M/s. Crowd Analytix Solutions Private Limited, Bangalore V. Deputy Commissioner Of Income Tax, Circle - 2(2)(1), Bangalore

ITA 1202/BANG/2019

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 0107 (ITAT-BANGALORE)
• Duration Of Justice: 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-12-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2015-2016
• Appeal Filed On: 27-05-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Opportunity of being heard; Set aside

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND SHRI D.S. SUNDER SINGH , ACCOUNTANT MEMBER IT A NO. 1202/BANG/2019 ASSESSMENT YEAR: 2015 - 16 CROWD ANALYTIX SOLUTIONS PVT. LTD., NO.2621, 27 TH MAIN ROAD, SECTOR 1, HSR LAYOUT, BANGALORE 560 102. PAN: AAACQ 2357F VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 2(2)(1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI C. RAMESH, CA RESPONDENT BY : SMT. R. PREMI, JT . CIT(DR)(ITAT) BENGALURU. DATE OF HEARING : 0 5 .12 .2019 DATE OF PRONOUNCEMENT : 30 .1 2 .2019 O R D E R PER N.V. VASUDEVAN, VICE PRESIDENT THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORD ER DATED 26.3.2019 OF CIT(APPEALS)-2, BENGALURU, RELATING TO ASSESSMENT YEAR 2015-16. 2. THE ASSESSEE IS A COMPANY. THE MAIN OBJECTS AS PER THE MEMORANDUM OF ASSOCIATION OF THE ASSESSEE IS AS FOL LOWS:- 1. TO CARRY ON THE BUSINESS OF DEVELOPING SOFTWAR E PRODUCTS AND WEB APPLICATIONS AND PROVIDING MANAGEMENT CONSU LTANCY ITA NO.1202/BANG/2019 PAGE 2 OF 7 SERVICES USING THESE SOFTWARE PRODUCTS & WEB APPLIC ATIONS TO COMPANIES IN INDIA AND REST OF THE WORLD. 2. TO PROMOTE BUSINESS PROCESS SOLUTIONS AND CONSUL TANCY SERVICES BY LEVERAGING THE PREDICTIVE WISDOM OF A C OMMUNITY OF ANALYTIC EXPERTS, DATA SCIENTISTS AND CONSULTANTS S ITUATED GLOBALLY, WHO COMPETE, COLLABORATE AND ARRIVE AT SOLUTIONS TH AT OPTIMIZES THE FUNCTIONING OF GLOBAL BUSINESSES, MAXIMIZES EFF ICIENCY WITH SIGNIFICANT IMPACT ON BUSINESS AND IDENTIFYING NEWE R OPPORTUNITIES FOR TOP LINE GROWTH. 3. THE ASSESSEE FILED RETURN OF INCOME FOR AY 2015- 16 DECLARING LOSS OF RS.1,83,97,553/-. THE AO NOTICED FROM THE PROFI T AND LOSS ACCOUNT THAT THERE WAS NO BUSINESS ACTIVITY CARRIED ON BY THE AS SESSEE AND NO REVENUES WERE GENERATED FROM BUSINESS. THE LOSS DECLARED UN DER THE HEAD INCOME FROM BUSINESS WAS BECAUSE OF THE FOLLOWING EXPENDI TURE OF RS.1,96,60,424/- DEBITED IN THE PROFIT AND LOSS ACC OUNT:- NAME EXPENSE (IN RS.) EMPLOYEE BENEFIT EXPENSES 1,20,82 ,823 FINANCE COSTS 23,875 DEPREDATION 6,89,696 OTHER EXPENSES 68,64,030 TOTAL EXPENSES 1,96,60,424 4. THE INCOME SHOWN IN THE PROFIT AND LOSS ACCOUNT COMPRISED OF INCOME FROM OTHER SOURCES VIZ., INTEREST FROM FIXED DEPOSITS OF RS.1,06,533, FOREIGN EXCHANGE GAIN OF RS.9,08,145 AND MISCELLANE OUS BALANCES WRITTEN OFF OF RS.62,651 IN ALL A SUM OF RS.10,77,329/-. 5. THE LOSS DECLARED IN THE RETURN OF INCOME OF RS. 1,83,97,553/- IS NOTHING BUT THE DIFFERENCE BETWEEN THE INCOME SHOWN IN PROFIT AND LOSS ACCOUNT OF RS.10,77,329 AND THE EXPENDITURE SHOWN I N THE PROFIT AND LOSS ACCOUNT OF RS.1,96,60,424/-. ITA NO.1202/BANG/2019 PAGE 3 OF 7 6. THE AO DID NOT ALLOW THE LOSS CLAIMED BY THE ASS ESSEE FOR THE REASON THAT THE FINANCIAL STATEMENTS (PROFIT & LOSS ACCOUNT) FROM AY 2013- 14 TO 2015-16 SHOWED THAT THE ASSESSEE EARNED NO IN COME FROM BUSINESS OPERATIONS. THE BALANCE SHEET FOR THE SAME PERIOD SHOWED THAT THE ASSESSEE WAS RECEIVING SHARE PREMIUM MONEY FROM TWO NON-RESIDENT COMPANIES AND THE SAME WAS GIVEN AS INTEREST FREE L OANS AND ADVANCES TO ITS SUBSIDIARIES. THE ASSESSEE NEVER CARRIED ON AN Y BUSINESS OF SOFTWARE DEVELOPMENT OR BUSINESS PROCESS SOLUTIONS. THERE W AS NO JUSTIFICATION FOR INCURRING SUCH A HUGE EXPENDITURE ON EMPLOYEE COST AND OTHER EXPENSES. THEREFORE THE EXPENSES CLAIMED CANNOT BE REGARDED A S INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE WITHIN THE MEAN ING OF SEC.37(1) OF THE INCOME TAX ACT, 1961 (THE ACT) AND THEREFORE TH E SAID DEDUCTION CANNOT BE ALLOWED. CONSEQUENTLY, THE LOSS CLAIMED UNDER T HE HEAD INCOME FROM BUSINESS OF RS.1,85,04,086/- WAS DISALLOWED AND AD DED TO THE TOTAL INCOME OF THE ASSESSEE. 7. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE P REFERRED APPEAL BEFORE CIT(A). BEFORE CIT(A), THE ASSESSEE CONTEND ED THAT IT IS A TECHNOLOGY START UP, WHEREIN THE PROMOTERS CAME UP WITH AN UNIQUE IDEA OF OFFERING A COMMON PLATFORM FOR COMPANIES SEEKING SO LUTIONS TO SOME COMPLEX OR ONE-TIME PROBLEMS OR OBTAINING SOME IDEA S ON SOME CONCEPTS FROM A DOMAIN EXPERT WHOM THEY MAY NOT EVEN KNOW HO W TO CONTRACT OR ENGAGE. THE ASSESSEE HAS CREATED A SOFTWARE APPLICA TION, WHICH BRINGS MULTITUDE OF COMPANIES, INDIVIDUALS, TECHNOLOGISTS, MATHEMATICIANS, STATISTICIANS, PHYSICISTS ETC, WHEREIN ANY COMPANY SEEKING ANSWERS TO A SPECIFIC PROBLEM OR SEEKING FRESH IDEAS OR WANTING TO CONVERSE WITH SOME SPECIALIST WHO MAY BE IN ANY CORNER OF THE WORLD WO ULD BE ABLE TO DO SO BY DISPLAYING THEIR NEED ON A COMMON MEDIUM, WHICH WIL L BE ACCESSED BY OTHERS AND A APPROPRIATE COMPANY OR A PERSON MAY PI CK-UP THE ENGAGEMENT. THE ASSESSEE IS BRINGING TOGETHER CROSS FUNCTIONAL, MULTI- ITA NO.1202/BANG/2019 PAGE 4 OF 7 DISCIPLINED, GEOGRAPHICALLY DISCHARGED ENTITIES WHE REIN SPECIFIC NEEDS OF ONE IS MET BY ANOTHER IN THE GROUP ON PRE-DETERMINE D TERMS AND CONDITIONS, INCLUDING FEE. THE ENGAGEMENT MAY HAPPEN BETWEEN AN Y 2 ENTITIES AND THE COMPANY WOULD GET PAID FOR FACILITATING THE ARRANGE MENT THROUGH THIS MEDIUM. 8. THESE KINDS OF COMPANIES REQUIRE HUGE FUNDS DURI NG INITIAL PERIOD TO DEVELOP THE EXPERTS WITH SKILLS. HENCE IT WILL TAKE MINIMUM 2 TO 3 YEARS TO DEVELOP THE SKILLS OF EXPERTS. SO IT IS VERY COMMON FOR THESE KINDS OF COMPANIES TO INVITE EQUITY FROM THE VENTURE CAPITAL ISTS TO FUND THE ACTIVITY. ACCORDINGLY THE ASSESSEE HAS BEEN FUNDED BY REGISTE RED VENTURE FUNDS IN INDIA. FURTHER, THE ASSESSEE HAS INCORPORATED A W HOLLY OWNED SUBSIDIARY IN USA TO MARKET ITS IDEAS. USA AND EUROPE ARE MATU RE MARKETS FOR THESE KIND OF COMPANIES AND THIS IS A TIME TESTED PREVALE NT PRACTICE AMONGST MOST OF THE COMPANIES TO INCORPORATE SUBSIDIARIES A CROSS CONTINENTS TO FACILITATE STRUCTURAL AND LEGAL SUPPORT TO THE BUSI NESS TRANSACTION. THE ASSESSEE COMPANY OBTAINED THE PERMISSION FROM RBI F OR SHARE PREMIUM RECEIVED AND ALSO COMPLIED WITH ALL THEIR REQUIREME NTS. IN VIEW OF THE ABOVE, NORMALLY DURING INITIAL PERIOD THE ASSESSEE HAS TO INCUR EXPENDITURE IN NATURE OF EMPLOYEE BENEFITS, LEGAL AND PROFESSIO NAL CHARGES, WHICH ARE PURELY REVENUE IN NATURE. THE ASSESSEE HAS INCURRE D MAJOR EXPENDITURE ON EMPLOYEES COST OF RS.1,20,82,823/- AND LEGAL AND PR OFESSIONAL CHARGES OF RS.34,02,052/- AND ADMINISTRATIVE EXPENSES. ALL THE SE EXPENDITURE ARE NECESSARY FOR THESE KINDS OF COMPANIES BEING MEANT FOR DEVELOPMENT OF SKILLS OF THE EXPERTS OVER A PERIOD OF 2 TO 3 YEARS DURING INITIAL PERIOD. 9. THE CIT(A) HOWEVER CONFIRMED THE ORDER OF THE AO HOLDING THAT THE ASSESSEE HAS NOT ESTABLISHED THAT THE EXPENDITURE C LAIMED IN PROFIT AND LOSS ACCOUNT WAS INCURRED FOR THE PURPOSE OF BUSINE SS OF THE ASSESSEE. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THIS TRIBUNAL. ITA NO.1202/BANG/2019 PAGE 5 OF 7 10. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED SUBMISSIONS MADE BEFORE CIT(A). THE LEARNED DR RELIED ON THE ORDER OF THE CIT(A). 11. WE ARE OF THE VIEW THAT THE ABSENCE OF REVENUE FROM BUSINESS CANNOT BE THE BASIS TO HOLD THAT EXPENDITURE DEBITE D IN PROFIT AND LOSS ACCOUNT WERE NOT INCURRED FOR THE PURPOSE OF BUSINE SS. THE LAW IS WELL SETTLED THAT IN TERMS OF THE PROVISO TO SEC.3 OF TH E ACT, BUSINESS INCOME CAN BE COMPUTED ONLY FROM THE DATE ON WHICH THE BUSINES S IS SET UP. SEC.3 OF THE ACT DEFINES PREVIOUS YEAR AS FOLLOWS: PREVIOUS YEAR DEFINED.-FOR THE PURPOSES OF THIS AC T, 'PREVIOUS YEAR' MEANS THE FINANCIAL YEAR IMMEDIATELY PRECEDIN G THE ASSESSMENT YEAR: PROVIDED THAT, IN THE CASE OF A BUSINESS OR PROFESS ION NEWLY SET UP, OR A SOURCE OF INCOME NEWLY COMING INTO EXISTEN CE, IN THE SAID FINANCIAL YEAR, THE PREVIOUS YEAR SHALL BE THE PERIOD BEGINNING WITH THE DATE OF SETTING UP OF THE BUSINE SS OR PROFESSION OR, AS THE CASE MAY BE, THE DATE ON WHICH THE SOURC E OF INCOME NEWLY COMES INTO EXISTENCE AND ENDING WITH THE SAID FINANCIAL YEAR. 12. THE IMPORTANCE OF PREVIOUS YEAR CAN BE JUDGED I N THE CONTEXT OF SECTION 4 OF THE ACT. SECTION 4 OF THE ACT PROVIDES FOR A CHARGE OF INCOME- TAX FOR ANY ASSESSMENT YEAR IS IN RESPECT OF THE TO TAL INCOME OF THE PREVIOUS YEAR OF EVERY PERSON. THE WHOLE PROCESS OF LEVY OF INCOME-TAX STARTS WITH COMPUTATION OF TOTAL INCOME OF THE PERSON DURING TH E PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR. IF THE BUSINESS OF THE ASSE SSEE WAS NOT SET UP DURING THE PREVIOUS YEAR AND THEREFORE INCOME UNDER THE HEAD BUSINESS CANNOT BE COMPUTED, ALL EXPENSES INCURRED BY THE AS SESSEE PRIOR TO SET UP OF THE BUSINESS, WHETHER THEY ARE REVENUE OR CAPITA L IN NATURE, HAVE TO BE CAPITALIZED OVER VARIOUS ASSETS OF THE ASSESSEE AND ONLY DEPRECIATION CAN BE CLAIMED ON SUCH CAPITALIZED VALUE. THE EXPENDIT URE INCURRED PRIOR TO THE SETTING-UP OF BUSINESS IS TO BE CONSIDERED AS A P RE-OPERATIVE CAPITAL ITA NO.1202/BANG/2019 PAGE 6 OF 7 EXPENDITURE. THE SIGNIFICANCE OF THIS CONCEPT HAS BEEN ELUCIDAT ED BY THE BOMBAY HIGH COURT IN WESTERN INDIA VEGETABLE PRODUCTS LTD. VS. CIT 26 ITR 151 (BOM) WHEREIN IT WAS OBSERVED THAT THE EXPRESSION SETTI NG UP' MEANS AS IS DEFINED IN THE OXFORD ENGLISH DICTIONAR Y TO PLACE ON FOOT' OR TO ESTABLISH' AND IN CONTRADISTINCTION TO COMMENCE'. THE DISTINCTION IS THAT WHEN A BUSINESS IS ESTABLISHED AND IS READY TO COMM ENCE BUSINESS THERE IT CAN BE SAID OF THAT BUSINESS, THAT IT IS SET UP. BU T BEFORE IT IS READY TO COMMENCE BUSINESS IT IS NOT SET-UP. BUT THERE MAY B E AN INTERREGNUM, THERE MAY BE AN INTERVAL BETWEEN A BUSINESS WHICH I S SET UP AND A BUSINESS WHICH IS COMMENCED AND ALL EXPENSES INCURR ED AFTER THE SETTING UP OF THE BUSINESS AND BEFORE THE COMMENCEMENT OF T HE BUSINESS DURING THE INTERREGNUM, WOULD BE PERMISSIBLE DEDUCTIONS UN DER SECTION 10(2) OF THE INCOME TAX ACT, 1922 (EQUIVALENT TO SEC.37(1) O F THE ACT). 13. WHEN THE ASSESSEE WAS INCORPORATED AND WHETHER THE BUSINESS OF THE ASSESSEE CAN BE REGARDED AS HAVING BEEN SET UP AND WHAT IS THE NATURE OF THE EXPENDITURE DEBITED IN THE PROFIT AND LOSS ACCOUNT AND AS TO HOW THEY ARE RELATED TO THE BUSINESS OF THE ASSESSE E, ALL THESE NEED TO BE SEEN BEFORE COMING TO A CONCLUSION WHETHER THE EXPE NDITURE CAN BE ALLOWED AS DEDUCTION AND WHETHER INCOME FROM BUSINE SS CAN BE COMPUTED. THE BURDEN TO SHOW THE EXISTENCE OF CONDITIONS FOR COMPUTING INCOME FROM BUSINESS AND TO SHOW THAT THE EXPENDITURE WAS INCUR RED FOR THE PURPOSE OF BUSINESS IS ON THE ASSESSEE. WHAT IS THE NATURE OF WORK PERFORMED BY THE EMPLOYEES, HOW THE SAME CONTRIBUTED TO THE BUSINESS OF THE ASSESSEE AS PER ITS MEMORANDUM OF ASSOCIATION AND IN WHAT MANNE R THOSE SERVICES THAT THE EMPLOYEES RENDERED CONTRIBUTED TO THE BUSINESS OF THE ASSESSEE IN FUTURE SHOULD ALL BE SEEN. WE ARE OF THE VIEW THAT IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE, IT WOULD BE JUST AND APP ROPRIATE TO SET ASIDE THE ORDER OF THE CIT(APPEALS) AND REMAND THE ISSUE FOR FRESH DETERMINATION IN THE LIGHT OF THE PARAMETERS LAID DOWN ABOVE AND IN ACCORDANCE WITH THE LAW ITA NO.1202/BANG/2019 PAGE 7 OF 7 ON THE ISSUE AS LAID DOWN IN SEVERAL JUDICIAL PRONO UNCEMENTS. THE AO WILL AFFORD OPPORTUNITY OF BEING HEARD TO THE ASSESSEE B EFORE DECIDING THE ISSUE. 14. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS TR EATED AS ALLOWED FOR STATISTICAL PURPOSE. PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF DECEMBER, 2019. SD/- SD/ - ( D S SUNDER SINGH ) ( N V VASUDEVAN ) ACCOUNTANT MEMBER VICE PRESIDENT BANGALORE, DATED, THE 30 TH DECEMBER, 2019. / DESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FIL E BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.