ICS Technology Services Private Limited, Hyderabad V. DCIT., Circle-2(1), Hyderabad, Hyderabad

ITA 1907/HYD/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 6680 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 3 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-04-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 07-04-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 19-12-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B RAMANJANEYULU
• Assessee Lawyers: A V RAGHURAM
• Keywords: Business income; Depreciation; Business expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B : HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA.NO.1907/HYD/2014 ASSESSMENT YEAR 2010-2011 M/S. ICS TECHNOLOGY SERVICES P. LTD., HYDERABAD 73. PAN AABCI2568P VS. DCIT, CIRCLE-2(1) HYDERABAD 4. (APPELLANT) (RESPONDENT) FOR ASSESSEE : MR. A.V. RAGHURAM FOR REVENUE : MR. B. RAMANJANEYULU DATE OF HEARING : 07.04.2016 DATE OF PRONOUNCEMENT : 13 .04.2016 ORDER PER SMT. P. MADHAVI DEVI, J.M. THIS IS ASSESSEES APPEAL FOR THE A.Y. 2010- 2011. IN THIS APPEAL, THE ONLY GRIEVANCE OF THE ASS ESSEE IS THAT THE CIT(A) HAS ERRED IN CONFIRMING THE DISALLO WANCE THE BUSINESS LOSS CLAIMED BY THE ASSESSEE OF RS.76,43,468. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY, WHICH IS INTO THE BUSINESS OF SOFTWARE DEVELOPMENT, FILED ITS RETURN OF INCOME FOR THE A.Y . 2010- 2011 ON 28.09.2010 ADMITTING TOTAL INCOME OF RS.1,82,36,830. DURING THE ASSESSMENT PROCEEDINGS UNDER SECTION 143(3) OF THE I.T. ACT, THE A.O. NOTI CED THAT 2 ITA.NO.1907/HYD/2014 M/S. ICS TECHNOLOGY SERVICES P. LTD., HYDERABAD THE ASSESSEE-COMPANY HAS EARNED DIVIDEND INCOME FRO M MUTUAL FUNDS AND INTEREST INCOME ON FIXED DEPOSITS WHICH ARE RETURNED AS INCOME FROM OTHER SOURCES AND HAS ALSO ADMITTED LOSS ON ACCOUNT OF BUSINESS TO THE TUNE OF RS.76,43,468 WHICH WAS SET OFF AGAINST THE INCOME F ROM OTHER SOURCES. HE FURTHER OBSERVED THAT THE ASSESSE E COMPANY DID NOT ADMIT ANY BUSINESS INCOME NOR DID I T CARRY-OUT ANY BUSINESS ACTIVITIES BUT HAS CLAIMED EXPENDITURE IN THE P & L A/C IN THIS YEAR. HE OBSER VED THAT THE LOSS THAT WAS ARRIVED AT WAS ON ACCOUNT OF EXPENDITURE TOWARDS SALARIES AND OPERATIVE AND ADMINISTRATIVE EXPENSES. OBSERVING THAT THERE WAS N O BUSINESS INCOME THIS YEAR, HE HELD THAT THE ASSESSE E DID NOT CARRY OUT ANY BUSINESS ACTIVITY AND HENCE THERE IS NO DIRECT CONNECTION BETWEEN THE EXPENDITURE AND THE BUSINESS AND THEREFORE, THE BUSINESS LOSS OF RS.76, 43,464 IS NOT ALLOWABLE. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WHO CONFIRMED THE DISALLOWANCE AN D FURTHER AGGRIEVED, ASSESSEE IS IN APPEAL BEFORE US. 3. THE LD. COUNSEL FOR THE ASSESSEE, SUBMITTED THAT THIS IS THE SIXTH YEAR OF BUSINESS OPERATIONS CARRIED ON BY THE ASSESSEE AND IN THE EARLIER YEARS, THE A SSESSEE WAS CARRYING ON BUSINESS ACTIVITIES AND HAS RETURNE D BUSINESS INCOME. HE HAS SUBMITTED THAT DURING THE RELEVANT ASSESSMENT YEAR, THERE WERE NO ORDERS TO T HE ASSESSEE AND THEREFORE, THERE WAS NO BUSINESS INCOM E EARNED BY THE ASSESSEE. HE HAS SUBMITTED THAT THE ASSESSEE WAS, HOWEVER, REQUIRED TO MAINTAIN THE 3 ITA.NO.1907/HYD/2014 M/S. ICS TECHNOLOGY SERVICES P. LTD., HYDERABAD EMPLOYEES AND THE INFRASTRUCTURE IN THE HOPE OF GET TING ORDERS AND THEREFORE, THE EXPENDITURE INCURRED ON A CCOUNT OF SALARIES AND OPERATIVE AND ADMINISTRATIVE EXPENS ES IS BUSINESS EXPENDITURE WHICH HAS RESULTED IN THE BUSI NESS LOSS. HE HAS SUBMITTED THAT SECTION 72 OF THE I.T. ACT PERMITS THE SET OFF OF THE BUSINESS LOSS FROM THE I NCOME UNDER ANY OTHER HEAD OF INCOME AND ASSESSEE HAS ACCORDINGLY SET OFF BUSINESS LOSS AGAINST THE INCO ME FROM OTHER SOURCES. HE HAS PLACED RELIANCE UPON THE DE CISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CAS E OF MR. YETURU RAMACHANDRA REDDY AND OTHERS VS. DCIT, CIRCL E- 3(3), HYDERABAD IN ITA.NO.660 TO 662, 664 & 665/HYD/2014 DATED 28.01.2015 IN SUPPORT OF HIS CONTENTION. THUS, ACCORDING TO HIM, THE EXPENDITURE INCURRED FOR CARRYING ON BUSINESS OPERATIONS THOUGH THERE IS NO BUSINESS INCOME IS ALLOWABLE. 4. THE LD. D.R. HOWEVER, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 5. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE HAS B EEN CARRYING ON BUSINESS ACTIVITY FOR THE PAST FIVE YEA RS AND THIS IS THE SIXTH YEAR OF ITS OPERATIONS. THE ASSES SEE COMPANY HAS EXPLAINED THE NATURE OF THE EXPENDITURE WHICH HAS RESULTED IN BUSINESS LOSS WHICH IS ON ACC OUNT OF PAYMENT OF SALARIES AND OPERATIVE AND ADMINISTRA TIVE EXPENSES. THE ASSESSEE HAS TO MAINTAIN THE INFRASTR UCTURE AND EMPLOYEES FOR CARRYING OUT THE BUSINESS OPERATI ONS 4 ITA.NO.1907/HYD/2014 M/S. ICS TECHNOLOGY SERVICES P. LTD., HYDERABAD AND ALSO FULFILL ITS COMMITMENT MADE IN THE EARLIER ASSESSMENT YEARS EVEN IF THERE IS NO ORDER IN THE R ELEVANT PREVIOUS YEAR. THE MERE FACT THAT THE ASSESSEE HAS NOT EARNED ANY BUSINESS INCOME DURING THE RELEVANT ASSESSMENT YEAR WILL NOT DISQUALIFY THE ALLOWABILIT Y OF THE BUSINESS EXPENDITURE INCURRED BY THE ASSESSEE. THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF MR . YETURU RAMACHANDRA REDDY AND OTHERS (CITED SUPRA), HAS IN SIMILAR CIRCUMSTANCES HELD THE EXPENSES TO BE ALLOWABLE. THE RELEVANT PORTION OF THE ORDER IS AS UNDER : 7. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. WE HAVE HEARD BOTH THE PARTIES. IN THE ASSESSMENT ORDER AT PARA 3 THE AO HAS MENTIONED AS FOLLOWS: 3. AS SEEN FROM THE P&L A/C OF THE ASSESSEES BUSINESS CONCERN, IT IS OBSERVED THAT THE ASSESSEE HAS NOT DONE ANY CONTRACT WORK DURING THE YEAR UNDER CONSIDERATION. HOWEVER, HE HAS CLAIMED LOSS OF RS.9,09,657. AN AMOUNT OF RS.15,09,657 HAS BEEN DEBITED TO P&L A/C INCLUDING AN AMOUNT OF RS.6,00,000 TOWARDS INCOME TAX. AFTER ADDING THE INCOME TAX, THE LOSS HAS BEEN ARRIVED AT RS.9,09,657/-, EXPENSES TO THE TUNE OF RS.15,09,657 (AS PER BOOKS). THE EXPENDITURE INCLUDES DEPRECIATION, FINANCIAL CHARGES AND ADMINISTRATIVE EXPENSES. THE ASSESSEE HAS BEEN ASKED TO STATE AS TO WHY THE EXPENDITURE SHOULD NOT BE DISALLOWED AS THERE WAS NO BUSINESS DURING THE YEAR. 7.1 VIDE HIS REPLY DATED 10.11.2010 THE ASSESSEE HAS SUBMITTED AS UNDER : THE AO ALSO DIRECTED ME TO EXPLAIN AS TO WHY THE PROFESSIONAL CHARGES AND LEGAL EXPENSES, SALARIES, ADMINISTRATIVE EXPENSES ETC., SHOULD BE ALLOWED WHEN THERE IS NO INCOME/REVENUE RECEIPT. IN THIS 5 ITA.NO.1907/HYD/2014 M/S. ICS TECHNOLOGY SERVICES P. LTD., HYDERABAD REGARD IT IS TO SUBMIT THAT THE ASSESSEE IS A CIVIL CONTRACTOR HAVING SEVERAL CASES OF CLAIMS RECEIVABLE. CASES ARE PENDING. THE CASES OF SINGUR PROJECT SUIT FILED IN 2002, AWARD CHEQUE RECEIVED I N THE YEAR 2006-07. THEREFORE, IN THE SAME MANNER, I HAVE TO SPEND PROFESSIONAL AND LEGAL EXPENSES EVERY YEAR, UNTIL ALL SUCH CASES ARE DECIDED. I HAV E TO KEEP ALIVE THE BUSINESS ACTIVITY WHETHER I DO BUSINESS OR NOT. THEREFORE, THESE EXPENSES TOWARDS PROFESSIONAL AND LEGAL CHARGES ARE ALLOWABLE. FURTHER , WHEN THE AMOUNTS ARE REALIZED, IT IS ASSESSABLE AS BUSINESS INCOME AND THERE IS NO PROVISION TO ALLOW THESE EXPENSES WHEN YOU ASSESS THE INCOME WHEN IT IS RECEIVED. A DETAILED STATEMENT OF COURT CASES/ARBITRATION CASES IS HEREWITH ENCLOSED. 7.2 THE AO HAS GIVEN A FINDING THAT THE ASSESSEE HAS NOT CARRIED OUT ANY BUSINESS ACTIVITY DURING THE YEAR UNDER CONSIDERATION AND THE ASSESSEE DID NOT OFFER ANY INCOME FROM ARBITRATION AWARD DURING THE YEAR UNDER CONSIDERATION AND HENCE HE DISALLOWED THE TOTAL EXPENDITURE DEBITED T O P&L A/C AND ADDED BACK TO THE INCOME RETURNED. 