ACIT, CHENNAI V. M/s. Nine Star Information Technologies Ltd., CHENNAI

ITA 1650/CHNY/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 7739 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-04-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 02-04-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 07-10-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: RAJA GANAPAT HI
• Keywords: Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER I.T.A. NO. 1650/MDS/2011 (ASSESSMENT YEAR : 2006-07) THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE IV(4), CHENNAI - 600 034 . (APPELLANT) V. M/S NINE STAR INFORMATION TECHNOLOGIES LTD., ANURAG, NO.72, GREAMS ROAD, THOUSAND LIGHTS, CHENNAI - 600006 PAN : AABCN0949B (RESPONDENT) APPELLANT BY : SHRI PRAMOD KUMAR, CIT-DR RESPONDENT BY : SHRI RAJA GANAPAT HI DATE OF HEARING : 02.04.2012 DATE OF PRONOUNCEMENT : 02.04.2012 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE REVENUE, ITS GRIEVANC E IS THAT COMMISSIONER OF INCOME TAX (APPEALS)-VI, CHENNAI, V IDE HIS ORDER DATED 26.7.2011, ALLOWED A CLAIM OF ` 86,47,623/- OF THE ASSESSEE AS REVENUE EXPENDITURE. I.T.A. NO. 1650/MDS/11 2 2. SHORT FACTS APROPOS ARE THAT ASSESSEE ENGAGED IN THE BUSINESS OF E-PUBLISHING, HAD FILED ITS RETURN FOR IMPUGNED ASSESSMENT YEAR, WHICH WAS DULY PROCESSED UNDER SECTION 143(1) OF IN COME-TAX ACT, 1961 (IN SHORT 'THE ACT'). LATER ON, ASSESSEES CA SE WAS SELECTED FOR SCRUTINY. DURING THE COURSE OF SCRUTINY PROCEEDING S, IT WAS NOTED BY THE ASSESSING OFFICER THAT ASSESSEE HAD SHOWN A SUM OF ` 2,51,40,055/- AS CAPITAL WORK-IN-PROGRESS IN ITS BA LANCE SHEET. IN THE NOTES TO THE BALANCE SHEET, ASSESSEE EXPLAINED SUCH SUM AS EXPENSES FOR R&D FOR SOFTWARE DEVELOPMENT, WHICH WA S CAPITALIZED. ASSESSING OFFICER FROM THE COMPUTATION OF INCOME NO TED THAT ASSESSEE HAD CHARGED A SUM OF ` 86,47,623/- COMING WITHIN THE TOTAL AMOUNT OF ` 2,51,40,055/-, AS A REVENUE OUTGO. EXPLANATION WA S SOUGHT FROM THE ASSESSEE AS TO WHY THE SAID CLAIM S HOULD NOT BE DISALLOWED. IN REPLY, ASSESSEE SUBMITTED THAT IT H AD INCURRED CERTAIN EXPENDITURE FOR DEVELOPMENT OF SOFTWARE FOR GETTING COMMITTED ORDERS. AS PER THE ASSESSEE, THE EXPENSES INCURRED FOR SUCH DEVELOPMENT WERE PERIOD COSTS. SINCE SOME OF THE ORDERS WERE D ELAYED, IN THE BOOKS PRO RATA EXPENSES WERE SHOWN AS PART OF WORK- IN-PROGRESS FOR HAVING IMPRESSIVE ACCOUNTING STATEMENTS. FURTHER, AS PER THE ASSESSEE, THE AMOUNTS WERE EXPENSES