Krishna Infotech, Hyderabad V. THE DCIT, CIRCLE-1, Rajahmundry

ITA 250/VIZ/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 2037 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 2 year(s) 10 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 20-01-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 17-04-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P SRINIVASA MURTHYDR
• Assessee Lawyers: S RAMA RAO
• Keywords: General deduction; Depreciation; Business expenditure; Capital expenditure
• Section: 142(1); 147; 148; 37

Judgement Text

ITA NO.250/VIZAG/2013 KRISHNA INFOTECH, HYDERABAD 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . , $ BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./I.T.A.NO.250&251/VIZAG/2013 ( / ASSESSMENT YEAR: 2006-07 & 2007-08) KRISHNA INFOTECH HYDERABAD VS. DCIT , CIRCLE - 1 , RAJAHMUNDRY [PAN: AAGFK 3833R ] ( / APPELLANT) ( / RESPONDENT) / APPELLANT BY : SHRI S. RAMA RAO, AR / RESPONDENT BY : SHRI P. SRINIVASA MURTHY,DR / DATE OF HEARING : 0 8. 0 2.201 6 / DATE OF PRONOUNCEMENT : 19.02.2016 / O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER: THESE APPEALS FILED BY THE ASSESSEE ARE DIRECTED A GAINST THE SEPARATE, BUT IDENTICAL ORDERS OF CIT(A), VISAKHAPA TNAM DATED 15.2.2013 FOR THE ASSESSMENT YEAR 2006-07 & 2007-08. SINCE, THE ISSUES INVOLVED IN THESE APPEALS ARE COMMON, THEY ARE CLUBBED, HEAR D TOGETHER AND DISPOSED OF BY WAY OF THIS COMMON ORDER. ITA NO.250/VIZAG/2013 KRISHNA INFOTECH, HYDERABAD 2 ITA 250/VIZAG/2013: 2. THE BRIEF FACTS OF THE CASE, ARE THAT THE ASSESS EE IS A PARTNERSHIP FIRM WHICH IS ENGAGED IN THE BUSINESS OF PROVIDING COMPUTER TRAINING, EDUCATION AND ALSO EXECUTION OF CONTRACTS IN SIMILA R TYPE OF WORKS. THE ASSESSEE HAS FILED ITS RETURN OF INCOME FOR THE ASS ESSMENT YEAR 2006-07 ON 31.10.2006 DECLARING A TOTAL INCOME OF RS.9,92,5 63/-. THE RETURN WAS PROCESSED U/S 143(1) OF THE INCOME-TAX ACT, 196 1 (HEREINAFTER CALLED AS THE ACT) ON 7.2.2007. THE CASE WAS REOP ENED UNDER SEC. 147 OF THE ACT, BY ISSUING NOTICE U/S 148 OF THE ACT. IN RESPONSE TO NOTICE ISSUED U/S 148, THE ASSESSEE HAS FILED A LETTER STA TING THAT THE RETURN FILED ORIGINALLY U/S 139(1) OF THE ACT, MAY BE TREA TED AS RETURN FILED IN RESPONSE TO NOTICE U/S 148 OF THE ACT. SUBSEQUENTL Y, THE CASE HAS BEEN SELECTED FOR SCRUTINY AND ACCORDINGLY, NOTICE U/S 1 43(2) AND 142(1) OF THE ACT WERE ISSUED. IN RESPONSE TO NOTICE, THE AU THORIZED REPRESENTATIVE OF THE ASSESSEE APPEARED FROM TIME T O TIME AND FURNISHED THE BOOKS OF ACCOUNTS AND OTHER RELEVANT INFORMATION. 