3DI SYSTEMS INDIA P. LTD, NAVI MUMBAI V. ITO 10(3)(4), MUMBAI

ITA 1746/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75296 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-01-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 13-01-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 13-03-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SONIA KUMAR
• Assessee Lawyers: MANISH J SHETH
• Keywords: Depreciation; Opportunity of being heard; Capital expenditure
• Section: 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI R.C.SHARMA, ACCOUNTANT MEMBER AND DR.S.T.M.PAVALAN, JUDICIAL MEMBER ITA NO. 1746/MUM/2012 ASSESSMENT YEAR: 2009-10 3DI SYSTEMS INDIA P.LTD 409, BLDG NO.2 SECTOR-IM MILLENNIUM BUSINESS PARK, MAHAPE, NAVI MUMBAI-400710. PAN:- AAACZ 1972H VS. ITO 10(3)(4), MUMBAI APPELLANT RESPONDENT ASSESSEE BY : SHRI MANISH J. SHETH REVENUE BY : MS. SONIA KUMAR DATE OF HEARING : 13.01.2014 DATE OF PRONOUNCEMENT : 24.01.2014 ORDER PER DR. S.T.M PAVALAN, JM THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF THE LD.CIT(A)-22, MUMBAI DATED 18.01.2012 FOR THE ASSES SMENT YEAR 2009-10. 2. GROUNDS NO. 1 TO 4 ARE BEING CONSIDERED TOGETHER AS THEY ARE RELATED TO THE DECISION OF THE LD.CIT(A) IN CONFIRMING THE ADDITIO N MADE BY THE AO U/S 41(1) OF THE INCOME TAX ACT ON ACCOUNT OF REMISSION OF LIABILITY AMOUNTING TO RS. 1,48,43,395/-. 3. BRIEFLY STATED, THE ASSESSEE, A COMPANY ENGAGED IN THE BUSINESS OF PROVIDING SOFTWARE SERVICE SUCH AS COMPREHENSIVE IT SOLUTIONS TO CLIENTS, WHILE DECLARING A TOTAL INCOME AT RS. 5,02,545/-, HAD SHOWN GROSS BLO CK OF ASSETS AT RS. 5,58,74,774/- AS AGAINST RS. 6,79,87,074/- SHOWN IN THE LAST YEAR . FROM ANNEXURE II TO FIXED ASSETS SCHEDULE, THE AO NOTICED THAT ASSESSEE HAD SHOWN AN AMOUNT OF RS. 1,48,43,395/- AS DELETIONS DURING THE YEAR UNDER THE HEAD PRODUC T DEVELOPMENT CHARGES. ITA NO.1746/MUM/2012 3DI SYSTEMS INDIA PVT.LTD ASSESSMENT YEAR: 2009-10 2 ACCORDING TO THE ASSESSEE, THE COMPANY HAD RECEIVED TWO PROJECTS VIZ JHARKHAND HEALTH SOCIETY AND ITI LTD, BANGALORE, AND IN ORDER EXECUTE THESE PROJECTS, THE COMPANY HAD SPENT EXPENSES ON SOFTWARE LICENSES, OP ERATING SYSTEMS, SQL SERVICES ENTERPRISES EDITION WITH SOFTWARE ASSURANCE, ADVANC E FOR SUPPLY OF HARDWARE, EQUIPMENTS LIKE PC, SCANNERS, PRINTERS, SERVERS, UP S AND GENERATORS ADVANCE FOR SOFTWARE DEVELOPMENT COST, ONSITE SUPPORT EXPENSES AND COST OF TRAINING MANUALS. THE ASSESSEE COMPANY HAD COMPLETED THE PILOT PROJEC T JHARKHAND HEALTH SOCIETY, MINISTRY OF HEALTH FOR ONE DISTRICT IN JHARKHAND AN D RAISED A BILL OF RS. 3,05,17,600/- IN YEAR 2005-06 AND AS THE PROJECT WAS ABANDONED IN SUBSEQUENT YEARS, THE COMPANY HAD DECIDED TO WRITE OFF UNPAID EXPENSES TO THE EXTENT OF RS. 1,48,43,395/- AND WRITE OFF THE BALANCE IN TEN YEAR S. HOWEVER, IN THE ASSESSMENT FRAMED, THE AO OBSERVED FROM THE COPY OF MEMORANDUM OF UNDERSTANDING SIGNED BY THE ASSESSEE WITH JHARKHAND HEALTH SOCIETY THAT 90% OF THE COST OF PROJECT HAD ALREADY BEEN RECEIVED BEFORE COMMISSIONING OF THE P ROJECT AND 10% AFTER SUCCESSFULLY COMMISSIONING OF THE PROJECT. HENCE, A SSESSEE COMPANY HAD DONE BILLING OF RS. 3,05,17,600/- IN THE YEAR 2005-06. B ASED ON THE FACT AND MATERIAL ON RECORD, THE AO WAS OF THE OPINION THAT THE UNILATER AL ACT OF ASSESSEE BY WAY OF WRITING OFF OF AN AMOUNT OF RS. 1,48,43,395/- BEING UNPAID EXPENSES TANTAMOUNT TO CESSATION OF LIABILITY AND THE PROVISIONS OF SECTIO N 41(1) ARE ATTRACTED AND THEREFORE THE AMOUNT OF RS. 1,48,43,395/- IS DEEMED TO BE PRO FITS AND GAINS OF BUSINESS OR PROFESSION. ACCORDINGLY, THE AO ADDED AN AMOUNT OF RS. 1,48,43,395/- TO THE TOTAL INCOME OF THE ASSESSEE. WITHOUT PREJUDICE, THE AO O BSERVED THAT EXPENDITURE INCURRED IN CONNECTION WITH SETTING UP A NEW PROJEC T WHICH HAS BEEN LATER ABANDONED IS A CAPITAL EXPENDITURE AND NOT ALLOWABL E AS DEDUCTION U/S 37 AS HELD IN THE CASE OF M/S EID PARTY (IND) LTD. VS. CIT (257 ITR 253) (MAD HC). ON APPEAL, THE LD.CIT(A) OBSERVED THAT THE AO HAD RIGHTLY MADE THE DISALLOWANCE U/S 41(1) / 37(1) AND THEREBY UPHELD THE ORDER OF THE AO. AGGRI EVED BY THE IMPUGNED ORDER, THE ASSESSEE IS IN APPEAL BEFORE US. 4. HAVING HEARD BOTH THE SIDES AND PERUSED THE MATE RIAL ON RECORD, IT IS PERTINENT TO MENTION THAT THE ASSESSEE COMPANY HAS ALREADY RECEIVED PAYMENTS OF ITA NO.1746/MUM/2012 3DI SYSTEMS INDIA PVT.LTD ASSESSMENT YEAR: 2009-10 3 THE COST OF THE PROJECT BEFORE COMMISSIONING THE PR OJECT AND HAS WRITTEN OFF THIS AMOUNT OF RS. 1,48,43,395/- BEING UNPAID EXPENSES W HICH ARE PAYABLE TO THE CREDITORS. THIS FACT STRENGTHENS THE FINDINGS OF TH E LOWER AUTHORITIES THAT THE CASE OF THE ASSESSEE FALLS WITHIN THE PURVIEW OF CESSATION OF LIABILITY FOR THE PURPOSE OF SECTION 41(1) OF THE ACT. ALSO, WE CONCUR WITH THE FINDINGS OF THE AUTHORITIES BELOW THAT EVEN THERE HAS BEEN EXPENDITURE INCURRED FOR S ETTING UP OF NEW PROJECT WHICH IS LATER ABANDONED AMOUNTS TO CAPITAL EXPENDITURE AND HENCE NOT ALLOWABLE AS DEDUCTION U/S 37 OF I.T. ACT. HOWEVER, WE ARE OF TH E CONSIDERED OPINION THAT THE ASSESSEE IS ENTITLED TO CLAIM DEPRECIATION ON THE P ROPORTIONATE EXPENDITURE CAPITALIZED ON PRODUCT DEVELOPMENT. IN VIEW OF THAT MATTER, WHILE WE UPHOLD THE ACTION OF THE AUTHORITIES BELOW IN DISALLOWING THE IMPUGNED AMOUNT U/S 41(1) / 37(1) OF THE ACT, WE DIRECT THE AO TO VERIFY THE EXPENDIT URE CAPITALIZED ON PRODUCT DEVELOPMENT AND ACCORDINGLY ALLOW THE CLAIM OF RELE VANT PROPORTIONATE DEPRECIATION ON SUCH EXPENDITURE IN ACCORDANCE WITH LAW AFTER PR OVIDING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. WE ORDER AND DIRECT ACCORDINGLY. 5. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 24 TH DAY OF JANUARY, 2014. SD/- SD/- (R.C. SHARMA) (DR. S.T.M.P AVALAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED 24.01.2014 *SKS SR. P.S, COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, E BENCH, ITAT, MUMBAI //BY ORDER// ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI