Vedams Software Solutions India Private Limited, Hyderabad V. Dy. Commissioner of Income Tax, Circle-17(2), Hyderabad

ITA 1750/Hyd/2017

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 7272 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB-A
• Next Hearing Date: 14-11-2019
• Assessment Year: 2013-2014
• Appeal Filed On: 23-10-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business expenditure; Diversion of income; Additional evidence; Bad and doubtful debts; Capital expenditure; TDS; Set aside
• Section: 40(a)(ia); 195; 201; 13; 37

Judgement Text

IN THE INCOME TAX A PPELLATE TRIBUNAL HYDERABAD BENCH A ', HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER I TA NO S. 1724 / HYD/201 6 AND 1750/HYD/2017 ASSESSMENT YEAR S : 2012 - 13 & 2013 - 14 VEDAMS SOFTWARE SOLUTIONS INDIA PVT. LTD., PAN A A BCV 8458 K VS. DY. COMMISSIONER OF INCOME - TAX, CIRCLE 17(2), HYDERABAD. A PPELLANT RESPONDENT ASSESSEE BY: S H RI A. SRINIVAS REVENUE BY: S HRI SUNKU SRINIVAS DATE OF HEARING: 14 / 1 1 / 201 9 DATE OF PRONOUNCEMENT: 31 / 01 /20 20 O R D E R PE R P. MADHAVI DEVI, J.M. : THESE ARE THE APPEALS OF THE ASSESSEE AGAINST THE ORDERS OF CIT(A) 5, HYDERABAD, DATED 30/09/2016 FOR AY 2012 - 13 AND DATED 23/08/2017 FOR AY 2013 - 14. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF DEVELOPING THE COMPUTER SOFTWARE/HARDWARE, EMBEDDED SOFTWARE ETC., IT FILED ITS RETURN OF INCOME FOR THE AY 2012 - 13 ON 30/11/2012 DECLARING A TOTAL INCOME OF RS. 51,47,140/ - AND HAD SHOWN BOOK PROFIT OF U/S 1 15JB, RS. 84,88,681/ - . FOR THE AY 2013 - 14, ASSESSEE FILED ITS RETURN OF INCOME ON 30/09/2013 ADMITTING INCOME OF RS. 1,86,97,140/ - . THE RETURNS WERE SELECTED FOR SCRUTINY UNDER CASS AND DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOR I.T.A. NO. 1724 /HYD/1 6 & 1750/HYD/2017 VEDAMS SOFTWARE SOLUTIONS INDIA PVT. LTD., HYD. 2 AY 2012 - 13, THE AO NO TICED THAT THE ASSESSEE HAS DEBITED AN AMOUNT OF RS. 1,13,62,037/ - AS BAD AND DOUBTFUL DEBTS, OUT OF WHICH, A SUM OF RS. 51,05,623/ - WAS PAID TO M/S YENIS GLOBAL ARTS INC. AS ADVANCES TOWARDS PURCHASE OF COMPUTER LICENCE. THE ASSESSEE JUSTIFIED BAD DEBT CL AIM , STATING THAT THE ASSESSEE HAS PAID ADVANCES TOWARDS PURCHASE OF COMPUTER LICENCE, BUT SINCE IT DID NOT GET ANY RESPONSE FROM THE PARTY, IT WAS WRITTEN OFF AND CLAIMED AS A DEDUCTION. THE AO OBSERVED FROM THE COPY OF THE INVOICE THAT THE AMOUNT OF RS. 51,05,623/ - WAS PAID ON 28/03/2012 FOR SUPPLY CHAIN MANAGEMENT PRODUCTS WITH CUSTOMISATIONS AND, THEREFORE, HE HELD THAT IT IS CAPITAL IN NATURE AND CANNOT BE ALLOWED AS REVENUE EXPEN DITURE . HE, THEREFORE, DISALLOWED THE SAME AND ADDED IT TO THE RETURNED INCOME OF THE ASSESSEE. 2.1 FURTHER, THE AO ALSO OBSERVED THAT THE ASSESSEE HAD DEBITED A SUM OF RS. 62,56,414/ - UNDER THE HEAD BAD AND DOUBTFUL ADVANCES WHICH WAS PAID TO 4 PARTIES . THE AO OBSERV ED THAT THOUGH THESE AMOUNTS REPRESENTED REVENUE EXPENDIT URE, SINCE THE ASSESSEE HAS NOT DEDUCTED TAX AT SOURCE THEREON, HE DISALLOWED THE SAME AND BROUGHT IT TO TAX. 3. AGGRIEVED , THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A), WHO CONFIRMED THE ORDER OF THE AO AND THE ASSESSEE I.T.A. NO. 1724 /HYD/1 6 & 1750/HYD/2017 VEDAMS SOFTWARE SOLUTIONS INDIA PVT. LTD., HYD. 3 IS IN SECOND APPEAL BEFORE THE TRIBUNAL BY RAISING THE FOLLOWING GROUNDS OF APPEAL: 1. THE ORDER OF THE APPELLATE COMMISSIONER IS CONTRARY TO THE LAW, FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE APPELLATE COMMISSIONER OUGHT NOT TO HAVE CONFIRMED AN AMOUNT OF RS.51,05,623/ - , BEING BAD DEBTS DEBITED IN THE BOOKS OF ACCOUNTS AND DISALLOWED BY THE A. O . 3. THE APPELLATE COMMISSIONER OUGHT NOT TO HAVE CONFIRMED AN AMOUNT OF RS.62,56,414/ - , BEING ADVANCES DEBITED IN THE BOOKS OF ACCOUNTS, WHICH WAS DISALLOWED BY THE A. O ON THE PREMISE THAT NO TAX WAS DEDUCTED AT THE TIME OF PAYMENT 4. ANY O THER GROUNDS WHICH THE APPELLANT MAY URGE EITHER BEFORE OR AT THE TIME OF HEARING. 4. AS REGARDS THE FIRST ISSUE OF ADVANCE PAID FOR PURCHASE OF COMPUTER SOFTWARE, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IT IS A SOFTWARE WHICH IS USED BY THE ASS ESSEE TO EMBED IT IN THE SOFTWARE PRODUCT PRODUCED BY IT AND THEREFORE, IT IS IN THE NATURE OF STOCK - IN - TRADE AND SINCE ASSESSEE COULD NOT GET ANY RESPONSE FROM THE PARTY, THE ADVANCE HAD TO BE WRITTEN OFF AND SINCE IT IS A TRADE DEBT, IT HAS TO BE ALLOWE D AS A BAD DEBT. 5. ON THE OTHER HAND, LD. DR DREW OUR ATTENTION TO THE FINDING OF THE CIT(A) THAT ADVANCE WAS PAID ON 28/03/2012 AND ONLY 3 DAYS THEREAFTER, THE ASSESSEE HAS WRITTEN IT OFF AS BAD DEBT ON 31/03/2012 AND, THEREFORE, THE SAID DEBT CANNOT BE TREATED AS A BAD DEBT. THE CIT(A) HAS HELD THAT THE PAYMENT IS I.T.A. NO. 1724 /HYD/1 6 & 1750/HYD/2017 VEDAMS SOFTWARE SOLUTIONS INDIA PVT. LTD., HYD. 4 A DIVERSION OF INCOME OR APPLICATION OF INCOME AND HAS BEEN GIVEN A COLOUR OF SOFTWARE PURCHASE AND THERE IS NO EVIDENCE THAT IT IS A BAD DEBT . THEREFORE, THE CIT(A) HAS HELD THAT IT CANNOT BE ALLOWED AS BUSINESS EXPENDITURE U/S 37 OF THE ACT. THE LD. DR, THEREFORE, SUPPORTED THE ORDER OF CIT(A) AND PRAYED FOR CONFIRMATION OF THE DISALLOWANCE. 6. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THOUGH THE PAYMENT IS NOT DOUBTED BY THE AO AND CIT(A), THE AO HAS HELD IT TO BE CAPITAL EXPENDITURE , WHILE THE CIT(A) HAS OBSERVED THAT IT HAS BEEN WRITTEN OFF WITH IN A PERIOD OF 3 DAYS , AND THEREFORE CANNOT BE CONSIDERED AS A BAD DEBT. W E AGREE WITH THE FINDINGS OF CIT(A) THAT WITHIN 3 DAYS, THE ASSESSEE COULD NOT HAVE TREATED THE PAYMENT AS A BAD DEBT . T HE ASSESSEES CONTENTION THAT IT DID NOT RECEIVE ANY REPLY FROM THE PARTY AND THEREFORE, IT HAS BEEN TREATED AS A BAD DEBIT, CANNOT BE ACCEPTED. EVEN IF IT IS TO BE ALLOWED AS BUSINESS EXPENDITURE, NECESSITY OF THE PAYMENT NEEDS TO BE CONSIDERED. THE ASSESSEES COUNSEL HAD FILED ADDITION AL EVIDENCE IN THE FORM OF COPIES OF THE ORDERS OF CIVIL COURTS WHEREIN ASSESSEE HAD F ILED CIVIL SUIT AGAINST THIS PARTY FOR RECOVERY OF ADVANCE PAID ALONG WITH INTEREST TO DEMONSTRATE THAT THIS PARTY DID EXIST. HOWEVER, ON GOING THROUGH THE SAME, WE FIND THAT THE ORDER OF THE CIVIL COURT W AS EX - PARTE THE SAID PARTY AND THEREFORE, THE DECR EES HAVE BEEN I.T.A. NO. 1724 /HYD/1 6 & 1750/HYD/2017 VEDAMS SOFTWARE SOLUTIONS INDIA PVT. LTD., HYD. 5 PASSED IN FAVOUR OF THE ASSESSEE. ADMITTEDLY, BOTH THE AO AND CIT(A) ARE NOT DOUBTING THE PAYMENT MADE TO THE SAID PARTY. SINCE THE ASSESSEE HAS NOT RECEIVED THE PRODUC T , FOR WHICH IT HAS MADE PAYMENT, THE ASSESSEE CANNOT BE HELD LIABLE. SINC E THE AUTHORITIES HAV E NOT ESTABLISHED THAT THE ASSESSEE HAS RECEIVED THE MONEY BACK , TH US , THE FINDING OF THE CIT(A) THAT IT IS DIVERSION OF INCOME OR APPLICATION OF INCOME IS NOT ESTABLISHED WITH EVIDENCE. HOWEVER, IN THE INTEREST OF JUSTICE, WE ARE IN CLINED TO ADMIT THE ADDITIONAL EVIDENCE FILED BY THE ASSESSEE AND REMAND TO THE AO TO EXAMINE THE GENUINENESS OF THE TRANSACTION AND IF THE PAYMENT IS FOUND TO BE GENUINE, ONLY THEN, THE SAME MAY BE ALLOWED. 7. AS REGARDS THE SECOND ISSUE OF CLAIM OF BAD AND DOUBTFUL DEBTS, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE PARTIES TO WHOM THE PAYMENTS HAVE BEEN MADE ARE FOREIGN PARTIES AND AS PER THE COPIES OF THE INVOICES FILED BEFORE THE AO & CIT(A), THEY AR E FOR SERVICES TO BE RENDERED OUTSIDE INDIA. HE SUBMITTED THAT SINCE THEY ARE FOREIGN PARTIES, PROVISIONS OF SECTION 40(A)(IA) ARE NOT APPLICABLE AND THE PROVISIONS OF SECTION 195 ARE TO BE APPLIED AND THAT TDS IS TO BE MADE ONLY FROM THE INCOME PORTION OF THE PAYMENT AND AS THE AO AND CIT(A) HAVE NOT BROUGHT ON RECORD THAT ANY PART OF THE INCOME IS CHARGEABLE TO TAX IN INDIA , DISALLOWANCE CANNOT BE MADE U/S 195 AS WELL. HE SUBMITTED THAT THE AO HAS NOT I.T.A. NO. 1724 /HYD/1 6 & 1750/HYD/2017 VEDAMS SOFTWARE SOLUTIONS INDIA PVT. LTD., HYD. 6 MENTIONED THE SECTION UNDER WHICH THE DISALLOWANCE HAS BENE MADE, BUT, THE CIT(A) IN HIS ORDER HAS HELD THAT THE PAYMENTS ARE IN VIOLATION OF SECTION U/S 40(A)(IA) AND ALSO U/S 195. HE, THEREFORE, PRAYED THAT THE DISALLOWANCE TO BE DELETED. 8. THE LD. D R , ON THE OTHER HAND, HOWEVER SUPPORTED THE ORDERS OF TH E A O AND SUBMITTED THAT THE PAYMENTS WERE MADE TO THE FOUR PARTIES IN NOVEMBER, 2011 AND HAVE BEEN DEBITED TO P&L A/C , AS BAD AND DOUBTFUL DEBTS IN MARCH, 2012 I.E. AT THE END OF THE YEAR BUT WITHIN A PERIOD OF 4 MONTHS AND T HEREFORE ACCORDING TO HIM, THE GENUINENESS OF THE TRANSACTION IS NOT PROVED. 9. HAVING REGARD TO THE RIVAL CONTENTIONS AND MATERIAL ON RECORD, WE FIND THAT THESE ARE THE PAYMENTS MADE TO FOREIGN PARTIES IN FOREIGN EXCHANGE. AO HAS NOT QUESTIONED THE GENUINENESS OF THE TRANSACTIONS, BUT , DISALLOWED IT ONLY ON THE GROUND THAT NO TDS WAS MADE BY THE ASSESSEE . IT IS THE CIT(A), WHO BROUGHT OUT THAT THE GENUINENESS OF THE TRANSACTION AND THE PURPOSE OF PAYMENTS, IS NOT ESTABLISHED. SINCE THE PAYMENTS WERE MADE TO THE FOREIGN PARTIES, THE PROVISIONS OF SECTION 195 WOULD APPLY TO THE TRANSACTION. THE POWERS OF CIT(A) ARE COTERMINOUS WITH THAT OF AO AND HE COULD DO WHAT THE AO HAS NOT DONE. EVEN, THE CIT(A) THOUGH HAS OBSERVED THAT IT IS TO BE DISALLOWED U/S 195 HAS NOT BROUGHT OUT AS TO THE INCOME PORTION, ON WHICH, TAX IS TO BE LEVIED IN INDIA. THE CASE OF THE ASSESSEE IS THAT THE SERVICES I.T.A. NO. 1724 /HYD/1 6 & 1750/HYD/2017 VEDAMS SOFTWARE SOLUTIONS INDIA PVT. LTD., HYD. 7 ARE TO BE RE NDERED OUTSIDE INDIA AND SINCE THE FOREIGN PARTIES HAVE NO PE IN INDIA AND THE SERVICES ARE RENDERED OUTSIDE INDIA, SECTION 195 WOULD NOT APPLY. SINCE THESE FACTORS HAVE NOT BEEN CONSIDERED BY THE AO AND CIT(A), WE DEEM IT FIT AND PROPER TO REMAND THE ISSU E TO THE FILE OF THE AO FOR VERIFICATION AND DIRECT T HE AO TO ADJUDICATE THE ISSUE IN ACCORDANCE WITH LAW AFTER GIVING THE ASSESSEE A FAIR OPPORTUNITY OF HEARING. 10. IN THE RESULT, ASSESSEES APPEAL FOR AY 2012 - 13 IS PARTLY ALLOWED FOR STATISTICAL PURPO SES. 11. FOR AY 2013 - 14 ALSO, THE ASSESSEE HAD CLAIMED A SUM OF RS. 1,73,10,041/ - , AS BAD AND DOUBTFUL DEBTS, IT INCLUDES PAYMENTS MADE TO 9 PARTIES WHO ARE FOREIGN PARTIES . AO OBSERVED THAT THE PAYMENTS WERE MADE IN VIOLATION OF PROVISIONS OF SECTION 4O (A)(IA) AND 195 OF THE ACT AND ALSO OBSERVED THAT GENUINENESS OF THE TRANSACTION AND THE PURPOSE OF PAYMENTS WERE NOT ESTABLISHED. HE ACCORDINGLY DISALLOWED THE SAME U/S 40(A)(IA) OF THE ACT, AND THE CIT(A) CONFIRMED THE SAID DISALLOW ANCE . 14. WE HAVE HE ARD THE PARTIES AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT OUT OF 9 PARTIES, ONE OF THE PARTY IS INDIAN PARTY I.E. HEMENDRA OF RS. 33,32,920/ - AND, THEREFORE, TO SUCH TRANSACTION, THE PROVISIONS OF SECTION 40(A)(IA) ARE CLEARLY I.T.A. NO. 1724 /HYD/1 6 & 1750/HYD/2017 VEDAMS SOFTWARE SOLUTIONS INDIA PVT. LTD., HYD. 8 APPLICABLE. SINCE ALL OTHER PARTIES ARE NON - RESIDENTS, THE PROVISIONS OF SECTION 40(A(IA) WOULD NOT APPLY. AS REGARDS THE PROVISIONS OF SECTION 195 AND GENUINENESS OF THE ADVANCES, WE HAVE ALREADY SET ASIDE SIMILAR ISSUE TO THE FILE OF AO FOR AY 2012 - 13 (SUPRA) AND WITH SIMILA R DIRECTIONS, THIS ISSUE IS ALSO SET ASIDE TO THE FILE OF AO FOR RE - ADJUDICATION IN ACCORDANCE WITH LAW AFTER GIVING FAIR OPPORTUNITY OF HEARING TO THE ASSESSEE. 15. IN THE RESULT, THIS APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 16. TO SUM UP, BOTH THE APPEALS UNDER CONSIDERATION ARE TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 31 ST JANUARY , 20 20 . SD/ - SD/ - (A. MOHAN A LANKAMONY) ACCOUNTANT MEMBER ( P. MADHAVI DEVI ) JUDICIAL MEMBER HYDERABAD, DATED 31 ST JANUARY , 20 20 KV I.T.A. NO. 1724 /HYD/1 6 & 1750/HYD/2017 VEDAMS SOFTWARE SOLUTIONS INDIA PVT. LTD., HYD. 9 COPY FORWARDED TO: 1. M/S VEDAMS SOFTWARE SOLUTIONS INDIA PVT. LTD., PLOT NO. 82/D, 83/D, SURVEY NO. 78, PATRIKA NAGAR, MADHAPUR, HYD. 2 . DC IT, CIRCLE 17 (2) , HYDERABAD . 3 . CIT(A) - 5 , HYDERABAD. 4. 5. PR. CIT 5 , HYDERABAD. THE DR, ITAT, HYDERABAD 6 . GUARD FILE S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR SR.P.S/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER