERS WHO VISITED THE SITE OWNED BY VG S. UNDER THESE CIRCUMSTANCES, EXPENDITURE INCURRED BY THE ASSESSEE COULD NOT BE SAID TO BE CAPITAL IN NATURE. SIMILAR VIEW WAS HELD BY THE TR IBUNAL IN POLYPLEX CORPN. LTD. V. ITO (2009) 176 TAXMAN 56 (MAG) WHERE IT IS HELD THAT EXPENDITURE INCURRED FOR DEVELOPMENT OF WEBSITE TO P ROMOTE VARIOUS BUSINESS ACTIVITIES OF THE ASSESSEE AND FOR DISPLAY OF ITS IN FORMATION, PRODUCTS ETC., ARE ALLOWABLE AS REVENUE EXPENDITURE. AS A RESULT, THIS GROUND OF REVENUE IS REJECTED. 5. THE SECOND ISSUE IS THE LIABILITY OF INTEREST PAYMENT TO THE DIRECTOR. 5 THE FACTS ARE THAT THE ASSESSING OFFICER FOUND DURING THE COURSE OF ASSESSMENT PROCEEDINGS THAT A SUM OF RS. 2.5 CRORES WAS REFLE CTED AS A COST OF OFFICE BUILDING PURCHASED AS ON 31.3.2000. BUT I N A SUBSEQUENT YEAR THE COMPANY CLASSIFIED THE OFFICE BUILDING AMOUNT A S LOANS AND ADVANCES AND ADDED BACK THE DEPRECIATION CLAIMED ON TH E OFFICE BUILDING. ON THE CHANGE OF THE STAND, THE ASSESSEE EXPLAINED THAT A SUM OF RS.2.5 CRORES WAS GIVEN BY AN EARLIER COMPANY, NAMELY, M/S JUI PTER INFOSOFT LTD. FOR ACQUIRING THE USE OF PREMISES AT BUILDING SAKAR-II FOR BUSINESS PURPOSES. THIS ADVANCE WAS GIVEN BY JUPITER INFOSOFT LTD . WHEN IT WAS NOT AMALGAMATED WITH THE ASSESSEE COMPANY. AFTER AMALGAMATIO N, THE CLAIM OF DEPRECIATION WHICH CONTINUED TO BE PASSED ON TO THE ASSESSEE COMPANY WAS CLAIMED BUT ERROR WAS RECTIFIED BY FILING THE REVI SED RETURN. THUS AN ERROR HAD CREPT IN CLASSIFYING THE SUM OF RS.2.5 CRORES A S AN ASSET WHICH IS NOW RE-CLASSIFIED AS LOANS AND ADVANCES. THE ASSESSING OFF ICER, HOWEVER, DID NOT AGREE WITH THIS EXPLANATION AND HEL D THAT ASSESSEE COMPANY HAS MADE ADVANCES TO ONE OF THE DIRECTORS OF THE COMPANY BY CAMOUFLAGING IT AS A SECURITY DEPOSIT. THE COMPANY HAS PA ID HUGE INTEREST ON ITS BORROWINGS TO THE EXTENT OF RS.83,42,84 6/-. HE ALSO HELD THAT RE-CLASSIFICATION OF FIXED ASSETS INTO ADVANCES IS DON E WITH MALAFIDE INTENTION TO EVADE PAYMENT OF TAX. THE LD. CIT(A) A LLOWED THE CLAIM ON THE GROUND THAT EXPENDITURE OF RS.2.5 CRORE WAS INCURRE D OUT OF SHARE CAPITAL RAISED BY JUPITER INFOSOFT LTD. AND IT HAD NO ELEMENT OF COST. 6. WE HAVE HEARD THE LD. D.R. AND LD. A.R. IN OUR CO NSIDERED VIEW, THERE IS NO CASE FOR INTERFERENCE IN THE ORDER OF THE L D. CIT(A). THE REASONS ARE THAT THE INVESTMENT IN THE PROPERTY SAKAR II WAS DONE BY JUPITER INFOSOFT LTD. PRIOR TO AMALGAMATION AND WAS O UT OF FUNDS RAISED IN PUBLIC ISSUE BY THAT COMPANY. LATER, THIS COMPANY MERGED WITH THE ASSESSEE RESULTING IN TRANSFER OF ASSET TO THE PRESENT COMP ANY, EVEN THOUGH RE-CLASSIFICATION FROM ASSET TO LOANS AND ADVAN CES MAY NOT BE 6 FREE FROM DOUBT BUT THE FACT THAT THE INVESTMENT INTO THE PROPERTY IS CLEARLY OUT OF INTEREST FREE FUNDS BEING THE SHARE CAPI TAL RAISED BY EARLIER COMPANY. THEREFORE, QUESTION OF DISALLOWING INTEREST PA ID BY THE PRESENT COMPANY DOES NOT ARISE. THERE IS NEITHER ANY EVIDENCE NO R ANY SUSPICION THAT INTEREST BEARING FUNDS OF THE PRESENT COMPANY HAV E BEEN INVESTED IN INTEREST FREE ADVANCES TO THE DIRECTOR. EVEN OTHERWISE, AMALGAMATION OF EARLIER COMPANY WITH THE PRESENT COMPANY IS CLEARLY A B USINESS DEAL AND THERE IS A CLEAR BUSINESS CONNECTION IN RESPECT OF OUTSTANDIN G AMOUNT AGAINST THE DIRECTOR. FOLLOWING THE DECISION OF THE HON BLE SUPREME COURT IN S.A. BUILDER LTD. V. CIT (2007) 288 ITR 01 (SC) , THE INTEREST PAID BY THE ASSESSEE COULD NOT BE DISALLOWED. AS A RESULT, WE DISMISS THE GROUND OF REVENUE. 7. THE LAST ISSUE IS REGARDING DISALLOWANCE OF INTEREST U /S 14A IN RESPECT OF INVESTMENT IN SHARES/MUTUAL FUNDS YIELDING D IVIDEND INCOME WHICH IS EXEMPT. THE FACTS OF THE CASE ARE THAT THE ASSESSIN G OFFICER NOTED THAT ASSESSEE COMPANY EARNED DIVIDEND INCOME OF RS.1 5,23,873/- AND HAD MADE INVESTMENT IN SHARES AND SECURITIES AT RS.3,5 5,36,730/-. THE ASSESSING OFFICER DISALLOWED PROPORTIONATE PAYMENT OF INTEREST AT RS.13,81,377/- HOLDING THAT PAYMENT OF INTEREST IN RE SPECT OF EARNING EXEMPTED INCOME WOULD BE DISALLOWED. IT WAS SUBMITTED T O THE LD. CIT(A) THAT INVESTMENT IN SHARES WAS MADE OUT OF SHARE CAPITAL A ND RESERVES OF M/S GABTL WHICH WAS ENGAGED IN THE BUSINESS OF SHARE TRADI NG. PRIOR TO AMALGAMATION NEITHER THE GABTL NOR THE ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF SALE AND PURCHASE OF THE SHARES. THE LD . CIT(A) DELETED THE ADDITION BY HOLDING THAT ASSESSEE HAD SUFFICIENT INT EREST FREE FUNDS OF RS.15.75 CRORES, THEREFORE, INVESTMENT INTO SHARE BUSINES S AMOUNTING TO RS.3.5 CRORES COULD BE OUT OF SUCH INTEREST FREE FUNDS. 8. WE HAVE HEARD THE LD. D.R. AND LD. A.R. IN OUR CO NSIDERED VIEW, 7 REVENUE SHOULD HAVE TAKEN A CONSISTENT VIEW. THE ASSESSEE HAS BEEN DECLARING DIVIDEND INCOME IN EARLIER YEAR ALSO AND NO SUCH DISALLOWANCE HAS BEEN MADE. RULE 8D WHICH PROVIDES METHOD FOR DETER MINING AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE I N TAXABLE INCOME IS EFFECTIVE FROM 24.3.2008. BUT IN THE DECISION OF SPECIA L BENCH IN ITO V. CAPITAL MANAGEMENT PVT. LTD. (2009) 312 ITR (A.T.) 001, I.T.A.T. MUMBAI SPECIAL BENCH IT IS HELD THAT THIS AMENDMENT IS PROCEDURA L IN NATURE AND HENCE RETROSPECTIVE AND, THEREFORE, WOULD BE APPLICABLE TO PAST ASSESSMENT YEARS ALSO. FURTHER, THIS DECISION WOULD BE APP LICABLE TO A CASE WHERE ASSESSEE FAILS TO ESTABLISH A DIRECT NEXUS BETWEEN INVESTMENT INTO EXEMPTED INCOME AND INTEREST FREE CAPITAL AVAILA BLE WITH THE ASSESSEE. IF IT IS ESTABLISHED THAT IN SOME EARLIER YEARS I NVESTMENT IN PURCHASE IN SHARES AND SECURITIES WAS MADE OUT OF INTEREST F REE FUNDS AVAILABLE WITH THE ASSESSEE AND THAT INVESTMENT CONTINUED TO EXIST IN SUBSEQUENT YEARS IN WHICH DIVIDEND INCOME BECAME EXEMPT DUE TO CHANGES IN LAW THEN INTEREST PAID BY THE ASSESSEE IN SUCH SUB SEQUENT YEARS ON BORROWED FUNDS UTILIZED APPARENTLY ELSEWHERE FOR THE PURPOSES OF BUSINESS MAY NOT BE PRESUMED TO HAVE BEEN PARTLY INV ESTED IN PURCHASING OR RETAINING SHARES AND, THEREFORE, A PART O F THE INTEREST PAYMENT WOULD NOT BE DISALLOWABLE BY INVOKING PROVIS IONS OF SEC. 14A. HOWEVER, THE CIT(A) HAS MADE HIS OWN CALCULATION AND SUST AINED AN ADDITION OF RS.28,678/- AGAINST WHICH ASSESSEE SEEMS TO BE NOT IN APPEAL. BUT, LEGALLY NO CASE IS MADE OUT TO BRING THE CASE U/S 14A AS ACCORDING TO THE FACTS AVAILABLE ON RECORD INVESTMENT IN SHARES WAS DONE BY M/S GABTL, A COMPANY WHICH LATER ON MERGED WITH THE ASSESSEE COMPANY AND INVESTMENTS WERE TAKEN OVER BY THE PRESENT ASSESSEE. 8 THEREFORE, WE DO NOT FIND ANY JUSTIFICATION IN THE G ROUND RAISED BY THE REVENUE. IT IS ACCORDINGLY REJECTED. 9. AS A RESULT, APPEAL FILED BY THE REVENUE IS DISMISSED. THE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 24.7. 2009. SD/- (T.K.SHARMA) JUDICIAL MEMBER SD/- (D.C.AGRAWAL) ACCOUNTANT MEMBER AHMEDABAD, DATED:24.7.2009 PSP* COPY TO : (1) THE ASSESSEE (2) THE ASSESSING OFFICER (3) THE CIT(A) CONCERNED, (4) THE CIT, CONCERNED, (5) THE DR, ITAT, AHMEDABAD, (6) GUARD FILE. BY ORDER ASSTT. REGISTRAR / D EPUTY REGISTRAR ITAT, AHMEDABAD BENCHES AHMEDABAD.