ACIT, Hubli V. M/s Gumbi Software Pvt. Ltd., Bangalore

ITA 1520/BANG/2013

• Counselvise Citation: 152021114 RSA 2013
• Duration Of Justice: 1 year(s) 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-06-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 11-06-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 11-11-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T S N MURTHY CITIIIDR
• Assessee Lawyers: H SHAMBHU SHARMA
• Keywords: Depreciation; Additional evidence; Non-deduction of tax; Difference of opinion; Competent authority; Revenue expenditure; Capital expenditure
• Section: 194C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ITA NO. 1520/BANG/2013 ASSESSMENT YEAR : 2010-11 THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1), HUBLI. VS. M/S. GUMBI SOFTWARE PVT. LTD. NO.202, IIND FLOOR, NCM, CENTRE POINT BUILDING, NEW COTTON MARKET, HUBLI. PAN : AACCG 7830R APPELLANT RESPONDENT APPELLANT BY : SHRI T.S.N. MURTHY, CIT-III(DR) RESPONDENT BY : SHRI H. SHAMBHU SHARMA, CA DATE OF HEARING : 11.06.2015 DATE OF PRONOUNCEMENT : 23.06.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER D ATED 30.8.2013 OF THE CIT(APPEALS), HUBLI RELATING TO ASSESSMENT YEAR 2010-11. 2. GROUND NOS. 1 TO 3 READ AS FOLLOWS:- ITA NO.1520/BANG/2013 PAGE 2 OF 15 1. IN THE CIRCUMSTANCES OF THE CASE AND IN LAW. WH ETHER THE CIT(A) IS RIGHT UPHOLDING THE ASSESSEES CLAIM OF NE T OFF OF EXPORTS AND IMPORT PAYMENTS IN THE ABSENCE OF PERMI SSION FROM THE COMPETENT AUTHORITY BEFORE THE DUE DATE (ONE YE AR FROM THE DATE OF EXPORT) TO BRING IN THE EXPORT RECEIPTS. 2. IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, WH ETHER THE ASSESSEE IS ELIGIBLE FOR CLAIM OF DEDUCTION U/S 10A ON NETTING OFF EXPORTS RECEIPTS AGAINST IMPORT PAYMENTS IN VIEW OF THE SPECIFIC PROVISIONS PROVIDED U/S 10A TO BRING IN THE EXPORT PROCEEDS WITHIN THE STIPULATED TIME. 3. IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, WH ETHER THE CIT(A) WAS RIGHT IN ADMITTING THE ADDITIONAL EVIDEN CES AND ALLOWING RELIEF TO THE ASSESSEE IN VIEW OF THE PROV ISIONS OF RULE 46A. 3. THE ASSESSEE IS A COMPANY ENGAGED IN SOFTWARE DE VELOPMENT. IT WAS HAVING A UNIT REGISTERED UNDER SOFTWARE TECHNOL OGY PARK OF INDIA SCHEME (STPI), INCOME FROM WHICH WAS ELIGIBLE FOR D EDUCTION U/S. 10A OF THE INCOME-TAX ACT, 1961 [THE ACT] WHICH WAS WORK ED OUT BY THE ASSESSEE AS UNDER:- GROSS EXPORTS IN STPI UNIT (US $ 6,00,000) : RS.26 9,46,000 EXPENDITURE IN STPI UNIT : RS. 21,77,319 NET INCOME IN STPI UNIT : RS.247,68,631 4. THE ASSESSEE EXPORTED SOFTWARE WORTH US$ 6,00,00 0 ON 29-03-2010 TO EVERGO TECHNOLOGY LIMITED, HONGKONG, WHICH WAS E VIDENCED BY STPI CERTIFIED SOFTEX FORM & INVOICE. HOWEVER, THE SAID EXPORT PROCEEDS COULD NOT BE RECEIVED WITHIN 6 MONTHS FROM THE DATE OF EXPORT ; AND ACCORDINGLY AS PER RBI CIRCULAR, THE ASSESSEE SOUGHT EXTENSION UPTO 31 -03-2011 AS PER LETTER DATED 21-09-2010 FILED BEFORE THE AUTHORISED DEALER OF RESERVE BANK OF ITA NO.1520/BANG/2013 PAGE 3 OF 15 INDIA, I.E., UNION BANK OF INDIA. INCIDENTALLY RESE RVE BANK OF INDIA ALSO UNILATERALLY EXTENDED FOR REALISATION OF EXPORT PRO CEEDS UPTO 31-03-2011 AS PER ITS CIRCULAR NO. RBI/2009-10/513 A.P.