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A.O. NOTICED THAT THE ASSESSEE HAS CLAIMED DEPRECIATION @ 50% ON IRIS CAMERAS. THE A.O. WAS OF THE OPINION THAT THE IRIS CAMERA IS A PLANT & MACHINERY COMING UNDER GENERAL BLOCK, ELIGIBLE FOR 15% DEPREC IATION, AS AGAINST ITA NO.250/VIZAG/2013 KRISHNA INFOTECH, HYDERABAD 3 THE ASSESSEE CLAIMED 50% DEPRECIATION, THEREFORE, I SSUED A SHOW CAUSE NOTICE AND ASKED TO EXPLAIN WHY EXCESS DEPRECIATION CLAIMED SHOULD NOT BE DISALLOWED. IN RESPONSE TO SHOW CAUSE NOTICE, TH E ASSESSEE SUBMITTED THAT IT HAS PURCHASED IRIS CAMERA FOR EXE CUTION OF SPECIFIED WORK FOR A.P. GOVERNMENT, FOOD & CIVIL SUPPLIES DEP ARTMENT FOR PREPARATION OF PHOTO ID RATION CARDS FOR THE BENEFI CIARIES. AS PER THE SAID AGREEMENT, THE ASSESSEE HAS TO PREPARE PHOTO I D RATION CARDS WITH THE IRIS IMAGE OF BENEFICIARIES. THE CONTRACT IS FO R A PERIOD OF 2 YEARS AND AFTER THE CONTRACT, THE IRIS CAMERAS ALONG WITH SOF TWARE AND HARDWARE USED FOR CAPTURING THE IRIS SHOULD BE RETURNED TO T HE PRINCIPALS I.E. THE DISTRICT COLLECTOR, GOVERNMENT OF ANDHRA PRADESH. T HE IRIS CAMERA IS SOPHISTICATED EQUIPMENT, WHICH CAN BE USED FOR SPEC IFIED PURPOSE AND WHICH CANNOT BE USED LIKE ANY OTHER DIGITAL CAMERA. IN ITS CASE, AFTER THE WORK IS OVER, IT CANNOT USE IT IN ANY OTHER WORK AN D IT WILL BE OBSOLETE ONCE THE WORK IS OVER. THEREFORE, THE COST OF SUCH IRIS CAMERAS WAS AMORTISED AND CHARGED TO THE PROFIT & LOSS ACCOUNT OVER A PERIOD OF 2 YEARS BY CLAIMING 50% DEPRECIATION. THE A.O., HOWEV ER, AFTER CONSIDERING THE EXPLANATIONS FURNISHED BY THE ASSES SEE HELD THAT THE IRIS CAMERA IS NOTHING BUT NORMAL DIGITAL CAMERA ELIGIBL E FOR DEPRECIATION OF 15% UNDER NORMAL BLOCK OF PLANT AND MACHINERY. SINC E, ASSESSEE PURCHASED THE ASSET AND PUT TO USE ON OR AFTER 1.10 .2005, THE A.O. ITA NO.250/VIZAG/2013 KRISHNA INFOTECH, HYDERABAD 4 CALCULATED DEPRECIATION @ 7.5% AND DISALLOWED THE E XCESS DEPRECIATION AMOUNTING TO RS.19,29,500/- 4. SIMILARLY, THE A.O. NOTICED THAT THE ASSESSEE HA S CLAIMED EXPENDITURE OF RS.4,49,990/- UNDER THE HEAD FRANCHI SEE FEES. THE A.O. FURTHER OBSERVED THAT A FRANCHISEE FEE IS IN THE NA TURE OF FEES FOR TECHNICAL SERVICES, WHICH ATTRACTS THE PROVISIONS O F SECTION 194J OF THE ACT. SINCE, ASSESSEE DID NOT DEDUCTED TDS, ISSUED A NOTICE AND ASKED TO EXPLAIN WHETHER TDS HAS BEEN DEDUCTED U/S 194J OF T HE ACT, IF SO FURNISH DETAILS. IN RESPONSE TO SHOW CAUSE NOTICE, THE ASSESSEE STATED THAT DURING THE FINANCIAL YEAR 1999-2000 IT HAS ENT ERED INTO FRANCHISEE AGREEMENT WITH SOFTWARE TECHNOLOGY GROUP INTERNATIO NAL LIMITED FOR RUNNING A FRANCHISEE FOR SOFTWARE TRAINING AND EDUC ATIONAL COURSES. AS PER THE FRANCHISEE