Sapient Corporation Pvt. Ltd, V. ACIT Circle 7 (1),

ITA 183/DEL/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 3621 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 5 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-06-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 16-03-2010
• Assessment Year: 2003-2004
• Appeal Filed On: 11-01-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GAJANAND MEENA
• Assessee Lawyers: V RASTOGI; SYALI SHRI TARANDEEP SINGH
• Keywords: Depreciation; Commercial expediency
• Section: 37(1); 32; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G : NEW DELHI BEFORE SHRI C.L.SETHI, JM AND SHRI R.C.SHARMA, AM ITA NO.183/DEL/2007 ASSESSMENT YEAR : 2003-04 M/S SAPIENT CORPORATION PRIVATE LIMITED, SAPIENT TOWER (D&E), DLF CYBER GREENS, DLF PHASE-III, SECTOR-25A, GURGAON, HARYANA. PAN NO.AAECS6286M. VS. ASSTT.COMMISSIONER OF INCOME TAX, CIRCLE-7(1), NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI M.S.SYALI, SHRI TARANDEEP SINGH AND SHRI V.RASTOGI. RESPONDENT BY : SHRI GAJANAND MEENA, CIT-DR. ORDER PER R.C.SHARMA, AM : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER OF CIT(A) DATED 27.10.2006 FOR THE AY 2003-04, WHEREIN FOLLOWING TW O GROUNDS HAVE BEEN TAKEN BY THE ASSESSEE :- 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE APPELLANTS CASE, THE LEARNED COMMISSIONER OF INCOME TAX (APPEA LS)-X, NEW DELHI [CIT(A)], HAS GROSSLY ERRED IN CONFIRMING THE ADDITION OF RS.15,423,141/- TOWARDS LEASEHOLD RENT PAID FOR THE BANGALORE OFFICE. 2. THAT ON THE FACTS AND IN CIRCUMSTANCES OF THE AP PELLANTS CASE, THE LEARNED CIT(A) HAS GROSSLY ERRED IN CONFIRMING THE DISALLOWANCE OF RS.57,61,776/- TOWARDS DEPRECIATION ON LEASEHOLD IMPROVEMENTS IN THE BANGALORE OFFICE. 2. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PER USED. FACTS IN BRIEF ARE THAT THE ASSESSEE COMPANY WAS INCORPORATED ON 9.3.2 000 AND IS A SUBSIDIARY ITA-183/DEL/2007 2 COMPANY OF M/S SAPIENT CORPORATION, USA. IT WAS SE T UP IN THE SOFTWARE TECHNOLOGY PARK OF GOVERNMENT OF INDIA (GURGAON) TO PRIMARILY UNDERTAKE THE FOLLOWING ACTIVITIES:- (I) RENDERING SERVICES TO GROUP COMPANIES ESSENTIALLY I N THE FORM OF BUILDING CUSTOMIZED SOFTWARE APPLICATIONS TO ENABLE GROUP COMPANIES IN RENDERING TECHNOLOGICAL CONSULTANCY SERVICES TO THEIR CLIENTS. (II) RENDERING POST-SALE IT ENABLED SUPPORT SERVICES IN RELATION TO THE SOFTWARE WHICH HAS BEEN DEVELOPED EITHER BY SAPIENT GROUP, OR BY THIRD PARTIES, AND PRIMARILY INCLUDE FIXING OF APPLICATIO N BUGS, COMPATIBILITY CHECKS IN CASES OF THIRD PARTY SOFTWARE UPGRADES, S OFTWARE ENHANCEMENTS ETC. 3. THE ASSESSEE COMPANY HAS SET UP A STP (SOFTWARE TECHNOLOGY PARK) UNIT AT GURGAON UNDER THE SOFTWARE TECHNOLOGY PARK SCHEM E OF GOVERNMENT OF INDIA FOR COMPUTER SOFTWARE DEVELOPMENT AND CLAIMED DEDUC TION U/S 10A OF THE IT ACT IN RESPECT OF INCOME DERIVED FROM STP UNIT. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE COMPANY HAS ALSO ACCREDITED ITSELF AS A RECOGNIZED INTERNATIONAL AIR TRANSPORT ASSOCIATION (IATA) AGENT AND EARNED COMMI SSION INCOME OF RS.60,61,869/-. DURING THE COURSE OF ASSESSMENT PR OCEEDINGS, THE AO FOUND THAT THE ASSESSEE COMPANY HAS CLAIMED LEASE RENTAL OF BA NGALORE PREMISES AT RS.1,54,23,141/- AS EXPENDITURE ON NON-10A UNIT. T HE AO ALSO NOTED THAT THE ASSESSEE COMPANY HAD NOT INCURRED ANY OTHER EXPENDI TURE AT BANGALORE. THE ASSESSEE WAS ASKED TO EXPLAIN THE JUSTIFICATION FOR CLAIMING OF LEASE RENTAL OF BANGALORE PREMISES. IT WAS ALSO SUBMITTED BY THE C OMPANY BEFORE THE AO THAT THE ASSESSEE COMPANY TOOK ON LEASE A PREMISES 3 RD FLOOR OF BLOCK B & C, DIAMOND DISTRICT, 150, AIRPORT ROAD KODIHALLI, BANGALORE 560 008 AND HAD INCURRED LEASE RENTAL AMOUNTING TO RS.1,54,23,141/- DURING THE YEA R UNDER CONSIDERATION. IT WAS ALSO SUBMITTED BEFORE THE AO THAT THE ASSESSEE COMP ANY HAD UNDERTAKEN EXPANSION OF ITS BUSINESS ACTIVITY BY OPENING A NEW BRANCH IN BANGALORE AND FOR THIS PURPOSE ITA-183/DEL/2007 3 TOOK THE PREMISES ON RENT FOR THE ENTIRE YEAR AND R ENT PAID WAS RS.1,54,23,141/-. HOWEVER, DUE TO THE BUSINESS CONSIDERATION, THE ASS ESSEE COMPANY DECIDED TO VACATE THE BUSINESS PREMISES, AND, SUBSEQUENTLY IT WAS VACATED. IT WAS CLAIMED THAT THE LEASE RENTAL PAID FOR THIS PREMISES WAS AL LOWABLE DEDUCTION AS THE PREMISES WAS READY FOR USE, THOUGH ACTUALLY NOT USED FOR BUS INESS PURPOSES, AS THE EXPENDITURE WAS INCURRED FOR EXPANSION OF THE ASSES SEES BUSINESS. AS PER AO, THE ASSESSEE COMPANY HAS NOT UTILIZED THE PREMISES FOR THE BUSINESS PURPOSES AT ALL. ACCORDINGLY, THE AO DECLINED ASSESSEES CLAIM OF EX PENDITURE ON LEASE RENTAL U/S 30 AS WELL AS DEPRECIATION ON LEASE IMPROVEMENT IN BANGALORE OFFICE CLAIMED AT RS.57.61 LAKHS U/S 32 OF I. T. ACT. BY THE IMPUGNE D ORDER, CIT(A) CONFIRMED BOTH THE DISALLOWANCE. BASIC CONTENTION OF LOWER AUTHOR ITIES WAS THAT NO BUSINESS WAS STARTED IN BANGALORE OFFICE, THEREFORE, EXPENDITURE 4 INCURRED THEREON WAS PRE OPERATIVE EXPENSES. IT WAS ALSO ALLEGED THAT EXPEN DITURE CLAIMED WAS TO BE CONSIDERED UNDER THE PROVISIONS OF SECTION 30 TO 36 AND ONCE THE SAME IS FOUND TO BE NOT ALLOWABLE U/S 30 TO 36, THE SAME CANNOT BE C ONSIDERED FOR ALLOWABILITY U/S 37(1) OF I. T. ACT IRRESPECTIVE OF THE FACT THAT EX PENSES WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 3.1 IT WAS CONTENDED BY THE LEARNED AR THAT ASSESSE E COMPANY HAS UNDERTAKEN EXPANSION OF ITS BUSINESS ACTIVITY OF COMPUTER SOFT WARE DEVELOPMENT, BY OPENING A NEW BRANCH IN BANGALORE AND IT WAS NOT A NEW BUSINE SS ACTIVITY BUT WAS EXPANSION OF AN ACTIVITY ALREADY UNDERTAKEN BY THE ASSESSEE. AS PER LEARNED AR, WHILE CONSIDERING CLAIM OF LEASE RENTAL AS WELL AS DEPREC IATION ON THE EXPENDITURE INCURRED ON IMPROVEMENT BANGALORE OFFICE PREMISES, THE AO SHOULD HAVE CONSIDERED THE ASSESSEES CLAIM U/S 37(1) OF THE AC T, INSOFAR AS EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS, NOTWITHSTANDING THE FACT THAT ASSESSEES CLAIM WAS DECLINED BY THE AO U /S 30 & 32 OF THE I. T. ACT. HE RELIED ON THE DECISION OF HON'BLE KERALA HIGH COURT IN THE CASE OF HIGH LAND PRODUCE CO. LTD. 102 ITR 803, WHEREIN ASSESSEES CLAIM FOR GRATUITY WAS ITA-183/DEL/2007 4 DECLINED BY THE AO ON THE PLEA THAT UNDER KERALA IN DUSTRIAL PAYMENT OF GRATUITIES ACT 1970, THE SAME WAS PAYABLE IN FUTURE AND THAT C ONDITION FOR CREATION OF FUND FOR GRATUITY U/S 37(1)(V) WAS NOT SATISFIED. THE H ONBLE HIGH COURT HELD THAT THE OBJECT OF SECTION 37(1) IS NOT TO PRECLUDE CONSIDER ATION OF A CLAIM WHICH WOULD NOT FALL UNDER SECTION 30 TO 36 OF THE ACT AND THAT RES IDUARY NATURE OF SECTION 37 IS TO BE CONSIDERED AND THE CLAIM OF THE ASSESSEE IS TO B E ALLOWED UNDER THIS SECTION. HE FURTHER INVITED OUR ATTENTION TO THE FACT THAT D ECISION OF HON'BLE KERALA HIGH COURT WAS AFFIRMED BY THE HON'BLE SUPREME COURT AND THE SAME WAS REPORTED AT 158 ITR 419. FURTHER RELIANCE WAS PLACED ON THE DE CISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF KHIMJI VISRAM & SONS (GUJARAT) PVT.LTD. 209 ITR 993 WHEREIN IT WAS HELD THAT IF THE EXPENSES ARE NOT DE DUCTIBLE U/S 30 TO 36 AND THE CONDITIONS PRESCRIBED IN SECTION 37 WERE SATISFIED, THE EXPENSES ARE REQUIRED TO BE ALLOWED U/S 37 OF THE ACT. OUR SPECIFIC ATTENTION WAS INVITED TO THE PARTICULAR OBSERVATION OF THE HIGH COURT TO THE EFFECT THAT W HERE CLAIM OF THE ASSESSEE IS NOT SUSTAINABLE U/S 30 IN RESPECT OF GROUND RENT AND MU NICIPAL TAXES PAID BY IT, YET AS THE SAID RENT AND TAXES WERE PAID WHOLLY AND EXCLUS IVELY FOR THE PURPOSE OF BUSINESS, ACCORDING TO COMMERCIAL EXPEDIENCY, THE S AME IS REQUIRED TO BE ALLOWED AS DEDUCTION U/S 37 FOR DETERMINING THE TRUE PROFIT S AND GAINS OF BUSINESS. IT WAS CATEGORICALLY OBSERVED BY THE HONBLE HIGH COURT TH AT FOR DETERMINING THE EXACT PROFITS AND GAINS OF THE BUSINESS, THE ASSESSEE IS UNDOUBTEDLY ENTITLED TO GET DEDUCTION U/S 37 IN RESPECT OF THE EXPENDITURE FOR WHICH ASSESSEE IS NOT ENTITLED TO GET U/S 30 OF THE ACT WITH REGARD TO GROUND RENT. AS PER LD. A.R. THE ISSUE IN HAND IS SQUARELY COVERED BY THESE PROPOSITION AND A.O. S HOULD NOT HAVE DECLINED ASSESSEES CLAIM U/S 37(1) OF I.T. ACT. AS PER LEA RNED AR, THE ASSESSEE HAS MADE FULL SUBMISSION WITH REGARD TO EXPANSION OF BUSINES S ACTIVITY UNDER WHICH BANGALORE OFFICE WAS OPENED, BUT THE SAME WERE BRUS HED ASIDE BY THE LOWER AUTHORITIES AND THE ASSESSEES CLAIM OF EXPENDITURE ON LEASE RENTAL AND DEPRECIATION AT BANGALORE OFFICE WAS DECLINED BY THE LOWER AUTHO RITIES MERELY ON THE PLEA THAT EXPENDITURE WAS ONLY TO BE CONSIDERED U/S 30 TO 36 AND NOT U/S 37(1) OF THE ACT. ITA-183/DEL/2007 5 4. ON THE OTHER HAND, LEARNED DR RELIED ON THE DECI SION OF HON'BLE DELHI HIGH COURT IN THE CASE OF SONY INDIA (P) LTD. 285 ITR 213 WHEREIN IT WAS HELD THAT WHERE EXPENDITURE CLAIMED WAS ONE OF THE NATURE DES CRIBED U/S 36(1)(IV) AND (V) OF THE ACT, BUT THE SAME WAS NOT ALLOWABLE BECAUSE THE RE WAS AN EXPRESS REQUIREMENT OF THE FUNDS BEING APPROVED BEFORE THE DEDUCTION CO ULD BE ALLOWED, THE SAME CANNOT BE CONSIDERED FOR ALLOWING U/S 37(1) OF I. T . ACT. 4.1 WE HAVE CONSIDERED THE RIVAL CONTENTIONS, CAREF ULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND ALSO DELIBERATED ON TH E CASE LAWS REFERRED BY LOWER AUTHORITIES IN THEIR RESPECTIVE ORDERS AND CITED BY LEARNED AR AND DR DURING THE COURSE OF HAVING BEFORE US IN THE CONTEXT OF FACTUA L MATRIX OF INSTANT CASE. FROM THE RECORD WE FOUND THAT ASSESSEE COMPANY WAS ENGAG ED IN ACTIVITY OF COMPUTER SOFTWARE DEVELOPMENT. IT WAS HAVING ITS UNIT AT GU RGAON UNDER THE SOFTWARE TECHNOLOGY PARK SCHEME OF GOVERNMENT OF INDIA, FOR WHICH IT CLAIMED DEDUCTION U/S 10A. THE ASSESSEE UNDERTOOK EXPANSION OF THE S AME LINE OF ACTIVITY, FOR WHICH OFFICE WAS OPENED AT BANGALORE, THE ASSESSEE HAS AL SO UNDERTAKEN RENOVATION WORK IN THE PREMISES TAKEN AT BANGALORE. EXPENDITURE WA S INCURRED ON LEASE RENTAL AS WELL AS CLAIM OF DEPRECIATION WAS MADE FOR THE EXPE NDITURE INCURRED ON IMPROVEMENT OF BANGALORE OFFICE. THE GENUINENESS O F THE EXPENDITURE AND THE FACT THAT IT WAS INCURRED FOR THE PURPOSES OF BUSIN ESS OF THE ASSESSEE WAS NOT DOUBTED ANYWHERE BY ANY OF THE LOWER AUTHORITIES. MERELY ON THE PLEA THAT SINCE EXPENDITURE SO INCURRED WAS TO BE CONSIDERED U/S 30 TO 36 OF THE ACT, THE ASSESSEES CLAIM WAS DECLINED. THE LOWER AUTHORITI ES HAVE RELIED ON THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF SONY IND IA (P) LTD. (SUPRA). THE LEARNED AR HAS POINTED OUT THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF HIGH LAND PRODUCE CO.LTD., DULY AFFIRMING THE VIEW OF THE HON'BLE KERALA HIGH COURT. HOWEVER, THIS DECISION OF HON'BLE SUPREME C OURT WAS NOT CONSIDERED BY THE HON'BLE DELHI HIGH COURT WHILE DELIVERING THE J UDGMENT IN THE CASE OF SONY INDIA (P) LTD. WE FOUND SUBSTANTIAL FORCE IN THE A RGUMENTS OF THE LEARNED AR TO THE EFFECT THAT DEPARTMENTAL AUTHORITIES SHOULD HAV E CONSIDERED THE ALLOWABILITY OF ITA-183/DEL/2007 6 EXPENDITURE BY CONSIDERING THE DECISION OF THE HON' BLE SUPREME COURT. HON'BLE KERALA HIGH COURT IN THE CASE OF HIGH LAND PRODUCE CO.LTD. (SUPRA) HAVE CATEGORICALLY OBSERVED THAT EVEN WHERE EXPENDITURE IS FOUND TO BE NOT DEDUCTIBLE U/S 36(1)(V), THE SAME IS REQUIRED TO BE CONSIDERED IN THE RESIDUARY HEAD OF EXPENDITURE I.E. U/S 37(1) OF THE ACT. IT WAS OBSE RVED BY THE HONBLE HIGH COURT THAT UNLESS THERE IS SOME STATUTORY PROVISION WHICH IN CLEAR TERMS OR BY NECESSARY IMPLICATION NEGATIVES AGAINST SUCH PRINCIPLES AND P RACTICE, THOSE PRINCIPLES AND PRACTICE MUST BE GIVEN THEIR FULL PLAY. ACCORDINGL Y, THE PROVISION OF GRATUITIES WHICH WAS SPECIFICALLY ALLOWABLE U/S 36(1)(V) WAS F OUND BY THE A.O. TO BE NOT ALLOWABLE IN VIEW OF THE FACT THAT PLACING THE FUND IN AN APPROVED GRATUITY FUND WAS CONDITION PRECEDENT TO CONSIDER THE CLAIM OF AS SESSEE U/S 36(1)(V) OF I.T. ACT. THE HONBLE COURT HELD THAT PROVISION OF GRATUITY I S TO BE CONSIDERED FOR ALLOWING U/S 37, NOTWITHSTANDING THE FACT THAT IT WAS NOT AL LOWED U/S 36(1)(V) OF THE ACT. THIS PROPOSITION OF LAW WAS AFFIRMED BY THE HON'BLE SUPREME COURT AND THE SAME WAS REPORTED AT 158 ITR 419. APPLYING THIS PROPOSI TION OF LAW, ONCE IT IS FOUND THAT OPENING OF BANGALORE OFFICE WAS IN THE PROCESS OF EXPANSION OF ASSESSEES EXISTING BUSINESS ACTIVITY OF COMPUTER SOFTWARE DEV ELOPMENT, EXPENDITURE INCURRED ON LEASE RENTALS AND DEPRECIATION ON THE IMPROVEMEN T OF BANGALORE OFFICE WHICH WAS ESSENTIALLY REVENUE IN NATURE, WAS REQUIRED TO BE CONSIDERED U/S 37 OF THE ACT AS THE EXPENDITURE WERE INCURRED WHOLLY AND EXCLUSI VELY FOR THE PURPOSE OF BUSINESS. THIS VIEW IS FULLY SUPPORTED BY THE DECI SION OF HON'BLE SUPREME COURT AS DISCUSSED HEREINABOVE. IN THE CASE OF SONY INDI A (P) LTD., THE HON'BLE DELHI HIGH COURT HAS NOT CONSIDERED THE DECISION OF HON'B LE SUPREME COURT AS DISCUSSE4D HEREINABOVE AND REPORTED AT 158 ITR 419. THE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF KHIMJI VISRAM & S ONS (GUJARAT) PVT.LTD. (SUPRA) WAS DECIDED BY CONSIDERING THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF HIGH LAND PRODUCE CO. LTD. AND IT WAS HELD THAT IF THE EXPENDITURE IS NOT DEDUCTIBLE U/S 30 TO 36 OF THE ACT, AND THE CONDITI ONS PRESCRIBED U/S 37 ARE SATISFIED, THE EXPENSES ARE REQUIRED TO BE ALLOWED U/S 37. ITA-183/DEL/2007 7 4.2 IN VIEW OF THE ABOVE DISCUSSION AND KEEPING IN VIEW THE FACT THAT INSPITE OF SUFFICIENT MATERIAL BROUGHT ON RECORD BEFORE THE LO WER AUTHORITIES, THE CONTENTION OF ASSESSEE WITH REGARD TO EXPANSION OF ITS EXISTIN G BUSINESS ACTIVITY WAS NOT PROPERLY CONSIDERED AND NO FINDING HAS BEEN RECORDE D WITH REGARD TO THE SAME, WE RESTORE THE MATTER BACK TO THE FILE OF THE AO FOR R ECORDING PROPER FINDING TO THIS EFFECT AND THEREAFTER DECIDING THE SAME AFRESH BY C ONSIDERING THE PROPOSITION LAID DOWN BY HON'BLE SUPREME COURT AS DISCUSSED HEREINA BOVE WE DIRECT ACCORDINGLY. 5. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED FOR STATISTICAL PURPOSES. DECISION PRONOUNCED IN THE OPEN COURT ON 25 TH JUNE, 2010. SD/- SD/- (C.L.SETHI) (R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 25.06.2010. VK. COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT DEPUTY REGISTRAR