DCIT, CHENNAI V. M/s. Maverick Systems Ltd., CHENNAI

ITA 148/CHNY/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61174 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 17-05-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 28-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S SRIDHAR
• Keywords: Capital asset; Bad and doubtful debts

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI BEFORE SHRI N.S.SAINI, ACCOUNT ANT MEMBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER ITA NO.148/MDS/2011 (ASSESSMENT YEAR : 2005-06) DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE IV(1), AAYAKAR BHAVAN IV FLOOR, 121, M.G.ROAD, NUNGAMBAKKAM, CHENNAI-600 034. VS. M/S.MAVERICK SYSTEMS LTD. FAGUN MANSION V FLOOR, 74, ETHIRAJ SALAI, EGMORE, CHENNAI-600 105. PAN:AACCM2335D (APPELLANT) (RESPONDENT) APPELLANT BY : MR. SHAJI P.JACOB, ADDL. CIT RESPONDENT BY : MR. S. SRIDHAR, ADVOCATE DATE OF HEARING : 17 TH MAY, 2012 DATE OF PRONOUNCEMENT : 31 ST MAY, 2012 O R D E R PER VIKAS AWASTHY, JUDICIAL MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE ORDER DATED 26.10.2010 PASSED BY THE CI T(A)-V, CHENNAI. 2. THE ASSESSEE IS A COMPANY REGISTERED UNDER THE PROVISIONS OF COMPANIES ACT, 1956 AND IS ENGAGED IN THE BUSINESS OF SOFTWARE VERIFICATION, VALIDATION AND T ESTING FOR VARIOUS SOFTWARE DEVELOPERS BOTH IN INDIA AND ABROA D. THE ASSESSEE FILED RETURN OF INCOME RELEVANT TO THE A SSESSMENT YEAR 2005-06 ON 28.10.2005 DECLARING ITS INCOME AS ` ITA NO.148/MDS/ 2011 2 1,14,517/-. THE CASE OF THE ASSESSEE WAS SELECTED F OR SCRUTINY AND NOTICE UNDER SECTION 143(2) DATED 31.1 .2007 WAS SERVED ON THE ASSESSEE. ON COMPLETION OF THE ASSES SMENT DISALLOWANCES ON ACCOUNT OF BAD DEBTS WRITTEN OFF T O THE TUNE OF ` 15.00 LAKHS, CAPITAL SUBSIDY ETC. WERE MADE BY THE ASSESSING OFFICER. AGGRIEVED AGAINST THE ASSESSMENT ORDER DATED 20.12.2007, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). THE CIT(A) ALLOWED THE APPEAL OF THE AS SESSEE VIDE ORDER DATED 26.10.2010. 3. THE REVENUE, AGGRIEVED AGAINST THE ORDER OF CIT( A) DATED 26.10.2010 HAS IMPUGNED THE ORDER IN APPEAL BEFORE THE TRIBUNAL ON THE GROUND THAT THE CIT(A) HAS ERRE D IN DELETING THE DISALLOWANCE OF ` 15 LAKHS BEING THE CLAIM OF BAD DEBTS WRITTEN OFF BY THE ASSESSEE. 4. MR. SHAJI P.JACOB, ADDL. CIT., APPEARING FOR THE REVENUE SUBMITTED THAT THE ASSESSEE WAS IN JOINT VENTURE WI TH M/S.SHANKAR APPLIED TECHNOLOGIES PVT. LTD. THE ASSE SSEE PAID AN AMOUNT OF ` 15.00 LAKHS FOR ACQUIRING SHARES OF M/S.SHANKAR APPLIED TECHNOLOGIES PVT. LTD FOR THE N EW AREA OF WORK. THE AMOUNT INVESTED BY THE ASSESSEE IS NOT HING BUT ITA NO.148/MDS/ 2011 3 INVESTMENT AND ANY LOSS ARISING