(DIR SERIE S) CIRCULAR NO. 57 DATED JUNE,29,2010. 5. SUBSEQUENTLY, THE ASSESSEE IMPORTED SOFTWARE ON 18-03-2011 FROM THE SAME CUSTOMER I.E., EVERGO TECHNOLOGY LIMITED, HONGKONG, AMOUNTING TO US $ 9,94,500. IN EFFECT ON 18-03-2011, THE ST ATUS OF THE ACCOUNT OF CUSTOMER EVERGO TECHNOLOGY LIMITED, HONGKONG, INSTE AD OF RECEIVABLE, TURNED INTO PAYABLE TO THE TUNE OF US $ 3,94,500; I N VIEW OF IMPORTS FROM THE SAME CUSTOMER. 6. THE ASSESSEE HAD TWO ALTERNATE OPTIONS:- FIRST OPTION:- RECEIVING THE EXPORT PROCEEDS OF US $ 6,00,000 FROM EVERGO TECHNOLOGY; AND REPATRIATING FOR PAYMEN T OF IMPORT COST OF US$ 9,94,500 TO EVERGO TECHNOLOGY, THEREBY UNNECESSARY EFFECTING TWO-WAY TRAFFIC OF FOREIGN EXCHANGE; OR SECOND OPTION:- SETTING OFF EXPORT PROCEEDS OF US $ 6,00,000 FROM EVERGO TECHNOLOGY; AGAINST THE IMPORT COST OF US$ 9,94,500 TO EVERGO TECHNOLOGY, THEREBY AVOIDING UNN ECESSARY EFFECTING TWO-WAY TRAFFIC OF FOREIGN EXCHANGE; AND RESULTING IN AMOUNT PAYABLE US$ 3,94,500 TO EVERGO TECHNOLOGY. 7. THE ASSESSEE, BASED ON ADVICE OF EXPERTS AND ALS O KEEPING IN VIEW JUDICIAL DECISIONS (WHICH DECISIONS SPECIFICALLY PE RMITTED SETOFF WITHOUT ADVERSELY AFFECTING TAX BENEFITS), OPTED FOR THE SE COND OPTION OF SET OFF OF IMPORTS WITH EXPORTS. IN EFFECT, ON 18-03-2011, WIT HIN EXTENDED PERIOD OF ITA NO.1520/BANG/2013 PAGE 4 OF 15 31-03-2011, THE ENTIRE EXPORT PROCEEDS OF FINANCIAL YEAR 2009-10 OF US$ 6,00,000 WAS EFFECTIVELY RECEIVED BY THE ASSESSEE B Y WAY SET OFF AGAINST IMPORTS. SUBSEQUENTLY ON 24-03-2011, THE ASSESSEE EXPORTED SOFTWARE TO EVERGO TECHNOLOGY, HONGKONG TO THE TUNE OF US $ 7,5 0,000. ON THIS DATE IN VIEW OF MUTUAL EXPORTS & IMPORTS, THE ASSESSEE W AS TO RECEIVE AN AMOUNT OF US $ 3,55,500 FROM EVERGO TECHNOLOGY, HON GKONG. ACCORDINGLY, THE ASSESSEE APPLIED TO AUTHORISED DEA LER, UNION BANK OF INDIA, REQUESTING FOR NETTING OFF THE BILLS AND ALS O ASKING FOR EXTENSION OF TIME FOR GETTING BALANCE AMOUNT UPTO 31-03-2012 AS PER THE LETTER DATED 26- 03-2011. THE DETAILS OF TRANSACTIONS WITH EVERGO TE CHNOLOGY, HONGKONG OVER A PERIOD 3 FINANCIAL YEARS WERE AS UNDER: DATE OF INVOICE OR BILL NATURE OF TRANSACTIONS AMOUNT IN US $ NET EFFECT IN US $ 29.03.2010 EXPORT 6,00,000 RECEIVABLE 6,00,000 18.03.2011 IMPORT 9,94,500 PAYABLE 3,94,500 21.03.2011 EXPORT 7,50,000 RECEIVABLE 3,55,000 15.06.2011 IMPORT 3,55,500 NIL 8. THE ASSESSEE HAD APPLIED FOR SETOFF AS PER RESER VE BANK OF INDIA INSTRUCTIONS AND AS PER THE PROCEDURE APPLIED THROU GH THE AUTHORISED DEALER UNION BANK OF INDIA. THERE WAS NO DENIAL FOR REQUEST FOR PERMISSION FOR SETOFF EITHER BY THE UNION BANK OF INDIA OR BY RESERVE BANK OF INDIA, AT THE TIME OF HEARING OF THE CASE BY THE ASSESSING OF FICER. SUBSEQUENTLY, UNION BANK OF INDIA THROUGH ITS LETTER DATED 13.8.2 013 ACKNOWLEDGED SET-OFF OF IMPORTS & EXPORTS. ITA NO.1520/BANG/2013 PAGE 5 OF 15 9. THE AO, HOWEVER, DENIED THE CLAIM OF ASSESSEE