Sumeru Soft P Ltd., CHENNAI V. ITO, CHENNAI

ITA 252/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8537 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-09-2016
• Appeal Filed By: Assessee
• Bench Allotted: C
• Assessment Year: 2010-2011
• Appeal Filed On: 09-02-2016
• Court: TRIBUNAL
• Department Lawyers: S SRIDHAR
• Assessee Lawyers: A V SREEKANTH
• Keywords: Earning of tax free income
• Section: 14A; 37

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : CHENNAI . . . , ! . '#'$ , % !& ' [ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ] ./ I.T.A.NO.252/MDS/2016 / ASSESSMENT YEAR : 2011-12 M/S SUMERU SOFT PVT. LTD NO.50, CAPITAL OLACE SOUTH BOAG ROAD T. NAGAR, CHENNAI 600 017 VS. THE INCOM E TAX OFFICER COMPANY WARD VI(1) CHENNAI [PAN AAECS 2260F] ( () / APPELLANT) ( *+() /RESPONDENT) / APPELLANT BY : SHRI A.V SREEKANTH, JCIT /RESPONDENT BY : SHRI S. SRIDHAR, ADVOCATE / DATE OF HEARING : 24 - 0 8 - 2016 ! / DATE OF PRONOUNCEMENT : 09 - 0 9 - 2016 / O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-15, CHENN AI, DATED 18.12.2015 FOR ASSESSMENT YEAR 2011-12. 2. ASSESSEE HAS TAKEN ALTOGETHER NINE GROUNDS OF WHICH GROUND NOS.1,8 AND 9 ARE GENERAL IN NATURE NEEDING NO SPEC IFIC ADJUDICATION. ITA NO.252/16 :- 2 -: 3. IN GROUND NOS.2 TO 5, THE GRIEVANCE RAISED BY THE ASSESSEE IS AGAINST SUSTAINING DISALLOWANCE OF ` 2,20,841/- U/S 14A OF THE ACT R.W. RULE 8D. 4. LD. AR SUBMITTED THAT THE ASSESSEE HAD NOT EARNED ANY EXEMPT INCOME DURING THE PREVIOUS RELEVANT TO THE I MPUGNED ASSESSMENT YEAR. HENCE, ACCORDING TO HIM, INVOCATI ON OF SEC. 14A WAS NOT CALLED FOR. 5. PER CONTRA, THE LD. DR WHILE ADMITTING THAT ASSESS EE HAD NOT EARNED ANY EXEMPT INCOME, ASSERTED THAT DISALLOWANC E U/S 14A COULD NOT BE LINKED TO EARNING OF EXEMPT INCOME AS SUCH. 6. WE HEARD THE RIVAL CONTENTIONS AND PERUSED THE ORDE RS OF THE AUTHORITIES BELOW. THE ASSESSING OFFICER HAD MA DE A DISALLOWANCE OF `2,20,841/- BY INVOKING SEC. 14A R.W.R 8D(2)(III). ASSESSING O FFICER HAD GIVEN A FINDING THAT THE ASSESSEE HAD NOT USED ANY BORROWED FUNDS FOR EARNING EXEMPT INCOME. FURTHER, ACCORDIN G TO HIM, FOR MAKING INVESTMENT WHICH COULD EARN EXEMPT INCOME, ASSESSEE WOULD HAVE INCURRED SOME ADMINISTRATIVE COST. ACCORDINGL Y, HE APPLIED RULE 8D(2)(III) AND MADE THE ABOVE DISALLOWANCE. IT IS NOT DISPUTED THAT THE ASSESSEE FOR THE RELEVANT PREVIOUS YEAR HAD NOT CLA IMED ANY INCOME AS EXEMPT. IN OTHER WORDS, EVEN IF THE INVESTMENT MAD E BY THE ASSESSEE WAS CAPABLE TO RAISE ANY EXEMPT INCOME IN FUTURE, ASSESSEE ITA NO.252/16 :- 3 -: HAD NOT EARNED ANY SUCH INCOME DURING THE IMPUGNED ASSESSMENT YEAR. THAT SEC. 14A CANNOT BE INVOKED WHERE THE A SSESSEE HAS NOT CLAIMED ANY INCOME OF EXEMPT IS A VIEW TAKEN BY VAR IOUS HIGH COURTS OF THE COUNTRY. IT HAS BEEN HELD SO BY THE DELHI HI GH COURT IN THE CASE OF CHEMINVEST VS CIT 378 ITR 33, CIT VS HOLCIN IND IA PVT LTD [2014] 90CCH 81, BY P&H HIGH COURT IN THE CASE OF CIT VS H ERO CYCLES LTD, 323 ITR 518, BY GUJARAT HIGH COURT JUDGMENT IN THE CASE OF CIT VS CORRTECH ENERGY P. LTD, 372 ITR 97 AND BY ALLAHABAD HIGH COURT IN THE CASE OF CIT VS SHIVAM MOTOR INDIA P LTD, 230 TAXMAN 63. ACCORDINGLY, WE ARE OF THE OPINION THAT DISALLOWANCE U/S 14A WO ULD NOT HAVE BEEN MADE AND SUCH DISALLOWANCE IS DELETED. GROUND NOS. 2 TO 5 STAND ALLOWED. 7. VIDE GROUND NOS.6 & 7, THE GRIEVANCE OF THE ASSESS EE IS DISALLOWANCE OF `14,95,000/- BEING THE EXPENDITURE INCURRED FOR BUSINESS PROMOTION/ADVERTISEMENT . 8. FACTS APROPOS ARE THAT THE ASSESSEE ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT, HAD FILED ITS RET URN DECLARING INCOME OF ` 4,81,080/-. DURING THE COURSE OF ASSESSMENT PROCEE DINGS, IT WAS NOTED BY THE ASSESSING OFFICER THAT ASSESSE E HAD CLAIMED BUSINESS PROMOTION EXPENDITURE OF ` 14,95,000/-. THE DETAILS OF THE EXPENDITURE PROVIDED BY THE ASSESSEE READ AS UNDER : ITA NO.252/16 :- 4 -: 1. CHENNAI ST. BEDES SPORTS FOUNDATION ` 45,000 2. YOUTH ASSOCIATION FOR CLASSICAL MUSIC ` 50,000 3. THE TAMILNADU CRICKET ASSOCIATION ` 4,00,000 4. SPONSORSHIP FOR SPECIAL BOX AT MA CHIDAMBARAM STADIUM, CHENNAI ` 1000000 (1/6 TH OF `60 LAKHS) 9. EXPLANATION OF THE ASSESSEE WAS SOUGHT AS TO WHY T HE ABOVE EXPENDITURE SHOULD NOT BE DISALLOWED SINCE IT WAS N OT WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS. REPLY OF THE ASSESSEE WAS THAT MAJOR PART OF THE EXPENDITURE COM ING TO `10 LAKHS WAS IN RELATION TO SPONSORSHIP MADE FOR TAMILNADU C RICKET ASSOCIATION. AS PER THE ASSESSEE, IT WAS FELT THAT VISIBILITY OF ITS OWN NAME WOULD GET ENHANCED SINCE IT WOULD BE DISPLAYED ALL OVER THE VENUE. AS PER THE ASSESSEE, THE EVENT WAS TO BE NAMED AFTER IT. FURTHER EXPLANATION OF THE ASSESSEE WAS THAT THROUGH SUCH EXPENDITURE IT HAD ESTABLISHED AN ASSOCIATION WITH TAMILNADU CRICKET ASSOCIATION A ND CRICKET BEING AN IMPORTANT GAME IN THE COUNTRY, SOFTWARE PROFESSIONA LS EMPLOYED BY IT BEING YOUNGSTERS, THE IMPROVED VISIBILITY OF THE ASSESSEE IN CRICKET WOULD GIVE IT A POSITIVE BUSINESS DEVELOPMENT FACT OR. HOWEVER, THE ASSESSING OFFICER WAS NOT IMPRESSED UPON THE ABOVE CONTENTION. ACCORDING TO HIM, ASSESSEE HAD GIVEN EXPLANATION O NLY WITH REGARD TO THE EXPENDITURE OF ` 10 LAKHS AND VIS--VIS THE BALANCE OF ` 4,95,000/- NOTHING WHATSOEVER WAS FURNISHED. INSOFAR AS THE F ORMER EXPENDITURE ITA NO.252/16 :- 5 -: WAS CONCERNED, AS PER THE ASSESSING OFFICER, ASSES SEE HAD SPONSORED ONE SPECIAL BOX IN MA CHIDAMBARAM STADIUM, DURING FINANCIAL YEAR 2007-08 FOR A SUM OF ` 60 LAKHS. THE SPONSORSHIP WAS FOR A PERIOD OF SIX YEARS. THE SPECIAL BOX COULD BE USED BY NOT MO RE THAN 15 PERSONS DURING MATCHES HELD IN THE STADIUM. AS PER THE ASS ESSING OFFICER, ONLY ADVANTAGE THE ASSESSEE RECEIVED WAS DISPLAY OF ITS NAME ON THE TOP OF THE BOX PLACED IN THE STADIUM. IN ADDITION, ASS ESSEE HAD PAID ` 4,00,000/- FOR SPONSORING 14 CRICKET TOURNAMENTS CO NDUCTED BY TAMILNADU CRICKET ASSOCIATION. CONCLUSION OF THE A SSESSING OFFICER WAS THAT THE ASSESSEE WAS HAVING A VERY LIMITED CL IENTELE VIZ. M/S INFOSYS, M/S STANDARD CHARTERED BANK, THE CANCER IN STITUTE AND M/S SUNDARAM BNP PARIBAS. THE ONLY OTHER CLIENT THE A SSESSEE WAS HAVING, AS PER THE ASSESSING OFFICER, WAS BASED ON US. THE SPONSORSHIP OF THE SPECIAL BOX DID NOT RESULT IN AN Y BENEFIT TO THE ASSESSEE AND AS PER THE ASSESSING OFFICER, WAS NOT AN EXPENDITURE RELATABLE TO THE BUSINESS OF SOFTWARE DEVELOPMENT. THE ASSESSING OFFICER ALSO NOTED THAT THE MANAGING DIRECTOR OF TH E ASSESSEE SHRI K.V. AIYAPPAN WAS ALSO THE VICE PRESIDENT OF THE TA MILNADU CRICKET ASSOCIATION AND THEREFORE, THE EXPENDITURE WAS INC URRED FOR EXTRANEOUS REASONS. HE MADE A DISALLOWANCE OF ` 14,95,000/-. ITA NO.252/16 :- 6 -: 10. BEFORE THE CIT(A), ARGUMENT OF THE ASSESSEE WAS TH AT METHOD OF PROMOTING ASSESSEES BUSINESS COULD NOT BE DIRECTLY COMPARED TO THE REVENUE EARNED. AS PER THE ASSESS EE, SPONSORSHIP PAID FOR ADVERTISING WAS DIRECTLY RELATABLE TO THE BUSINESS OF THE ASSESSEE DUE TO THE ENHANCED VISIBILITY OF THE ASS ESSEES NAME IN THE STADIUM, DUE TO SUCH SPONSORSHIP. THUS, ACCORDING TO THE ASSESSEE, THE CLAIM WAS UNFAIRLY DISALLOWED. HOWEVER, THE CI T(A) WAS NOT IMPRESSED. ACCORDING TO HIM, WHAT ASSESSEE WAS NO T SOMETHING USED FOR MASS CONSUMPTION AND THE EXPENDITURE INCUR RED WAS RIGHTLY DISALLOWED BY THE ASSESSING OFFICER. 11. NOW BEFORE US, THE LD. AR STRONGLY ASSAILING THE DI SALLOWANCE MADE BY THE LOWER AUTHORITIES, SUBMITTED THAT ASSE SSEE WAS IN THE QUEST OF NEW CLIENTS. AS PER THE LD. AR, IT WAS AN ADMITTED POSITION THAT ASSESSEE HAD ONLY LIMITED CLIENTS. HENCE, TO INCREASE ITS BUSINESS, IT WAS NECESSARY TO ATTRACT NEW CLIENTS. ADVERTISE MENT THROUGH HOARDINGS IN THE STADIUM WHERE CRICKET TOURNAMENTS WERE HELD AND SPONSORSHIP OF SPECIAL BOX INCREASED THE VISIBILITY OF ASSESSEE-COMPANY ENHANCED THE CHANCES FOR GETTING NEW CLIENTS. FUR THER, AS PER THE LD. AR, SEVERAL OTHER CONCERNS LIKE BANKS AND INSURANCE COMPANIES SPONSORED SPECIAL BOXES BUT REVENUE COULD NOT SHOW WHETHER ANY DISALLOWANCES WERE MADE IN THEIR CASES. IN ANY CAS E, AS PER THE LD. ITA NO.252/16 :- 7 -: AR, THE EXPENDITURE WAS INCURRED IN RELATION TO THE BUSINESS OF THE ASSESSEE AND THE ASSESSING OFFICER OUGHT NOT HAVE S AT IN THE CHAIR OF THE BUSINESSMAN TO DECIDE WHETHER THE EXPENDITURE W AS REQUIRED OR NOT. 12. PER CONTRA, THE LD. DR STRONGLY SUPPORTED THE ORDER S OF THE AUTHORITIES BELOW. 13. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. OUT OF THE TOTAL EXPENDITURE OF ` 14,95,000/- CLAIMED BY THE ASSESSEE UNDER THE HEA D BUSINESS PROMOTION, ` 14 LAKHS WAS PAID TO TAMILNADU CRICKET ASSOCIATION . OUT OF THE BALANCE SUM OF ` 95,000/-, A SUM OF ` 45,000/- WAS PAID TO CHENNAI ST. BEDES SPORTS FOUNDATION AND ` 50,000/- WAS PAID TO YOUTH ASSOCIATION FOR CLASSICAL MUSIC. NOTHING WHATSOEVE R HAS BEEN BROUGHT OUT BY THE ASSESSEE TO SHOW THE BUSINESS PURPOSE O F THESE PAYMENTS. COMING TO THE PAYMENTS MADE TO TAMILNADU CRICKET AS SOCIATION, OUT OF THE TOTAL SUM OF ` 14 LAKHS, ` 10 LAKHS WAS FOR SPONSORING SPECIAL BOX AT MA CHIDAMBARAM STADIUM AND ` 4 LAKHS FOR SPONSORING 14 CRICKET TOURNAMENTS CONDUCTED BY TAMILNADU CRICKET ASSOCIAT ION. CASE OF THE ASSESSEE IS THAT IT WAS TRYING TO INCREASE ITS CLIE NTS DUE TO THE EXPOSURE THROUGH THE CRICKET MEDIUM. HOWEVER, IT IS AN ADMI TTED POSITION THAT ASSESSEE WAS IN THE SOFTWARE DEVELOPMENT AND IT HAD ONLY VERY LIMITED ITA NO.252/16 :- 8 -: NUMBER OF CLIENTS. CLAIM OF THE ASSESSEE IS THAT BY SPONSORING CRICKET TOURNAMENTS ITS EXPOSURE WOULD BE ENHANCED AND WOUL D RESULT IN ATTRACTING MORE CLIENTS. THIS IN OUR OPINION, IS F ARFETCHED. NO COMMERCIAL CONCERN WOULD EMPLOY A SOFTWARE CONCERN FOR DEVELOPMENT OF SOFTWARE THROUGH ITS EXPOSURE FROM HOARDINGS AT A CRICKET TOURNAMENT. THEY WOULD BE LOOKING INTO THE SKILLS OF THE CONCERN TO DECIDE WHETHER IT WOULD BE AN APPROPRIATE CHOICE FO R DEVELOPING SOFTWARE. IT IS ALSO AN ADMITTED POSITION THAT THE MANAGING DIRECTOR OF THE ASSESSEE-COMPANY WAS THE VICE PRESIDENT OF TAM ILNADU CRICKET ASSOCIATION. THE SPECIAL BOX SPONSORED BY THE ASS ESSEE COULD BE USED BY 15 PERSONS AND WAS AN AIR-CONDITIONED ONE. IT IS DIFFICULT TO IMAGINE HOW 15 PERSONS SITTING IN AN AIR-CONDITIONE D BOX AND WATCHING A CRICKET MATCH WOULD HELP THE BUSINESS OF THE ASS ESSEE. AS PER THE LD AR, SIMILAR DISALLOWANCES OUGHT TO HAVE BEEN MAD E IN THE CASE OF OTHER CONCERNS WHO HAD SPONSORED SIMILAR BOXES. IN OUR OPINION, THIS WOULD NOT HELP THE ASSESSEES CASE IN ANY MANNER. SEC. 37 MANDATES THAT AN EXPENDITURE COULD BE ALLOWED ONLY IF IT WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE ASSE SSEE HAS NOT BEEN ABLE TO SHOW THE NEXUS OF THE BUSINESS OF THE ASSE SSEE WITH THE EXPENDITURE INCURRED FOR SPONSORING OF SPECIAL BOX. HENCE, WE ARE OF THE VIEW THAT THE CIT(A) HAD RIGHTLY CONFIRMED THE DISALLOWANCE MADE ITA NO.252/16 :- 9 -: BY THE ASSESSING OFFICER. WE DO NOT FIND ANY REASO N TO INTERFERE WITH THE ORDERS OF THE LOWER AUTHORITIES. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PART LY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH SEPTEMBER, 2016, AT CHENNAI. SD/- SD/- ( . . . ' ) (N.R.S. GANESAN) / JUDICIAL MEMBER ( ! . '#'$ ) (ABRAHAM P. GEORGE) % / ACCOUNTANT MEMBER #$ / CHENNAI %& / DATED: 9 TH SEPTEMBER, 2016 RD &' ()*) / COPY TO: 1 . / APPELLANT 4. + / CIT 2. / RESPONDENT 5. ),- . / DR 3. +/' / CIT(A) 6. -01 / GF