OUT OF IT IS A CAPI TAL LOSS. HE SUBMITTED THAT AT PAGE 2 OF THE ASSESSMENT ORDER, T HE ASSESSING OFFICER HAS RECORDED SUBMISSIONS OF THE A SSESSEE WHEREIN THE ASSESSEE HAD CATEGORICALLY STATED THAT MAVERIC ENTERED INTO AN AGREEMENT WITH THEM TO TAKE SOME ST AKE AND PROVIDE SUPPORT SERVICES FOR THE COMMERCIALIZATION OF THE TECHNOLOGY . THE ASSESSEE HAS FURTHER SUBMITTED BEFORE THE ASSESSING OFFICER THAT IT HAD INVESTED THE AMOUNT WITH M/S.SHANKAR APPLIED TECHNOLOGIES PVT. LTD. FOR THEI R JOINT VENTURE. THE D.R. SUBMITTED THAT THE AMOUNT INVESTED BY THE ASSESSEE, IN VIEW OF THE ABOVE SUBMISSIONS OF T HE ASSESSEE, IS INVESTMENT. THE TERMS USED BY THE ASSE SSEE SUCH AS DEVELOPMENT, INVESTMENT IN THE SUBMISSI ONS CLEARLY INDICATE THE INTENTION OF THE ASSESSEE TO MAKE INVE STMENT WITH M/S.SHANKAR APPLIED TECHNOLOGIES PVT. LTD. THUS, A NY LOSS ON ACCOUNT OF INVESTMENT CANNOT BE WRITTEN OFF AS B AD DEBTS. AT THE MOST, THE ASSESSEE CAN CLAIM CAPITAL LOSS. T O SUPPORT HIS CONTENTIONS, HE RELIED ON THE JUDGEMENT PASSED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. R.G . SCIENTIFIC ENTERPRISES PVT.LTD., REPORTED AS 311 ITR 401 AND THE ORDER ITA NO.148/MDS/ 2011 4 OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF T ULIP STAR HOTELS LTD. VS. ADDL. CIT., REPORTED AS 316 ITR (AT ) 341. 5. ON THE OTHER HAND, MR. S.SRIDHAR, COUNSEL APPEAR ING ON BEHALF OF THE ASSESSEE SUBMITTED THAT THE AMOUNT IN VESTED BY THE ASSESSEE IS NOT IN THE NATURE OF CAPITAL INVEST MENT. HE CONTENDED THAT THE ASSESSEE IS NOT IN THE BUSINESS OF PRODUCT DEVELOPMENT, THE ASSESSEE IS IN THE BUSINESS OF SOF TWARE TESTING SERVICES. THE ASSESSEE ADVANCED THE AMOUNT IN PURSUANCE OF THE AGREEMENT IN ORDER TO ENHANCE ITS BUSINESS OPPORTUNITIES . HE ALSO SUBMITTED THAT THE STAND O F THE ASSESSEE THROUGHOUT HAS BEEN THAT AMOUNT WAS ADVANC ED TO M/S.SHANKAR APPLIED TECHNOLOGIES PVT. LTD. TO DEVEL OP THE PROJECT. ONCE THE PROJECT IS DEVELOPED, IT WOULD E ARN REVENUE OUT OF MARKETING OF THAT PROJECT AND THAT THE ADVAN CE GIVEN BY THE ASSESSEE WOULD ASSIST M/S.SHANKAR APPLIED TECHNOLOGIES PVT. LTD. TO COMPLETE DEVELOPMENT OF T HEIR PROJECT AT AN EARLY DATE AND IN TURN HELP THE ASSES SEE TO EARN REVENUE FOR MARKETING THE SAME. HE FURTHER SUBMITT ED THAT THE LOSS SUFFERED BY THE ASSESSEE WAS IN THE COURSE OF BUSINESS AND AS SUCH HAS BEEN RIGHTLY HELD BY THE CIT(A) AS ITA NO.148/MDS/ 2011 5 REVENUE LOSS. HE STRONGLY SUPPORTED THE ORDER PASS ED BY CIT(A) STATING IT TO BE WELL REASONED ORDER. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PARTI ES AND HAVE GONE THROUGH THE ORDERS PASSED BY THE AUTHORIT IES BELOW. A PERUSAL OF THE ASSESSMENT ORDER WOULD SHOW THAT THE ASSESSEE IN HIS WRITTEN SUBMISSIONS HAS TAKEN A CATEGORIC STAND BEFORE THE ASSESSING OFFICER THAT AN AMOUNT OF ` 15.00 LAKHS HAS BEEN ADVANCED BY THE ASSESSEE TO M/S.SHANKAR APPLIED TECHNOLOGIES PVT. LTD. TO DEVEL OP THE PRODUCT AND ALSO THAT ONCE THE PRODUCT IS DEVELOPED IT CAN EARN REVENUE OUT OF MARKETING OF THAT PRODUCT AS EA RLY AS POSSIBLE. THE ASSESSING OFFICER HOWEVER, IGNORED TH E SUBMISSIONS MADE BY THE ASSESSEE AND HAS PROCEEDED TO TREAT THE LOSS SUFFERED BY THE ASSESSEE ON ACCOUNT OF NON- RECOVERY OF ` 15 LAKHS AS CAPITAL LOSS. 7. ON APPEAL, THE CIT(A) AFTER HEARING THE SUBMIS SIONS OF BOTH THE PARTIES HAS HELD AS UNDER:- 3.4 FURTHER THE ASSISTANT COMMISSIONER HAS PROCEEDED TO DISALLOW ON THE SOLE ASSUMPTION THAT T HE SAID AMOUNT OF ADVANCE WAS INVESTMENT IN NATURE AN D ITA NO.148/MDS/ 2011 6 THEREBY IT PARTAKES THE CHARACTER OF APITAL, WHI CH IN THE REALITY IS OTHERWISE AS UNDER:- (A) AS PER THE AGREEMENT ON APPLICATION DEVELOPME NT DATED 4 TH APRIL, 2001, THE SHANKAR APPLIED TECH (P) LTD., IS OBLIGATED TO CARRY OUT THE FOLLOWING, PURS UANT TO ANNEXURE-3 OF THE SAID AGREEMENT. I) WOULD BE PRIMARILY RESPONSIBLE TO IDENTIFY AND P RIORITISE THE APPLICATION THAT NEEDS DEVELOPMENT. II) WOULD PROVIDE ALL TECHNICAL INPUTS REQUIRED FOR DEVELOPMENT. III) WOULD PROVIDE ALL TECHNICAL INPUTS REQUIRED FO R DEVELOPMENT. IV) WOULD HIRE ANY OTHER TECHNICAL OR MANAGERIAL RE SOURCE AS MAY BE NECESSARY TO DEVELOP. V) WOULD MEET ALL THE COSTS IN THIS REGARD. (B) THE ABOVE ARE FURTHER DULY COVERED BY THE COMMITMENT OR GUARANTEE ON ITS BEHALF VIDE SECTION 3 OF THE SAID AGREEMENT. (C) FURTHER, PURSUANT TO SECTION XXVI OF THE ABOVE AGREEMENT, WHICH IS TITLED AS ESSENCE OF THE AGREEMENT AND THE SAME IS REPRODUCED: ABILITY OF THE PARTNERS TO POOL THE RESOURCES IN A MEANINGFUL AND MUTUALLY BENEFICIAL MANNER FOR THIS AGREEMENT. CONFORMANCE TO THE OBLIGATIONS SET FORTH HEREIN FOR EITHER PARTY. ITA NO.148/MDS/ 2011 7 COMPLETION OF MUTUAL RESPONSIBILITIES TO THE OTHERS SATISFACTION WITHIN THE TIME LIMIT SET AND IN AN ORGANIZED MANNER. HENCE THE SUBSTANCES OF THIS AGREEMENT, PURSUANT TO WHICH THE AMOUNT PAID FOR ` 15 LAKHS IS TO ENGAGE IN PROVIDING SERVICES AND AT NO POINT OF TIME, THE ASP ECT OF INVESTMENT IS DISCUSSED IN THE SAID AGREEMENT. ACCORDINGLY, IN LINE WITH THE PRINCIPLE OF SUBSTANC E OVER FORM, THE SAID AMOUNT HAS BEEN PAID FOR FURTHERING THE INTEREST OF THE BUSINESS OF THE APPELLANT COMPANY O NLY AND WILL NOT THUS PARTAKE THE CHARACTER OF INVESTME NTS AND THUS THE ASPECT OF CAPITAL LOSS, AS CONCLUDED B Y THE ASSESSING OFFICER IS NOT CORRECT. 3.5 ON THE BASIS OF ABOVE ANALYSIS, I HOLD, THAT TH E ACTION OF THE ASSESSING OFFICER IN ADDING A SUM OF ` 15 LAKHS BEING THE ADVANCE MADE TO M/S. SHANKAR APPLIED TECH. (P) LTD. IS NOT JUSTIFIED. CONSEQUENTLY, I AL LOW THE CLAIM OF SUMS TOTALING ` 15 LAKHS IN THE COMPUTATION OF TOTAL INCOME FOR THE ASSESSMENT YEAR 2005-06 IN THE TOTAL ACCEPTANCE OF THE GROUNDS OF APPEAL IN GROUND NO.3,4,5 & 6 FORMING PART OF STATUTORY FORM 35 FILE D BEFORE YOU. 8. THE D.R. HAS RELIED ON THE JUDGEMENT PASSED BY T HE HONBLE DELHI HIGH COURT IN THE CASE OF R.G. SCIENT IFIC ITA NO.148/MDS/ 2011 8 ENTERPRISES PVT.LTD.,(SUPRA) AND THE ORDER OF THE T RIBUNAL IN THE CASE OF TULIP STAR HOTELS LTD. (SUPRA). THE FAC TS OF THE PRESENT CASE AND THE FACTS INVOLVED IN THE ABOVE CI TED JUDGEMENTS ARE DISTINGUISHABLE. IN BOTH THE CASES R EFERRED TO ABOVE THE MONEY WAS ADVANCED FOR PURCHASE OF CAPITA L ASSET AND NON-RECOVERY OF THE ADVANCE MONEY WAS HELD TO B E CAPITAL LOSS AND NOT A BUSINESS LOSS. IN THE INSTAN T CASE, THE MONEY WAS NOT ADVANCED BY THE ASSESSEE TO ACQUIRE A NY CAPITAL ASSET. THE MONEY ADVANCED BY THE ASSESSEE W AS FOR THE DEVELOPMENT OF THE PROJECT. THE ASSESSEE IS AL READY IN THE BUSINESS OF SOFTWARE VERIFICATION, VALIDATION A ND TESTING FOR VARIOUS SOFTWARE DEVELOPERS. THUS, THE JUDGEMENTS RELIED ON BY THE D.R. ARE NOT APPLICABLE TO THE PRESENT CASE. 9. THE BASIC DOCUMENT WHICH WOULD BE RELEVANT TO DE CIDE WHETHER THE AMOUNT ADVANCED BY THE ASSESSEE IS INVE STMENT OR ADVANCE IS AN AGREEMENT BETWEEN THE ASSESSEE AND M/S.SHANKAR APPLIED TECHNOLOGIES PVT. LTD. THE CIT( A) HAS TAKEN INTO CONSIDERATION THE TERMS AND CONDITIONS O F THE AGREEMENT TO ASCERTAIN THE NATURE OF AMOUNT FORWARD ED BY THE ASSESSEE TO M/S.SHANKAR APPLIED TECHNOLOGIES PVT. L TD. THE ITA NO.148/MDS/ 2011 9 CIT(A) HAS PASSED A WELL-REASONED AND DETAILED ORDE R AFTER THE ANALYSIS OF AGREEMENT AND SUBMISSIONS OF THE PA RTIES. THE AMOUNT WAS PAID BY THE ASSESSEE FOR FURTHERING ITS BUSINESS INTEREST AND NOT FOR THE PURPOSE OF INVEST MENT. THE CIT(A) APTLY CONCLUDED THAT THE AMOUNT OF ` 15 LAKHS ADVANCED BY THE ASSESSEE TO M/S.SHANKAR APPLIED TECHNOLOGIES PVT. LTD. WHICH WAS SUBSEQUENTLY NOT R ECOVERED IS A BUSINESS LOSS AND THUS ALLOWABLE AS REVENUE EX PENDITURE. WE, THEREFORE, DO NOT FIND ANY INFIRMITY IN THE ORD ER PASSED BY THE CIT(A) AND THUS, NO INTERFERENCE IN THE IMPUGNE D ORDER IS CALLED FOR. FINDING NO MERIT IN THE APPEAL OF THE R EVENUE, WE DISMISS THE SAME. ORDER PRONOUNCED IN THE OPEN COURT ON THURSDAY, T HE 31 ST OF MAY, 2012 AT CHENNAI. SD/- S D/- ( N.S. SAINI ) (VIKAS AWASTHY) ACCOUNTANT MEMBER JUDICIAL MEMBER CHENNAI, DATED THE 31 ST MAY, 2012. SOMU COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT (4) CIT(A) (5) D.R. (6) G.F .