7.3 WE ARE OF THE OPINION THAT WHILE EXPENDITURE CAN BE ALLOWED ONLY FOR BUSINESS WHICH IS CARRIED ON DURING THE YEAR, IT CANNOT BE DISALLO WED MERELY BECAUSE THERE IS NO PRODUCTION DURING THE YEAR, BUT BUSINESS ITSELF HAS NOT BEEN CLOSED AS HE LD IN CIT VS. UDAIPUR MINERAL DEVELOPMENT SYNDICATE PVT. LTD (269 ITR 263 (RAJ.). LITIGATION COST TO DE FEND ONES RIGHT HAS BEEN HELD TO BE ADMISSIBLE AS BUSINESS EXPENDITURE. IT HAS BEEN DISCUSSED IN LANDMARK CASES AS FOLLOWS : MERELY BECAUSE THERE ARE CERTAIN ALLEGATIONS AND THE STATE GOVT. HAS CONSTITUTED AN ENQUIRY INTO SUC H ALLEGATIONS, THE EXPENDITURE INCURRED BY THE COMPANY IN ENGAGING AN ADVOCATE TO ASSIST THE COMMISSION APPOINTED FOR THIS PURPOSE FOR ASCERTAINING THE FACTS CANNOT BE DISALLOWED. SUCH EXPENDITURE IS NECESSARY FOR PROTECTING OR SAFEGUARDING THE IMAGE OF THE COMPANY, WHICH 6 ITA.NO.1907/HYD/2014 M/S. ICS TECHNOLOGY SERVICES P. LTD., HYDERABAD HAS NECESSARILY TO BE PRESERVED FOR THE PURPOSE OF ITS BUSINESS. IT WAS SO DECIDED AFTER REVIEW OF MAN Y PRECEDENTS ON DEDUCTIBLE EXPENDITURE IN GUJARAT AGRO OIL ENTERPRISES LTD V. CIT (2002) (256 ITR 230 (GUJ.) FOLLOWING THE DECISION IN CIT V. H. HIRJEE ( 1953) (23 ITR 427 (SC). INCIDENTALLY, IN HIRJEES CASE DECIDED BY A BENCH OF THREE JUDGES, THE SUPREME COURT ALSO HELD THAT SUCH EXPENDITURE WOULD BE ALLOWABLE IN VIEW OF ITS IMPACT ON THE PROFITS OF T HE ASSESSEE AND THAT THE DEDUCTIBILITY OF THE EXPENDITURE DOES NOT DEPEND UPON FINAL OUTCOME OF THE PROCEEDINGS, WHICH MAY TAKE SOME YEARS BEFORE SUCH PROCEEDINGS ARE BROUGHT TO FINALITY. 7.4 HENCE PROFESSIONAL CHARGES AND LEGAL CHARGES ARE TO BE CONSIDERED ALLOWABLE. THEREFORE, WE REMIT THE ISSUE TO THE FILE OF THE AO TO GO THROUGH THE EXPENDITURE CLAIMED BY THE ASSESSEE IN THE P&L ACCOUNT AND DETERMINE THE ALLOWABILITY OF THE SAME IN LIGHT OF THE ABOVE MENTIONED DECISIONS. 5.1. WE ARE THEREFORE, INCLINED TO ACCEPT THAT THE EXPENDITURE INCURRED BY THE ASSESSEE EVEN THOUGH TH ERE IS NO BUSINESS INCOME IS ALLOWABLE AND UNDER SECTION 7 2 OF THE I.T. ACT, THE LOSS ARISING FROM BUSINESS IS TO BE ALLOWED TO BE SET OFF AGAINST THE INCOME FROM OTHER SOURCES . 6. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 13.04.2016. SD/- SD/- (S. RIFAUR RAHMAN) (SMT. P. MADHAVI DEVI) ACOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 13 TH APRIL, 2016 VBP/- 7 ITA.NO.1907/HYD/2014 M/S. ICS TECHNOLOGY SERVICES P. LTD., HYDERABAD COPY TO : 1. M/S. ICS TECHNOLOGY SERVICES P. LTD., 8-2-293/K/141, PHASE-III, KAMALAPURI COLONY, HYDERABAD 73. 2. THE DCIT, CIRCLE - 2(1), 8 TH FLOOR, I.T. TOWERS, A.C. GUARDS, HYDERABAD 4. 3. CIT(A) - II I, HYDERABAD. 4. CIT - II , HYDERABAD 5. D.R. ITAT B BENCH, HYDERABAD. 6. GUARD FILE