AGREEMENT, IT NEEDS TO MAKE TECH NICAL KNOWHOW FEE AND TRAINING RESOURCES FEE OF RS.4,50,000/-. THE SA ID AMOUNT HAS BEEN PAID DURING THE FINANCIAL YEAR 1999-2000, THEREFORE , NO TDS HAS BEEN DEDUCTED. THE A.O. AFTER CONSIDERING THE EXPLANATI ONS FURNISHED BY THE ASSESSEE HELD THAT THE FRANCHISEE FEE ATTRACTS TDS U/S 194J OF THE ACT. SINCE, ASSESSEE FAILED TO DEDUCT TDS AS PER SECTION 194J OF THE ACT, THE FRANCHISEE FEES AMOUNTING TO RS. 4,49,990/- HAS BEE N DISALLOWED U/S 40(A)(IA) OF THE ACT AND ADDED TO THE TOTAL INCOME. ITA NO.250/VIZAG/2013 KRISHNA INFOTECH, HYDERABAD 5 5. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE A SSESSEE REITERATED ITS SUBMISSIONS BEFORE THE A.O. THE ASSESSEE FURTHER S UBMITTED THAT AS PER THE AGREEMENT ENTERED INTO BETWEEN DISTRICT COLLECT OR, THE LIFE OF THE IRIS CAMERAS USED IN THE EXECUTION OF WORKS CONTRACT IS ONLY 2 YEARS. AFTER THE EXECUTION OF WORKS CONTRACT, IT NEEDS TO RETURN THE SOFTWARE ALONG WITH DATA CAPTURED IN THE IRIS CAMERA TO THE DISTRI CT COLLECTOR. ONCE THE SOFTWARE IS RETURNED TO THE PRINCIPALS, THE IRIS CA MERA BECOMES OBSOLETE. THEREFORE, IT HAS AMORTISED AND CHARGED THE COST OF SUCH IRIS CAMERAS TO THE PROFIT & LOSS ACCOUNT OVER A PERIOD OF 2 YEARS @ 50% FOR EACH YEAR. SIMILARLY, AS REGARDS THE DISALLOWANCE OF FRANCHISE E FEES, THE ASSESSEE SUBMITTED THAT ON 18-4-1999 IT HAS ENTERED INTO AGR EEMENT WITH SOFTWARE TECHNOLOGY GROUP INDIA LIMITED FOR TAKING FRANCHISEE TO OFFER SOFTWARE TRAINING AND EDUCATION. AS PER THE AGREEME NT, DURING THE FINANCIAL YEAR 1999-2000 IT HAS PAID UPFRONT TECHNI CAL KNOWHOW AND TRAINING FEES OF RS.4,50,000/-. SINCE, THE AGREEMEN T WAS TERMINATED DURING THE FINANCIAL YEAR RELEVANT TO ASSESSMENT YE AR 2006-07, IT HAS CHARGED FRANCHISEE FEES TO THE PROFIT & LOSS ACCOUN T. AS THE AMOUNT WAS PAID DURING THE FINANCIAL YEAR 1999-2000, IT DID NO T DEDUCTED TDS ON SUCH PAYMENT. THE PROVISIONS OF SECTION 40(A)(IA) W AS NOT IN FORCE WHEN ITA NO.250/VIZAG/2013 KRISHNA INFOTECH, HYDERABAD 6 THE PAYMENT WAS MADE, THEREFORE, NO DISALLOWANCE CA N BE MADE FOR FRANCHISEE FEE. 6. THE CIT(A), HOWEVER, AFTER CONSIDERING THE EXPLA NATIONS FURNISHED BY THE ASSESSEE HELD THAT THE IRIS CAMERA IS A HARD WARE COMPONENT AND IS AKIN TO ANY DIGITAL CAMERA. IT HAS ITS OWN UTILI TY AS HARDWARE. IT MAY NEED DATA CARD SOFTWARE FOR ITS FUNCTION, BUT THAT WOULD NOT MEAN THAT THE CAMERA AS SUCH IS OBSOLETE. WITH THESE OBSERVATI ONS, THE CIT(A) HELD THAT IRIS CAMERA IS NOTHING BUT A NORMAL DIGIT AL CAMERA AND ELIGIBLE FOR 15% DEPRECIATION AND NOT 50% AS CLAIMED BY THE ASSESSEE. THE CIT(A) FURTHER HELD THAT IT IS EVIDENT FROM