FO R DEDUCTION U/S. 10A FOR THE FOLLOWING REASONS:- THE ASSESSEES PLEA CANNOT BE ACCEPTED. IN VIEW OF THE ASSESSEES SUBMISSION IT IS EVIDENT THAT THE ASSESS EE HAS NOT RECEIVED OR BROUGHT IN THE EXPORT PROCEEDS AS PROVI DED U/S 10A OF THE ACT. THE ASSESSEE HAS NOT BEEN PERMITTED BY THE AUTHORISED DEALER TO RECEIVE THE EXPORT PROCEEDS BEYOND SIX MO NTHS, AS PROVIDED U/S 10A, ON FULFILLING THE CONDITIONS AS P ER THE GUIDELINES PRESCRIBED BY THE RESERVE BANK OF INDIA. THE ASSESSEE HAS ALSO NOT FURNISHED ANY EVIDENCES FOR HAVING PER MITTED THE COMPANY BY THE COMPETENT AUTHORITY TO NET OFF ITS E XPORT PROCEEDS AGAINST IMPORT PAYMENTS. EVEN PRESUMING THAT THE ASSESSEE WAS ALLOWED TO NET OFF THE EXPORT PROCEEDS AGAINST IMPORT PAYMENTS UNDER THE FEMA REGULATIONS, THE ASS ESSEE IS NOT ENTITLED FOR CLAIMING DEDUCTION U/S 10A AS THE PROV ISIONS OF SECTION 10A(3) SPECIFICALLY PROVIDES THAT THIS SEC TION APPLIES TO THE UNDERTAKING, IF THE SALE PROCEEDS OF ARTICLES O R THINGS OR COMPUTER SOFTWARE EXPORTED OUT OF INDIA ARE RECEIVE D IN, OR BROUGHT INTO, INDIA BY THE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE, WITHIN A PERIOD OF SIX MONTHS FROM THE EN D OF THE PREVIOUS YEAR OR, WITHIN SUCH FURTHER PERIOD AS THE COMPETENT AUTHORITY MAY ALLOW IN THIS BEHALF. HENCE THE ASSE SSEES CLAIM OF DEDUCTION U/S 10A IS DISALLOWED. 10. BEFORE THE CIT(APPEALS); THE ASSESSEE, APART FR OM REITERATING THE CLAIM OF THE ASSESSEE AS MADE BEFORE THE AO; FILED A LETTER OF UNION BANK OF INDIA DATED 13.8.2013 PERMITTING THE NET OFF. T HE CIT(APPEALS) AFTER CONSIDERATION OF THE ABOVE EVIDENCE, HELD THAT THE ASSESSEE SHOULD BE ALLOWED THE BENEFIT OF DEDUCTION U/S. 10A. BEFORE THE CIT(A), THE ASSESSEE HAD PLACED RELIANCE ON THE DECISION OF THE HONBLE ALLAHABAD HIGH COURT IN CIT V. HENNA JEBRAT (2012) 21 TAXMAN.COM 314 , WHEREIN ON AN IDENTICAL PLEA BY THE ASSESSEE, WHO IMPORTED GOLD BARS FROM F OREIGN CLIENTS, ITA NO.1520/BANG/2013 PAGE 6 OF 15 EXPORTED GOLD ORNAMENTS AFTER CONVERSION, CLAIMED D EDUCTION ON THE AMOUNT OF EXPORTS, THOUGH HE HAD RECEIVED ONLY THE NET AMOUNT PAYABLE BY THE FOREIGN PARTY. THE HONBLE ALLAHABAD HIGH COUR T RELYING ON THE DECISION OF THE HONBLE SUPREME COURT IN J.B. BODA & CO. PVT. LTD., 223 ITR 271 (SC) , HELD THAT EXEMPTION U/S. 10A CANNOT BE DENIED TO THE ASSESSEE. IN THE CASE OF J.B. BODA & CO. PVT. LTD. (SUPRA) , THE HONBLE SUPREME COURT OBSERVED THAT TWO WAY TRAFFIC IS UNNE CESSARY AND THE ASSESSEE CAN ADJUST THE RECEIVABLE AGAINST PAYMENTS . THE CIT(A) ON A CONSIDERATION OF THE ABOVE SUBMISSIONS, ALLOWED THE CLAIM OF THE ASSESSEE AND OBSERVED AS FOLLOWS:- I HAVE GONE THROUGH THE FACTS OF THE CASE, CONTEN TS OF THE ASSESSMENT ORDER AND WRITTEN SUBMISSIONS OF THE ASS ESSEE. AS EXPLAINED ABOVE IN DETAIL THOUGH THE ASSESSEE WAS N OT RECEIVED THE RECEIPTS WITHIN THE STIPULATED TIME OF SIX MONT HS BUT WITHIN THE TIME HAS APPROACHED THE RBI OR AUTHORISED BANK TO PERMIT TO RECEIVE THE SALE PROCEEDS BEYOND SIX MONTHS AND THE RBI HAS GIVEN GENERAL PERMISSION THROUGH IT CIRCULAR DATED 29.06.2010 WHERE IT IS MENTIONED THAT ATTENTION OF AUTHORISED DEALER CATEGORY-1 (AD CATEGORY-1) BANKS IS INVITED TO INCR EASING THE PERIOD OF REALIZATION AND REPATRIATION TO INDIA OF THE AMOUNT REPRESENTING THE FULL EXPORT VALUE OF GOODS OR SOFT WARE EXPORTED, FROM SIX MONTHS TO TWELVE MONTHS FROM THE DATE OF E XPORT, SUBJECT TO REVIEW AFTER ONE YEAR. THE ISSUE HAS SIN CE BEEN REVIEWED AND IT HAS BEEN DECIDED, IN CONSULTATION W ITH THE GOVT. OF INDIA, TO EXTEND THE ABOVE RELAXATION UP TO MARC H 31, 2011. REGARDING THE IMPORT PAYMENTS TO BE MADE TO EVERGO TECHNOLOGY, HONGKONG. ACCORDINGLY, THE APPELLANT AP PLIED TO AUTHORISED DEALER, UNION BANK OF INDIA REQUESTING F OR NETTING OFF THE BILLS. THE HONBLE SUPREME COURT IN THE CAS E OF J B BODA & CO PVT. LTD. 223 ITR 271 HAS OBSERVED THAT TWO WA Y TRAFFIC IS UNNECESSARY AND THE ASSESSEE CAN ADJUSTED THE RECEI VABLE AGAINST THE PAYMENTS. HENCE THE CONTENTION OF THE AO THAT E XPORT RECEIPTS WERE NOT RECEIVED WITHIN SIX MONTHS OF THE STIPULATED ITA NO.1520/BANG/2013 PAGE 7 OF 15 PERIOD IS NOT JUSTIFIABLE AS THE ASSESSEE HAS APPRO ACHED THE RBI TO RECEIVE THE RECEIPTS BEYOND SIX MONTHS OF THE STIPU LATED PERIOD AND THE RBI HAS GIVEN GENERAL PERMISSION TO RECEIVE THE EXPORT PROCEEDS BEYOND THE STIPULATED TIME. HENCE THE DIS ALLOWANCE MADE BY THE AO IS DISMISSED AND THE ASSESSEES GROU ND OF APPEAL IS ALLOWED. 11. AGGRIEVED BY THE ORDER OF CIT(APPEALS), THE REV ENUE HAS PREFERRED GROUNDS NO.1 TO 3 BEFORE THE TRIBUNAL. 12. WE HAVE HEARD THE SUBMISSIONS OF THE LD. DR, WH O REITERATED THE STAND OF THE REVENUE AS REFLECTED IN THE GROUNDS OF APPEAL FILED BEFORE THE TRIBUNAL. THE LD. COUNSEL FOR THE ASSESSEE RELIED ON THE ORDER OF CIT(APPEALS). WE ARE OF THE VIEW THAT THE ORDER OF THE CIT(APPEALS) ON THIS ISSUE DOES NOT REQUIRE ANY INTERFERENCE. AS FAR AS GROUND NO.1 IS CONCERNED, IT IS SEEN THAT THE EXPORT PROCEEDS OF R S.6,00,000 US $ SHOULD HAVE BEEN REALIZED BY THE ASSESSEE BEFORE 29.3.2011 WITHIN ONE YEAR FROM THE DATE OF EXPORT. THE SAME WAS REALIZED BY THE A SSESSEE ON 18.3.2011, SINCE THE ASSESSEE IMPORTED FROM EVERGREEN TECHNOLO GY LTD. GOODS TO THE VALUE OF RS.9,94,500 US $. IN OTHER WORDS, WITHIN THE PERIOD OF ONE YEAR FROM THE DATE OF EXPORT, THE ASSESSEE IS DEEMED TO HAVE REALIZED THE EXPORT PROCEEDS AND TO HAVE MADE PAYMENT TO THE FOR EIGN PARTY EQUIVALENT TO 3,94,500 US $. THE ASSESSEE ALSO APPLIED TO THE COMPETENT AUTHORITY I.E., UNION BANK OF INDIA, AUTHORISED DEALER OF RBI , FOR GIVING A FORMAL APPROVAL FOR NET OFF OF EXPORTS RECEIVABLE AGAINST IMPORT PAYABLE. THE COMPETENT AUTHORITY DID NOT REJECT THE APPLICATION FOR NET OFF WITHIN THE ITA NO.1520/BANG/2013 PAGE 8 OF 15 STIPULATED PERIOD OF ONE YEAR OR TILL THE PASSING O F THE ASSESSMENT ORDER BY THE AO. IN SUCH CIRCUMSTANCES, IT HAS BEEN HELD IN SEVERAL DECISIONS THAT THE PERMISSION APPLIED IS DEEMED TO HAVE BEEN ALLOW ED. IN THIS REGARD, THE DECISION OF THE ITAT BANGALORE IN THE CASE OF WIPRO LTD. V. DCIT IN ITA NOS. 426 & 427/BANG/2006 FOR A.Y. 2001-02 & 2002-03 , HAS BEEN RIGHTLY RELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE BEF ORE THE CIT(A). BESIDES THE ABOVE, ON 13.8.2013, UNION BANK OF INDIA ALLOWE D THE CLAIM OF ASSESSEE FOR NET OFF. THE SAID LETTER IS PLACED AT PAGE 59 OF ASSESSEES PAPERBOOK. IN FACT, THE RBI EXCHANGE CONTROL DEPAR TMENT HAS IN ITS CIRCULAR NO.91 DATED 1.4.2003 LAID DOWN THE FOLLOWI NG CONDITIONS FOR NETTING OFF:- D. NETTING OFF OF EXPORT RECEIVABLES AGAINST IMPORT PA YMENTS IT HAS BEEN DECIDED THAT AUTHORISED DEALERS MAY AL LOW REQUESTS RECEIVED FROM EXPORTERS FOR NETTING OFF OF EXPORT RECEIVABLES AGAINST IMPORT PAYMENTS FOR UNITS LOCAT ED IN SPECIAL ECONOMIC ZONES SUBJECT TO THE FOLLOWING: (I) THE NETTING OFF OF EXPORT RECEIVABLES AGAINS T IMPORT PAYMENTS IS IN RESPECT OF THE SAME INDIAN ENTITY AN D THE OVERSEAS BUYER / SUPPLIER ( BILATERAL NETTING ). TH E NETTING MAY BE DONE AS ON DATE OF BALANCE SHEET OF THE UNIT IN SEZ. (II) THE DETAILS OF EXPORT OF GOODS IS DOCUMENTED IN GR(O) FORMS/DTR AS THE CASE MAY BE WHILE DETAILS OF IMPOR T OF GOODS / SERVICES IS RECORDED THROUGH AL/A2 FORM AS THE CASE MAY BE. THE RELATIVE GR / SDF FORMS WILL BE TREATED AS COMPLETE BY THE DESIGNATED AUTHORISED DEALER ONLY A FTER THE ENTIRE PROCEEDS ARE ADJUSTED / RECEIVED. (III) BOTH THE TRANSACTIONS OF SALE AND PURCHASE I N R RETURNS UNDER FET-ERS ARE REPORTED SEPARATELY. ITA NO.1520/BANG/2013 PAGE 9 OF 15 (IV) THE EXPORT / IMPORT TRANSACTIONS WITH ACU COU NTRIES ARE KEPT OUTSIDE THE ARRANGEMENT. (V) ALL THE RELEVANT DOCUMENTS ARE SUBMITTED TO TH E CONCERNED AUTHORISED DEALER WHO SHOULD COMPLY WITH ALL THE RE GULATORY REQUIREMENTS RELATING TO THE TRANSACTIONS. 13. IT IS IN ACCORDANCE WITH THIS CIRCULAR THAT THE AUTHORISED DEALER HAS GRANTED THE REQUISITE PERMISSION TO THE ASSESSEE. IN SUCH CIRCUMSTANCES, WE ARE OF THE VIEW THAT THERE IS NO MERIT IN GROUND NO.1 RAISED BY THE REVENUE. 14. AS FAR AS GROUND NO.2 IS CONCERNED, THE DECISIO N OF THE ALLAHABAD HIGH COURT IN THE CASE OF HENNA JEBART (SUPRA) AND THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF J.B. BODA & CO. PVT. LTD. (SUPRA) REFERRED TO IN THE EARLIER PART OF THIS ORDER, CLEA RLY SUPPORT THE CONCLUSIONS ARRIVED AT BY THE CIT(APPEALS). 15. WITH REGARD TO GROUND NO.3, THE ORDER OF ASSESS MENT WAS PASSED ON 11.3.2013, WHEREAS THE PERMISSION OF UNION BANK OF INDIA, THE AUTHORISED DEALER, ALLOWING NET OFF IS DATED 13.8.2013. THIS DOCUMENT COULD NOT HAVE BEEN FILED BEFORE THE AO. IN SUCH CIRCUMSTANCES, T HE PROVISIONS OF RULE 46A(1)(B) OR (C) WILL BE APPLICABLE. EVEN OTHERWI SE, UNDER THE PROVISIONS OF RULE 46A(4), THE COMMISSIONER HAD POWER TO CALL FOR EVIDENCE NECESSARY FOR ADJUDICATION OF THE APPEAL. ACCORDINGLY, NO FA ULT CAN BE FOUND WITH THE ORDER OF CIT(APPEALS) ON THE GROUND THAT ADDITIONAL EVIDENCE OUGHT NOT TO HAVE BEEN ADMITTED. ITA NO.1520/BANG/2013 PAGE 10 OF 15 16. FOR THE REASONS GIVEN ABOVE, WE CONFIRM THE ORD ER OF THE CIT(APPEALS) AND DISMISS GROUNDS NO.1 TO 3 RAISED B Y THE REVENUE. 17. GROUND NOS. 4 & 5 READ AS FOLLOWS:- 4. IN THE CIRCUMSTANCES OF THE CASE AND IN LAW WH ETHER THE CIT(A) IS RIGHT IN HOLDING THAT THE PROVISIONS OF S ECTION 40(A)(IA) CANNOT HE INVOKED IN RESPECT OF DEFAULT IN SHORT DE DUCTION OF TAX. 5. IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, WH ETHER THE CIT(A) IS RIGHT IN HOLDING THAT PURCHASE OF UPS BAT TERIES ARE IN THE NATURE OF REVENUE EXPENSES. 18. THE FACTS NECESSARY FOR ADJUDICATION OF THE AFO RESAID GROUNDS ARE AS FOLLOWS. THE GOVT. OF KARNATAKA THROUGH KARNATAKA STATE ELECTRONICS DEVELOPMENT CORPORATION LTD. (KEONICS) WAS IMPLEMEN TING CET RURAL TRAINING PROGRAMME 2009-10. THE ASSESSEE HAS DEVEL OPED TECHNOLOGY FOR PROVIDING ONLINE CLASSES TO THE CET CATALYST CO URSE. THE ASSESSEE WAS ACCORDINGLY ENGAGED BY THE STATE OF KARNATAKA TO IM PLEMENT THE CET RURAL TRAINING PROGRAMME. THE ASSESSEE ENGAGED M/S. KEN COMPUTEK PVT. LTD. [KCPL] TO CARRY OUT ITS OBLIGATION UNDER THE AGREEM ENT WITH THE STATE OF KARNATAKA. KCPL RENDERED SERVICES AND RAISED BILLS FOR PAYMENT FOR THE SERVICES RENDERED. ASSESSEE PAID A SUM OF RS.5,85, 25,180 TO KCPL. ASSESSEE DEDUCTED THE TAX AT SOURCE ON THE SAID PAY MENT TO KCPL @ 2% AS REQUIRED U/S. 194C OF THE ACT. ACCORDING TO THE AO, THE SERVICES RENDERED BY KCPL WAS IN THE NATURE OF FEES FOR PROF ESSIONAL OR TECHNICAL SERVICES, FALLING WITHIN THE AMBIT OF SECTION 194J OF THE ACT, AND THEREFORE ITA NO.1520/BANG/2013 PAGE 11 OF 15 THE ASSESSEE OUGHT TO HAVE DEDUCTED TAX AT SOURCE @ 10% ON THE PAYMENT. THE AO THEREFORE INVOKED THE PROVISIONS O F SECTION 40(A)(IA) OF THE ACT AND DISALLOWED A SUM OF RS.4,68,20,140 AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. THE FOLLOWING WERE THE OBSERVATIONS OF THE AO IN THIS REGARD:- THUS IN ACCORDANCE WITH THE PROVISIONS OF SE CTION 194J (UNDER CHAPTER XVII-B), THE ASSESSEE WAS REQUIRED T O DEDUCT TAX @ 10% ON THE AGGREGATE AMOUNT OF RS. RS. 5,85,25,18 0/-, WHICH WORKS OUT TO RS. 58,52,518/-. BUT THE ASSESSEE HAS ONLY DEDUCTED TAX OF RS. 11,70,504/-. HENCE THE TAX OF RS. 46,82, 014/-, WHICH IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XVII-B, AND SUCH TAX HAS NOT BEEN DEDUCTED, AS PROVIDED U/S 40(A)(IA) OF THE ACT . IN VIEW OF THE SPECIFIC PROVISIONS OF SECTION 40(A)(IA), THE ASSES SEE HAS FAILED TO DEDUCT TAX U/S 194J TO THE EXTENT RS.46,82,014/- AG AINST THE PAYMENTS MADE TO M/S. KEN COMPUTEK , WHICH ARE IN T HE NATURE OF FEES FOR PROFESSIONAL AND TECHNICAL SERVICES WIT HIN THE MEANING OF THE PROVISIONS OF SECTION 194J OF THE ACT, AND H ENCE THE CORRESPONDING PAYMENTS OF RS. 4,68,20,140/- IS DISA LLOWED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 40(A)IA) OF THE ACT. 19. APART FROM THE ABOVE, THE ASSESSEE AS A PART OF IMPLEMENTATION OF THE SAID CET RURAL TRAINING PROGRAMME 2009-10 INSTA LLED UPS IN VARIOUS TRAINING CENTRES. AS PER THE AGREEMENT, UPS WAS AL SO TO BE PROVIDED TO THE TRAINING CENTRES AND WAS PART OF THE SERVICES T O BE RENDERED BY THE ASSESSEE. ACCORDING TO THE ASSESSEE, SINCE THE UPS HAD TO BE PROVIDED ON A PERMANENT BASIS AT THE TRAINING CENTRES, IT HA D PURCHASED UPS AND SHOWN THE COST IN THE DEBIT SIDE OF THE P&L ACCOUNT AND THE AMOUNTS PAID FOR THE SERVICES RENDERED BY THE ASSESSEE WERE SHOW N IN THE CREDIT SIDE. ACCORDING TO THE ASSESSEE, IT WAS A CASE OF PURCHAS E AND SALE OF UPS AND ITA NO.1520/BANG/2013 PAGE 12 OF 15 THEREFORE THE EXPENDITURE WAS PURELY REVENUE EXPEND ITURE AS FAR AS THE ASSESSEE IS CONCERNED. THE ASSESSEE ALSO MADE IT C LEAR THAT UPS WAS NOT ITS TRADING APPARATUS. THE AO, HOWEVER, DISALLOWED THE COST OF UPS AS A CAPITAL EXPENDITURE AND ACCORDINGLY DISALLOWED A SU M OF RS.7,80,091. THIS SUM WAS ARRIVED AT BY DISALLOWING THE ENTIRE CAPITA L EXPENDITURE OF RS.9,18,789 AND REDUCING DEPRECIATION ALLOWED BY TH E AO OF RS.1,37,818. 20. ON APPEAL BY THE ASSESSEE, ON THE QUESTION, WHE THER DISALLOWANCE CAN BE MADE U/S. 40(A)(IA) OF THE ACT IN A CASE WHE RE THERE HAS BEEN SHORT DEDUCTION OF TAX AT SOURCE, THE CIT(APPEALS) WAS OF THE VIEW THAT FOR SHORT DEDUCTION OF TAX AT SOURCE, THERE CANNOT BE ANY DIS ALLOWANCE U/S. 40(A)(IA). IN COMING TO THE AFORESAID CONCLUSION, THE CIT(APPE ALS) RELIED ON THE DECISION OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT V. S.K. TEKRIWAL, ITA NO.183/2012, WHEREIN IT WAS HELD THAT DISALLOWANCE U/S. 40(A)(IA) CANNOT BE MADE WHEN THERE IS A SHORT DEDU CTION OF TAX AT SOURCE AND CAN BE MADE ONLY WHEN THERE IS NON-DEDUCTION OF TAX AT SOURCE. 21. WITH REGARD TO THE COST OF UPS WHICH WAS TREATE D AS CAPITAL EXPENDITURE BY THE AO, THE CIT(APPEALS) ALLOWED THE CLAIM OF THE ASSESSEE OBSERVING AS FOLLOWS:- I HAVE GONE THROUGH THE FACTS OF THE CASE, CONTENT S OF THE ASSESSMENT ORDER AND WRITTEN SUBMISSION OF THE ASSE SSEE. THE ASSESSEE HAS PRODUCED A LETTER ISSUED BY KARNATAKA STATE ELECTRONICS DEVELOPMENT CORPORATION LTD, THE GOVT. OF KARNATAKA ISSUED ON 16.10.2009 WHERE IT IS MENTIONE D THAT AS PER THE AGREED TERMS WE HEREBY INFORM YOU THAT THE BATT ERIES WITH UPS TO BE INSTALLED FOR POWER BACK UP AT RURAL PU C OLLEGES FOR ITA NO.1520/BANG/2013 PAGE 13 OF 15 CET RURAL TRAINING PROGRAME 2009-10 AND SHALL BE HA NDED OVER TO THE RESPECTIVE COLLEGES AFTER THE COMPLETION OF THE TRAINING PROGRAMME. KINDLY INFORM THE NODAL EXECUTIVES REGAR DING THE SAME. THE ASSESSEE HAD CLAIMED THE BATTERIES THAT W ERE PURCHASED ARE TO BE HANDED OVER WITH UPS TO THE RESPECTIVE RU RAL PU COLLEGES AND BATTERIES ARE NO LONGER WITH THE ASSES SEE AND THE SAME MAY BE CONSIDERED AS A REVENUE EXPENDITURE. AS THE SAME INFORMATION NOT AVAILABLE WITH THE AO AT THE TIME O F PASSING THE SCRUTINY ASSESSMENT ORDER, THE CONTENTION OF THE AS SESSEE THAT THE EXPENDITURE INCURRED FOR PURCHASE OF BATTERIES AS W HICH WERE HANDOVER ALONG WITH UPS AND THE INSTRUMENT WAS NO L ONGER WITH THE ASSESSEE AND THE SAME HAS TO BE CONSIDERED AS A REVENUE EXPENDITURE AS CONTENDED BY THE ASSESSEE. THE ASSES SEES CONTENTION IS AGREED AND THE ADDITION MADE BY THE A O IS DELETED. 22. AGGRIEVED BY THE ORDER OF CIT(APPEALS), THE REV ENUE HAS RAISED GROUNDS 4 & 5 BEFORE THE TRIBUNAL. 23. WE HAVE HEARD THE SUBMISSIONS OF THE LD. DR, WH O RELIED ON THE ORDER OF THE AO. 24. WE HAVE CONSIDERED HIS SUBMISSIONS, AS FAR AS DISALLOWANCE U/S. 40(A)(IA) OF THE ACT IS CONCERNED, WE ARE OF THE V IEW THAT DISALLOWANCE U/S 40(A)(IA) SHALL NOT BE MADE MERELY BECAUSE TDS HAS BEEN DEDUCTED U/S 194C INSTEAD OF SECTION 194J. IN ADIT, INTERNATIONAL TAXATION VS. EXPRESS DRILLING SYSTEMS LLC (ITAT DELHI), ITA NO.751/DEL/2 013, DATED 09TH JANUARY, 2015 , IT WAS HELD THAT THE PROVISIONS OF SECTION 40(A)( IA) OF THE ACT HAS TWO LIMBS; ONE IS WHERE, INTER ALIA , ASSESSEE HAS TO DEDUCT TAX; AND THE SECOND WHERE AFTER DEDUCTING TAX, INTER ALIA , THE ASSESSEE HAS TO PAY INTO GOVERNMENT ACCOUNT. THERE IS NOTHING IN THE SAID SE CTION TO TREAT, INTER ALIA , ITA NO.1520/BANG/2013 PAGE 14 OF 15 THE ASSESSEE AS DEFAULTER WHERE THERE IS A SHORT FA LL IN DEDUCTION. WITH REGARD TO THE SHORT FALL, IT CANNOT BE ASSUMED THAT THERE IS A DEFAULT AS THE DEDUCTION IS NOT AS REQUIRED BY OR UNDER THE ACT, B UT THE FACTS IS THAT THIS EXPRESSION, ON WHICH TAX IS DEDUCTIBLE AT SOURCE U NDER CHAPTER XVLL-B AND SUCH TAX HAS NOT BEEN DEDUCTED OR, AFTER DEDUCTION HAS NOT BEEN PAID ON OR BEFORE THE DUE DATE SPECIFIED IN SUB SECTION(1) OF SECTION 139. THUS SECTION 40(A)(IA) OF THE ACT REFERS ONLY TO THE DUT Y TO DEDUCT TAX AND PAY TO GOVERNMENT ACCOUNT. IF THERE IS ANY SHORTFALL DUE T O ANY DIFFERENCE OF OPINION AS TO THE TAXABILITY OF ANY ITEM OR THE NAT URE OF PAYMENTS FALLING UNDER VARIOUS TDS PROVISIONS, THE ASSESSEE CAN BE D ECLARED TO BE AN ASSESSEE IN DEFAULT U/S 201 OF THE ACT AND NO DISAL LOWANCE CAN BE MADE BY INVOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. THE LAW HAS HOWEVER BEEN PROSPECTIVELY AMENDED W.E.F. AY 2015-1 6. IN VIEW OF THE ABOVE LEGAL POSITION, WE ARE OF THE VIEW THAT NO FA ULT CAN BE FOUND WITH THE ORDER OF THE CIT(A) ON THIS ISSUE. 25. AS FAR AS THE EXPENDITURE ON PURCHASE OF UPS IS CONCERNED, UPS CANNOT BE CLAIMED BACK BY THE ASSESSEE FROM THE RUR AL COLLEGES IN WHICH IT IS INSTALLED AS A PART OF THE CET RURAL TRAINING PR OGRAMME AND AS PER THE TERMS OF AGREEMENT BETWEEN THE ASSESSEE AND STATE O F KARNATAKA. THIS WAS MADE VERY CLEAR BY THE DIRECTOR, DEPARTMENT OF PRE-UNIVERSITY EDUCATION, GOVT. OF KARNATAKA IN ITS COMMUNICATION DATED 7.10.2009. UPS, THEREFORE, WAS NOT AN APPARATUS WITH WHICH THE ASSE SSEE CARRIED ON ITS BUSINESS, BUT HAD BEEN GIVEN TO THE RURAL COLLEGES AS A PART AND PARCEL OF ITA NO.1520/BANG/2013 PAGE 15 OF 15 THE SERVICES RENDERED BY THE ASSESSEE. IT IS ON TH IS BASIS THAT THE CIT(APPEALS) HAS TREATED THE EXPENDITURE AS REVENUE EXPENDITURE. 26. WE ARE OF THE VIEW THAT THE CONCLUSIONS DRAWN B Y THE CIT(APPEALS) IN THIS REGARD ARE ACCEPTABLE AND CALLS FOR NO INTE RFERENCE. 27. FOR THE REASONS GIVEN ABOVE, GROUNDS NO. 4 & 5 ARE ALSO DISMISSED. 28. IN THE RESULT, THE APPEAL BY THE REVENUE IS DIS MISSED. PRONOUNCED IN THE OPEN COURT ON THIS 23 RD DAY OF JUNE, 2015. SD/- SD/- ( ABRAHAM P. GEORGE ) ( N.V. VASU DEVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER BANGALORE, DATED, THE 23 RD JUNE, 2015. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.