ELIGIBLE FOR CH ARGING AGAINST INCOME IN THE SUCCEEDING FINANCIAL YEAR TO THE EXTE NT IT WAS NOT I.T.A. NO. 1650/MDS/11 3 CLAIMED IN THE IMPUGNED ASSESSMENT YEAR. AS PER TH E ASSESSEE, IT HAD NOT MADE ANY FURTHER CLAIM IN THE SUCCEEDING YE AR. A.O. FROM THE ABOVE SUBMISSION WAS OF THE OPINION THAT IT WAS AN ADMITTED POSITION THAT SUCH EXPENSES WERE ELIGIBLE FOR CHARGING AGAIN ST THE INCOME IN THE SUCCEEDING FINANCIAL YEAR. AS PER THE A.O., SU CH EXPENDITURE BROUGHT AN ENDURING BENEFIT TO THE ASSESSEE. HE, THEREFORE, CONSIDERED THE CLAIM NOT TO BE ALLOWABLE AND SUCH C LAIM MADE THROUGH THE INCOME COMPUTATION STATEMENT WAS DISALL OWED. 3. IN ITS APPEAL BEFORE LD. CIT(APPEALS), ARGUMENT OF THE ASSESSEE WAS THAT A BREAK-UP OF THE EXPENDITURE WAS SUBMITTE D TO THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT P ROCEEDINGS. AS PER THE ASSESSEE, THE AMOUNT OF ` 86,47,623/- DISALLOWED BY THE A.O. COMPRISED OF RENT FOR CHENNAI OFFICE ` 72,45,000/-, RENT FOR BANGALORE OFFICE ` 11,79,000/- AND ELECTRICITY CHARGES OF ` 2,23,623/-. CLAIM OF THE ASSESSEE WAS THAT THESE WERE ALLOWABLE UNDER SE CTION 30 OF THE ACT AND IN ANY CASE, THESE WERE EXPENDITURE WHOLLY ATTRIBUTABLE TO ITS BUSINESS ACTIVITIES. ALTERNATIVELY, IT WAS SUBMITT ED THAT THE CLAIM WAS ALSO ALLOWABLE UNDER SECTION 35(1)(I) OF THE ACT. RELIANCE WAS PLACED ON THE DECISION OF HONBLE APEX COURT IN THE CASE O F KEDARNATH JUTE MANUFACTURING CO. LTD. V. CIT (82 ITR 363) IN ADDIT ION TO THE I.T.A. NO. 1650/MDS/11 4 DECISIONS OF ANDHRA PRADESH HIGH COURT IN THE CASE OF NATHMAL BANKATIAL PRIKS & CO. V. CIT (122 ITR 168) AND KARN ATAKA HIGH COURT IN THE CASE OF HANUMAN MOTOR SERVICE V. CIT (66 ITR 88). LD. CIT(APPEALS), RELYING ON THE DECISION OF HONBLE AP EX COURT IN THE CASE OF KEDARNATH JUTE MANUFACTURING CO. LTD. (SUPR A), HELD THAT THE EXPENSES CLAIMED BY THE ASSESSEE WERE ESSENTIALLY P ERIOD COSTS. ACCORDING TO LD. CIT(APPEALS), TREATMENT IN THE BOO KS OF ACCOUNTS WAS NOT RELEVANT FOR CONSIDERING WHETHER A DEDUCTIO N CLAIMED BY THE ASSESSEE WAS ALLOWABLE OR NOT. HE, THEREFORE, DELE TED THE DISALLOWANCE. 