THE FRA NCHISEE AGREEMENT DATED 18.4.1999 THAT PAYMENT OF FRANCHISEE FEES HAS BEEN MADE AT THE TIME OF ENTERING INTO AGREEMENT. HENCE, THERE IS A MERIT IN THE CONTENTION OF THE ASSESSEE THAT THE PAYMENT WAS NOT MADE DURING THE YEAR AND THERE IS NO LIABILITY FOR TDS. ACCORDINGLY , THE DISALLOWANCE MADE U/S 40(A)(IA) OF THE ACT IS DELETED. HOWEVER, THE C IT(A) FURTHER OBSERVED THAT THE CLAIM OF FRANCHISEE FEES EXPENSES OF RS.4, 49,990/- IN THE SUBJECT PREVIOUS YEAR IS NOT JUSTIFIED AS THE TRAIN ING CENTRE WAS CLOSED ON 17.4.2006. AS PER THE AGREEMENT, THE IMPUGNED AMOUN T RELATED TO THE TERM OF THE AGREEMENT I.E. FOR 6 YEARS. THE CLAIM THAT THE AMOUNT WAS KEPT AS DEPOSIT AND WRITTEN OFF IS NOT ACCEPTABLE I N VIEW OF ITA NO.250/VIZAG/2013 KRISHNA INFOTECH, HYDERABAD 7 CLEAR PROVISIONS CONTAINED IN FRANCHISEE AGREEMENT THAT IT IS A FEE FOR MAN POWER TRAINING AND OTHER SERVICE FOR THE TERM O F THE AGREEMENT, ACCORDINGLY, DIRECTED THE A.O. TO DISALLOW THE FRAN CHISEE FEE U/S 37 OF THE ACT. AGGRIEVED BY THE CIT(A) ORDER, THE ASSESS EE IS IN APPEAL BEFORE US. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MA TERIALS AVAILABLE ON RECORD. THE FIRST ISSUE CAME UP FOR OU R CONSIDERATION IS WHETHER CIT(A) WAS RIGHT IN CONFIRMING DISALLOWANCE OF EXCESS DEPRECIATION CLAIMED ON IRIS CAMERAS. THE A.O. WAS OF THE OPINION THAT THE IRIS CAMERA IS NOTHING BUT A NORMAL DIGITAL CAM ERA, COMING UNDER PLANT AND MACHINERY AND ELIGIBLE FOR 15% DEPRECIATI ON. IT WAS THE CONTENTION OF THE ASSESSEE THAT IRIS CAMERA IS NOT A MERE DIGITAL CAMERA. IT IS A PART OF THE COMPUTER SYSTEM CONFIGURATION A ND THE SAID EQUIPMENT IS FOUND AS IRIS ACCESS SYSTEM. IT HAS AN IRIS REC OGNITION SYSTEM AND A COMPUTER ACCESSORY. THE LITERATURE PUBLISHED BY LG WITH REGARD TO IRIS ACCESS 2000, THE INSTRUMENT USED IN THE BUSINESS OF THE ASSESSEE IS SUBMITTED IN THE PAPER BOOK. THE ASSESSEE FURTHER S UBMITTED THAT AS CAN BE SEEN FROM THE LITERATURE, THE EQUIPMENT NOW UNDE R CONSIDERATION IS TECHNICALLY KNOWN AS EOU(ENROLMENT OPTICAL UNIT) 30 00. THIS RECOGNIZES THE IRIS FOR ENROLMENT OF THE IRIS IN THE SERVER. T HE IRIS RECOGNITION ITA NO.250/VIZAG/2013 KRISHNA INFOTECH, HYDERABAD 8 SYSTEM, THE SOFTWARE TO BE USED FOR THE PURPOSE AND THE GRABBER CARD ARE SUPPLIED BY THE DISTRICT COLLECTOR OF A.P. GOVE RNMENT FOR THE USE OF IRIS RECOGNITION SYSTEM TO BE USED ONLY FOR THE PUR POSE OF ISSUE OF VARIOUS TYPES OF RATION CARDS. WITHOUT THE SOFTWAR E, THE IRIS RECOGNITION SYSTEM CANNOT BE OPERATED. THE ASSESSEE FURTHER CO NTENDED THAT THE SOFTWARE SUPPLIED BY THE PRINCIPALS I.E. DISTRICT C OLLECTOR HAS TO BE RETURNED TO THE GOVERNMENT AFTER THE WORK IS COMPLE TED. IT HAS NO RIGHT ON THE SOFTWARE SUPPLIED BY THE PRINCIPALS. THEREF ORE, IT HAS CHARGED THE COST OF SUCH CAMERAS OVER A PERIOD OF 2 YEARS T O THE PROFIT & LOSS ACCOUNT. 8. WE HAVE CONSIDERED THE SUBMISSIONS OF THE ASSESSE E AND ALSO GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE ASSESSEE MAIN BUSINESS IS TO PROVIDE SOFTWARE TRAINING. THIS WORK OF PREPARATION OF PHOTO ID RATION CARDS WAS TAKEN AS A SPECIAL CONTRA CT. AS PER THE SAID AGREEMENT ENTERED INTO WITH THE DISTRICT COLLECTOR, THE IRIS CAMERA WAS SUPPLIED BY THE DISTRICT COLLECTOR. IT IS FURTHER OBSERVED THAT AS PER CLAUSE 7 OF THE AGREEMENT, AFTER THE COMPLETION OF THE WORK THE ASSESSEE NEEDS TO RETURN THE SOFTWARE ALONG WITH A DATA CAPTURED IN THE IRIS RECOGNITION SYSTEM TO THE PRINCIPALS. IT IS U NCERTAIN THAT ONCE THE SOFTWARE IS RETURNED, WHETHER THE IRIS CAMERAS WORK INDEPENDENTLY ITA NO.250/VIZAG/2013 KRISHNA INFOTECH, HYDERABAD 9 WITHOUT THE AID OF THAT SOFTWARE OR NOT. IT IS THE CONTENTION OF THE ASSESSEE THAT WITHOUT THE AID OF SOFTWARE PROVIDED WITH THE IRIS CAMERA, THE CAMERAS BECOME OBSOLETE AND CANNOT BE USED IN I TS BUSINESS. ON PERUSAL OF THE PAPER BOOK FILED BY THE ASSESSEE, WE FIND THAT THE IRIS CAMERA IS A SOPHISTICATED EQUIPMENT WORKS WITH THE AID OF SOFTWARE AND COMPUTER ALONG WITH OTHER ACCESSORIES. AS STATED IN THE CLAUSE 7 OF THE AGREEMENT, THE ASSESSEE NEEDS TO RETURN THE SOFTWAR E ALONG WITH DATA CAPTURED IN IRIS ACCESS SYSTEM. THERE IS NO GUARANT EE THAT THE ASSESSEE CAN GET SIMILAR TYPE OF WORK TO MAKE USE OF THE IRI S CAMERA IN ITS BUSINESS. IT WAS THE CONTENTION OF THE LOWER AUTHO RITIES THAT THE IRIS CAMERA IS A NORMAL DIGITAL CAMERA CAN BE USED INDEP ENDENTLY. WE DO NOT AGREE WITH THE STAND TAKEN BY THE LOWER AUTHORI TIES FOR THE REASON THAT THE IRIS CAMERA IS A HARDWARE COMPONENT AND IT WORKS WITH THE AID OF SPECIFIED SOFTWARE PROVIDED ALONG WITH IRIS ACCE SS SYSTEM. THOUGH THE CIT(A) STATED THAT THE CAMERA IS A HARDWARE COMPONE NT AND IT IS AKIN TO ANY DIGITAL CAMERA, IT IS NOT CERTAIN THAT IRIS CAM ERA CAN BE USED FOR GENERAL PURPOSES. THEREFORE, WE ARE OF THE OPINION THAT THE CIT(A) WAS NOT CORRECT IN COMING TO THE CONCLUSION THAT THE IR IS CAMERA IS A HARDWARE COMPONENT AND IT IS AKIN TO ANY DIGITAL CA MERA AND HENCE ELIGIBLE FOR NORMAL DEPRECIATION OF 15% AS A PLANT AND MACHINERY. ITA NO.250/VIZAG/2013 KRISHNA INFOTECH, HYDERABAD 10 9. THE ASSESSEE SUBMITTED A PAPER BOOK CONTAINING D ETAILS OF IRIS CAMERA. THE LITERATURE PUBLISHED BY LG WITH REGARD TO IRIS ACCESS 2000, MADE IT CLEAR THAT THE IRIS RECOGNITION SYSTEM IS S PECIAL