4. NOW BEFORE US, LEARNED D.R., STRONGLY ATTACKING THE ORDER OF LD. CIT(APPEALS), SUBMITTED THAT ASSESSEE ITSELF HAD SH OWN SUCH AMOUNT AS PART OF CAPITAL WORK-IN-PROGRESS. ACCORDING TO HIM, SOFTWARE IS CONSIDERED AS AN ASSET AND EXPENDITURE INCURRED FOR DEVELOPMENT OF SOFTWARE WHICH WAS SHOWN AS PART OF WORK-IN-PROGRES S OUGHT NOT HAVE BEEN ALLOWED BY LD. CIT(APPEALS) AS REVENUE EX PENDITURE FOR TAX PURPOSES. IN ANY CASE, ACCORDING TO LEARNED D. R., LD. CIT(APPEALS) RELIED ON A BREAK-UP FURNISHED BY THE ASSESSEE FOR ALLOWING THE CLAIM, WITHOUT GETTING A REPORT OF THE ASSESSING OFFICER. I.T.A. NO. 1650/MDS/11 5 5. PER CONTRA, LEARNED A.R. SUBMITTED THAT DETAILS OF BREAK-UP WERE SUBMITTED BEFORE THE ASSESSING OFFICER. HOWEVER, THE ASSESSING OFFICER FAILED TO CONSIDER SUCH BREAK-UP. AS PER T HE LEARNED A.R., TREATMENT IN THE BOOKS OF ACCOUNTS WAS NOT RELEVANT FOR THE PURPOSE OF DETERMINING WHETHER A CLAIM OF THE ASSESSEE WAS ALLOWABLE IN THE ACT OR NOT. THE SOLE CRITERIA WAS WHETHER EXPENDIT URE WAS INCURRED WHOLLY FOR THE PURPOSE OF BUSINESS. BY THE VERY NA TURE OF EXPENSES WHICH WERE RENT AND ELECTRICITY CHARGES, IT WAS AN ALLOWABLE REVENUE OUTGO. LD. CIT(APPEALS) WAS VERY MUCH CORRECT IN D ELETING THE DISALLOWANCE. HE ARGUED THAT THE ORDER OF LD. CIT( APPEALS) HAD TO BE SUSTAINED. 6. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. THE TOTAL AMOUNT OF EXPENSES CAPITALIZED BY THE ASS ESSEE IN ITS BOOKS OF ACCOUNTS AS PART OF WORK-IN-PROGRESS WAS ` 2,52,40,055/-. IT IS NOT DISPUTED THAT THE SUM OF ` 86,47,623/- CONSIDERED FOR DISALLOWANCE BY THE ASSESSING OFFICER WAS PART OF T HE ABOVE AMOUNT. ASSESSEE WAS ADMITTEDLY ENGAGED IN THE BUSINESS OF ELECTRONIC PUBLISHING. ELECTRONIC PUBLISHING DEFINITELY REQUI RED DEVELOPMENT OF SOFTWARE AND SUCH SOFTWARE DEVELOPED BY ITS VERY NA TURE WILL RESULT IN ENDURING BENEFIT TO THE ASSESSEE. FOR DEVELOPMENT OF SUCH SOFTWARE, I.T.A. NO. 1650/MDS/11 6 ASSESSEE HAD INCURRED EXPENSES AND SHOWN SUCH EXPEN SES AS PART OF ITS CAPITAL WORK-IN-PROGRESS. THIS TREATMENT WA S APPARENTLY IN ACCORDANCE WITH ACCOUNTING STANDARDS IN RESPECT OF ACCOUNTING FOR SOFTWARE EXPENSES. HOWEVER, ASSESSEE CHOSE TO CLA IM A SUM OF ` 86,47,623/- AS A REVENUE OUTGO IN ITS COMPUTATION S TATEMENT. CLAIM OF THE ASSESSEE WAS THAT THIS WAS RENT AND ELECTRIC ITY AND HAVING BEEN INCURRED WHOLLY FOR THE PURPOSE OF BUSINESS WA S ALLOWABLE AS REVENUE OUTGO AND/OR UNDER SECTION 30 OF THE ACT. NO DOUBT, AS ARGUED BY THE ASSESSEE, TREATMENT IN THE BOOKS OF A CCOUNTS CANNOT BE A SOLE DETERMINANT FOR DECIDING ALLOWABILITY OF AN AMOUNT UNDER THE ACT. HOWEVER, IN OUR OPINION, TREATMENT IN THE BO OKS OF ACCOUNTS IS A POINTER AS TO HOW THE ASSESSEE ITSELF TREATED THE O UTGO FOR THE PURPOSE OF ITS BUSINESS. HONBLE APEX COURT IN TH E CASE OF CIT V WOODWARD GOVERNOR INDIA P.LTD (312 ITR 254), IN PAR A 21 OF ITS ORDER, HAS HELD AS UNDER:- 21. IN CONCLUSION, WE MAY STATE THAT IN ORDER TO FI ND OUT IF AN EXPENDITURE IS DEDUCTIBLE THE FOLLOWING HAVE TO BE TAKEN INTO ACCOUNT (I) WHETHER THE SYSTEM OF ACCOUNTING FOLLOW ED BY THE ASSESSEE IS MERCANTILE SYSTEM, WHICH BRINGS INTO DE BIT THE EXPENDITURE AMOUNT FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY DISBURSED AND BRINGS INTO CRE DIT WHAT IS DUE, IMMEDIATELY IT BECOMES DUE AND BEFORE IT IS ACTUALL Y RECEIVED; (II) WHETHER THE SAME SYSTEM IS FOLLOWED BY THE ASSESSEE FROM THE VERY BEGINNING AND IF THERE WAS A CHANGE IN THE SYS TEM, WHETHER I.T.A. NO. 1650/MDS/11 7 THE CHANGE WAS BONA FIDE; (III) WHETHER THE ASSESSE E HAS GIVEN THE SAME TREATMENT TO LOSSES CLAIMED TO HAVE ACCRUE D AND TO THE GAINS THAT MAY ACCRUE TO IT; (IV) WHETHER THE ASSES SEE HAS BEEN CONSISTENT AND DEFINITE IN MAKING ENTRIES INTEREST HE ACCOUNT BOOKS IN RESPECT OF LOSSES AND GAINS; (V) WHETHER T HE METHOD ADOPTED BY THE ASSESSEE FOR MAKING ENTRIES IN THE B OOKS BOTH IN RESPECT OF LOSSES AND GAINS IS AS PER NATIONALLY AC CEPTED ACCOUNTING STANDARDS; (VI) WHETHER THE SYSTEM ADOPT ED BY THE ASSESSEE IS FAIR AND REASONABLE OR IS ADOPTED ONLY WITH A VIEW TO REDUCING THE INCIDENCE OF TAXATION. IT IS CLEAR FROM THE ABOVE DECISION OF HONBLE APEX COURT THAT TREATMENT IN THE BOOKS OF ACCOUNTS HAS A STRONG BEA RING ON DETERMINING WHETHER AN AMOUNT IS ALLOWABLE OR NOT. WE ARE OF THE OPINION THAT NONE OF THE AUTHORITIES BELOW CONSIDER ED THE RELEVANT ACCOUNTING STANDARDS AND NATURE OF BUSINESS OF THE ASSESSEE WHILE DECIDING THE ISSUE. LD. CIT(APPEALS) FELL IN ERROR IN GIVING ALLOWANCE TO THE ASSESSEE WITHOUT VERIFYING SUCH ASPECTS. IN OUR OPINION, THE MATTER REQUIRES A RE-VISIT BY THE A.O. WE, THEREFO RE, SET ASIDE THE ORDERS OF AUTHORITIES BELOW AND REMIT THE ISSUE REG ARDING ALLOWABILITY OF CLAIM OF THE ASSESSEE BACK TO THE FILE OF THE A. O. FOR FRESH CONSIDERATION IN ACCORDANCE WITH LAW AND AFTER CONS IDERING THE NATURE OF BUSINESS OF THE ASSESSEE. 7. IN THE RESULT, APPEAL FILED BY THE REVENUE IS AL LOWED FOR STATISTICAL PURPOSES. I.T.A. NO. 1650/MDS/11 8 ORDER PRONOUNCED IN THE OPEN COURT AFTER CONCLUSION OF HEARING ON 2 ND APRIL, 2012. SD/- SD/- (CHALLA NAGENDRA PRASAD) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 2 ND APRIL, 2012. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A)-VI, CHENNAI (4) CIT-III, CHENNAI (5) D.R. (6) GUARD FILE