EQUIPMENT NOT A MERE DIGITAL CAMERA. WITHOUT THE SOFTWARE, THE IRIS RECOGNITION SYSTEM CANNOT BE OPERATED. THE IRIS RECOGNITION SYSTEM, TH E SOFTWARE TO BE USED FOR THE PURPOSE AND THE GRABBER CARD ARE SUPPL IED BY THE GOVERNMENT FOR THE USE OF IRIS RECOGNITION SYSTEM T O BE USED ONLY FOR THE PURPOSE OF ISSUE OF VARIOUS TYPES OF RATION CAR DS. THE ASSESSEE CATEGORICALLY STATED THAT THIS CAMERA CANNOT BE USE D IN NORMAL COURSE OF BUSINESS AND IT CAN BE USED ONLY FOR THE SPECIFIED PURPOSE OF CAPTURING IRIS. THE ASSESSEE TAKEN THIS CONTRACT FOR THE FIRS T TIME AND AFTER COMPLETION OF THE PROJECT HE DID NOT ENTER INTO ANY OTHER CONTRACT OF SIMILAR TYPE. THE CAMERAS BECOME OBSOLETE ONCE THE WORK IS OVER. WE FIND FORCE IN THE ARGUMENT OF THE ASSESSEE FOR THE REASON THAT ON PERUSAL OF DETAILS, WE FIND THAT THE ASSESSEE HAS USED THIS CAMERAS SUPPLIED BY THE PRINCIPALS FOR THE SPECIFIED PURPOSE OF EXECUTI ON OF ITS WORK CONTRACT. AS PER THE AGREEMENT, THE SOFTWARE USED FOR CAPTURI NG IRIS SHOULD BE RETURNED TO THE PRINCIPALS. THEREFORE, WE ARE OF T HE OPINION THAT THE IRIS CAMERA WITHOUT THE AID OF SOFTWARE IS OBSOLETE AND IT CANNOT BE USED IN THE NORMAL COURSE OF BUSINESS. THE ASSESSEE HAS RI GHTLY CLAIMED 50% ITA NO.250/VIZAG/2013 KRISHNA INFOTECH, HYDERABAD 11 DEPRECIATION OVER A PERIOD OF TWO YEARS. HENCE, WE DIRECT THE A.O. TO ALLOW THE DEPRECIATION AS CLAIMED BY THE ASSESSEE. 10. THE NEXT ISSUE CAME UP FOR OUR CONSIDERATION IS DISALLOWANCE OF FRANCHISEE FEES U/S 40(A)(IA) OF THE ACT. THE A.O. WAS OF THE OPINION THAT THE PAYMENT OF FRANCHISEE FEES IS IN THE NATUR E OF TECHNICAL FEES, ATTRACTS PROVISIONS OF SECTION 194J OF THE ACT. SI NCE, ASSESSEE FAILS TO DEDUCT TDS, DISALLOWED THE AMOUNT U/S 40(A)(IA) OF THE ACT. ON FIRST APPEAL, THE CIT(A) HELD THAT THE IMPUGNED PAYMENT W AS NOT MADE DURING THE PREVIOUS YEAR AND HENCE THERE IS NO LIAB ILITY FOR TDS. ACCORDINGLY, DELETED THE DISALLOWANCE MADE U/S 40(A )(IA) OF THE ACT. HOWEVER, THE CIT(A) WAS OF THE OPINION THAT THE CLA IM OF FRANCHISEE FEES IN THE SUBJECT PREVIOUS YEAR WAS NOT JUSTIFIED, AS THE AGREEMENT WAS TERMINATED ON 17.4.2006. THE CIT(A) FURTHER OBSERV ED THAT THE PERIOD OF AGREEMENT IS FOR A PERIOD OF 6 YEARS. THE ASSES SEE MADE THE PAYMENT IN THE FINANCIAL YEAR 1999-2000, THEREFORE, ASSESSEE IS NOT ELIGIBLE FOR DEDUCTION IN THE SUBJECT PREVIOUS YEAR , THEREFORE DIRECTED THE A.O. TO DISALLOW THE AMOUNT U/S 37 OF THE ACT. IT WAS THE CONTENTION OF THE ASSESSEE THAT THE SUBJECT AGREEMENT WAS TERMINA TED DURING THE FINANCIAL YEAR 2005-06 RELEVANT TO ASSESSMENT YEAR 2006-07. THEREFORE, IT HAS RIGHTLY CLAIMED THE EXPENDITURE ON TERMINATI ON OF THE AGREEMENT. ITA NO.250/VIZAG/2013 KRISHNA INFOTECH, HYDERABAD 12 11. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATE RIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. THE A.O. DISALLOWED THE AMOUNT FOR THE REASON THAT ASSE SSEE HAS FAILED TO DEDUCT TDS ON PAYMENT OF FRANCHISEE FEES. THE CIT( A) WAS OF THE OPINION THAT THE ASSESSEE WAS RIGHT IN NOT DEDUCTIN G TDS AS THE PAYMENT WAS NOT MADE DURING THE RELEVANT FINANCIAL YEAR, HOWEVER, HELD THAT THE AMOUNT IS NOT ALLOWABLE U/S 37 OF THE ACT, AS THE SUBJECT PAYMENT WAS NOT PERTAINING TO THE FINANCIAL YEAR UN DER CONSIDERATION. THE ASSESSEE FILED A PAPER BOOK CONTAINING THE COPY OF AGREEMENT ENTERED INTO WITH THE SOFTWARE TECHNOLOGY GROUP OF INDIA LIMITED, WHICH IS AVAILABLE AT PAGES 44 TO 74 OF THE PAPER B OOK. ON PERUSAL OF THE AGREEMENT, WE FIND THAT THE AGREEMENT WAS ENTER ED ON 18.4.1999 AND ENDED ON 17.4.2005. AS PER CLAUSE 3.9 OF THE A GREEMENT, IT WAS SPECIFICALLY MENTIONED THAT THE DATE OF TERMINATION OF THE AGREEMENT IS 17.4.2005. WE FURTHER NOTICED THAT THE CLAUSE 7 OF AGREEMENT PROVIDES FOR TERMINATION OF AGREEMENT. AS PER CLAUSE 8 OF T HE AGREEMENT, IT WAS SPECIFICALLY MENTIONED THAT THE DATE OF TERMINATION OF THE AGREEMENT IS AS PER CLAUSE 3.9 OF THE AGREEMENT I.E. ON 17.4.200 5. THEREFORE, WE ARE OF THE OPINION THAT THE CIT(A) WAS RECORDED INCORRE CT FINDINGS OF THE FACTS TO STATE THAT THE AGREEMENT WAS TERMINATED ON 17.4.2006 AND ITA NO.250/VIZAG/2013 KRISHNA INFOTECH, HYDERABAD 13 HENCE THE IMPUGNED AMOUNT WAS NOT ELIGIBLE FOR DEDU CTION FOR THE YEAR UNDER CONSIDERATION. 12. HAVING SAID THAT LET US EXAMINE WHETHER THE CIT (A) WAS CORRECT IN DISALLOWED THE AMOUNT U/S 37 OF THE ACT. THE CIT(A ) DISALLOWED THE AMOUNT U/S 37 OF THE ACT, BY STATING THAT THE IMPUG NED AMOUNT FALLS OUTSIDE THE FINANCIAL YEAR AND HENCE NOT ENTITLED F OR DEDUCTION. WE DO NOT SEE ANY MERITS IN THE FINDINGS OF THE CIT(A). S ECTION 37 PROVIDES FOR GENERAL DEDUCTIONS, WHERE ANY EXPENDITURE (NOT BEIN G EXPENDITURE OF THE NATURE DESCRIBED IN SECTION 30 TO 36 AND NOT BE ING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENDITURE OF THE ASSESSEE) INCURRED ONLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSION SHALL BE ALLOWED AS A DEDUCTION IN COMPUTING THE INCOME CHAR GEABLE UNDER THE HEAD BUSINESS OR PROFESSION. AS PER SECTION 37, IF THE EXPENDITURE INCURRED ONLY AND EXCLUSIVELY FOR THE PURPOSE OF BU SINESS, THEN THE AMOUNT SHOULD BE ALLOWED AS A DEDUCTION IN COMPUTIN G THE INCOME FROM BUSINESS. IN THE PRESENT CASE ON HAND, FROM THE FA CTS IT WAS CLEARLY SHOWN THAT THE AMOUNT WAS INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THE ONLY DISPUTE WAS THAT THE SUBJECT PA YMENT WAS NOT ENTITLED FOR DEDUCTION U/S 37 OF THE ACT, AS THE AM OUNT WAS NOT INCURRED DURING THE RELEVANT FINANCIAL YEAR. BUT, THE FACT CLEARLY SHOWS THAT THE ITA NO.250/VIZAG/2013 KRISHNA INFOTECH, HYDERABAD 14 ASSESSEE DEBITED THE IMPUGNED AMOUNT DURING THE PRE VIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2006-07. THOUGH THE SU BJECT PAYMENT WAS MADE IN THE FINANCIAL YEAR 1999-2000, THE ASSESSEE CHARGED THE AMOUNT TO THE P&L ACCOUNT DURING THE FINANCIAL YEAR 2006-0 7, SINCE THE AGREEMENT WAS TERMINATED AND BUSINESS WAS CLOSED DU RING THE FINANCIAL YEAR 2005-06 RELEVANT TO ASSESSMENT YEAR 2006-07. T HOUGH, THE EXPENDITURE HAS BEEN PAID IN EARLIER YEARS AND CONS IDERED AS PRIOR PERIOD EXPENDITURE, STILL IT CAN BE CLAIMED AS EXPE NDITURE DEDUCTIBLE FOR THE YEAR UNDER CONSIDERATION AS LONG AS IT WAS INCU RRED FOR BUSINESS PURPOSE. WHEN THE PRIOR PERIOD EXPENDITURE/LIABILIT Y CLAIMED AS BUSINESS EXPENDITURE FOR THE RELEVANT ASSESSMENT YEAR, THE P OINT TO BE CONSIDERED IS WHETHER THE CLAIM WAS ASCERTAINED AND CRYSTALLIZ ED DURING THE YEAR UNDER CONSIDERATION OR NOT. IN THE PRESENT CASE ON HAND, THE ASSESSEE PROVED THAT THE SUBJECT AGREEMENT WAS TERMINATED DU RING THE FINANCIAL YEAR 2005-06 AND HE HAS NOT CLAIMED THE EXPENDITURE IN EARLIER YEARS. THEREFORE, WE ARE OF THE OPINION THAT THE CIT(A) WA S NOT CORRECT IN DISALLOWED THE FRANCHISEE FEES U/S 37 OF THE ACT. HENCE, WE REVERSE THE CIT(A) ORDER AND DIRECT THE A.O. TO DELETE THE ADDI TIONS. 13. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ITA NO.250/VIZAG/2013 KRISHNA INFOTECH, HYDERABAD 15 ITA 251/VIZAG/2013: 14. THE FACTS AND ISSUES INVOLVED IN THIS APPEAL AR E IDENTICAL TO ITA NO.250/VIZAG/2013. THEREFORE, FOR THE REASONS RECOR DED IN THE PRECEDING PARAGRAPHS, WE ALLOW THE APPEAL FILED BY THE ASSESSEE. 15. IN THE RESULT, THE APPEALS FILED BY THE ASSESSE E FOR BOTH THE YEARS ARE ALLOWED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 19 TH FEB16. SD/- SD/- ( . ) ( . ) (V. DURGA RAO) (G. MANJUNATHA) /JUDICIAL MEMBER /ACCOUNTANT MEMBER # /VISAKHAPATNAM: ' /DATED : 19.02.2016 VG/SPS )# *# /COPY OF THE ORDER FORWARDED TO:- 1. / THE APPELLANT KRISHNA INFOTECH, C/O S. RAMA RAO , ADVOCATE, FLAT NO.102, SHRIYAS ELEGANCE, H.NO.3-6-643, STREET NO. 9, HIMAYATNAGAR, HYDERABAD. 2. / THE RESPONDENT DCIT CIRCLE-1, RAJAHMUNDRY 3. + / THE CIT, RAJAHMUNDRY 4. + ( ) / THE CIT (A), VISAKHAPATNAM 5. # . , . , # / DR, ITAT, VISAKHAPATNAM 6 . / GUARD FILE / BY ORDER // TRUE COPY // 12 . (SR.PRIVATE SECRETARY) . , # / ITAT, VISAKHAPATNAM