The DCIT, Circle-4, Ahmedabad V. Icon Data Management Ltd.,(Merged with GHCL Ltd.), Ahmedabad

ITA 2549/AHD/2007

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 63124 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 5 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 05-09-2012
• Assessment Year: 2002-2003
• Appeal Filed On: 08-06-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KARTAR SINGH
• Assessee Lawyers: S N SOPARKAR
• Keywords: Capital asset; Revenue expenditure

Judgement Text

I TA NO.2549 /AHD/2007 . ASSESSMENT Y EAR 2002- 03 . 1 IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD (BEFORE SHRI G.C.GUPTA VICE PRESIDENT & SHRI ANIL C HATURVEDI, A.M.) I.T. A. NO.2549/AHD/2007 (ASSESSMENT YEAR: 2002-03) DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-4, KENDRIYA PRATYAKSHA KAR BHAVAN, NR.PANJARA POLE, AMBAWADI, AHMEDABAD. (APPELLANT) VS. ICON DATA MANAGEMENT LTD., (MERGED WITH GHCL LTD.) GHCL HOUSE, OPP. PUNJABI HALL, SWASTIK SOCIETY, NAVRANGPURA, AHMEDABAD. (RESPONDENT) PAN: AAACI7811C APPELLANT BY : SHRI KARTAR SINGH, CIT (D R) RESPONDENT BY : SHRI S.N. SOPARKAR, SR.ADV. ( )/ ORDER DATE OF HEARING : 5- 09- 2012 DATE OF PRONOUNCEMENT : 30-11-2012 PER: SHRI ANIL CHATURVEDI, A.M. THIS APPEAL IS FILED BY THE REVENUE AGAINST THE ORD ER OF LD. CIT (A)- VIII, AHMEDABAD DATED 13-3-2007 FOR THE ASSESSMENT YEAR 2002-03. 2. THE ASSESSEE IS A LIMITED COMPANY ENGAGED IN THE BUSINESS OF IT ENABLED SERVICES (INTERNATIONAL CUSTOMER CONTACT CE NTER). ASSESSEE FILED I TA NO.2549 /AHD/2007 . ASSESSMENT Y EAR 2002- 03 . 2 ITS ORIGINAL RETURN OF INCOME FOR A.Y. 2002-03 ON 31-10-2002 DECLARING TOTAL LOSS OF (-) RS.9,91,62,820/-.THE RETURN WAS PROCESS ED U/S. 143(1)(A) AND THE RETURNED LOSS WAS ACCEPTED BY THE INTIMATION DA TED 13-2-2002. A.O. THEREAFTER REOPENED THE ASSESSMENT TO ASCERTAIN C ORRECTNESS OF THE LOSS DECLARED AND ISSUED NOTICE U/S. 148 ON 26-07-2005. THE COPY OF THE REASONS RECORDED FOR ISSUE OF NOTICE U/S. 148 WAS P ROVIDED TO THE ASSESSEE. IN RESPONSE TO THE NOTICE U/S. 148, ASSES SEE VIDE ITS LETTER DATED 4-8-2005 SUBMITTED THAT THE ORIGINAL RETURN FILED O N 30-10-2005 MAY BE TREATED AS RETURN IN PURSUANCE TO NOTICE U/S. 148 O F THE ACT. DURING THE COURSE OF RE-ASSESSMENT PROCEEDINGS A.O. NOTICED TH AT THE TRAVELING EXPENDITURE MENTIONED IN PARAGRAPH 4 ON PAGE 3 HAS BEEN CLAIMED AS REVENUE EXPENDITURE THOUGH THE SAME WAS TREATED AS DEFERRED REVENUE EXPENDITURE IN THE BOOKS OF ACCOUNTS. A.O. ALSO NOT ICED THAT OUT OF THE TOTAL EXPENDITURE OF RS.1,32,62,337/-, ASSESSEE HAD DEBIT ED A SUM OF RS.12,31,175/- TO PROFIT AND LOSS ACCOUNT AND THE BALANCE AMOUNT OF RS.1,20,31,162/- WAS CARRIED OVER TO SUBSEQUENT YEA RS. A.O. ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE ASKING HIM TO EXP LAIN AS TO WHY PRE- COMMENCEMENT EXPENSES BEING INITIAL MARKETING EXPEN SES AND PROFESSIONAL FEES FOR CONSULTANCY WHICH HAVE BEEN S HOWN AS CAPITAL IN NATURE IN THE BOOKS OF ACCOUNTS SHOULD NOT DISALLOW ED AS REVENUE EXPENDITURE. THE ASSESSEE INTERALIA SUBMITTED THAT OUT OF THE TOTAL EXPENDITURE OF RS.132.64 LACS, EXPENDITURE OF RS.36 .07 LACS WAS INCURRED AFTER THE COMMENCEMENT OF COMMERCIAL PRODUCTION I.E . AFTER 1-10-2001.THE EXPENDITURE HAS BEEN DEFERRED IN THE BOOKS OF ACCOU NTS BUT CLAIMED AS REVENUE EXPENDITURE IN THE RETURN OF INCOME. ASSESS EE ALSO PLACED RELIANCE ON VARIOUS DECISIONS IN SUPPORT OF ITS CONTENTION T HAT THE EXPENDITURE BE I TA NO.2549 /AHD/2007 . ASSESSMENT Y EAR 2002- 03 . 3 ALLOWED AS REVENUE EXPENDITURE. A. O. DID NOT ACCEP T THE CONTENTION OF THE ASSESSEE FOR THE REASON THAT MAJORITY OF THE EXPENS ES AMOUNTING TO RS.46.55 LACS WAS INCURRED BEFORE THE COMMENCEMENT OF PRODUCTION AND THE EXPENDITURE TO THE TUNE OF RS.32.07 LACS HAD ON LY BEEN INCURRED AFTER THE COMMENCEMENT OF THE PRODUCTION. FROM, THE DETAI LS OF THE NARRATION GIVEN IN THE ANALYSIS FOR EXPENDITURE A.O. OBSERVED THAT THE EXPENDITURE RELATED TO SALARIES, RENT, TRAVEL EXPENSES, LEGAL F EES, COPYWRITING AND GRAPHIC DESIGN. HE WAS OF THE VIEW THAT THE EXPENDI TURE WAS IN THE NATURE OF MARKETING SURVEY WHEREBY THE ASSESSEE WAS TRYING TO IDENTIFY A SUITABLE ALLIANCE WITH A CALL CENTRE IN USA. HE WAS OF THE V IEW THAT THE EXPENSE INCURRED PRIOR TO THE COMMENCEMENT CANNOT BE ALLOWE D AS REVENUE EXPENDITURE. FURTHER ACCORDING TO HIM THE ASSESSEE GOT ENDURING BENEFIT OUT OF THE INITIAL MARKETING EXPENSES AND THEREFORE , THE EXPENDITURE CANNOT BE TREATED AND ALLOWED AS REVENUE EXPENDITURE. THE A.O. RELYING ON THE DECISION OF UCO BANK VS. CIT [1999] 240 ITR 355 (SC ), KEDARNATH JUTE MFG.CO. LTD., VS. CIT [1971] 82 ITR 363 (SC) AND OT HER DECISIONS HELD THAT THE ENTIRE EXPENDITURE OF RS. 132.62 LACS CANNOT BE ALLOWED AS REVENUE EXPENDITURE. HE HOWEVER, ALLOWED THE EXPENDITURE OF RS.36.07 LACS INCURRED AFTER THE COMMENCEMENT OF THE BUSINESS AS REVENUE EXPENDITURE. THE BALANCE AMOUNT OF RS.96.55 LACS WAS AMORTIZED U /S. 35D.HE FURTHER ALLOWED 1/5 TH OF RS.96.55 LACS IN THE YEAR UNDER ASSESSMENT THUS OUT OF THE TOTAL EXPENDITURE UNDER THE HEAD INITIAL MARKETING EXPENSES HE WORKED OUT THE ALLOWABLE EXPENDITURE TO THE EXTENT OF RS.55,38 ,535/- AND THE BALANCE OF RS.77,23,803/- WAS DISALLOWED AND ADDED TO THE T OTAL INCOME. AGGRIEVED WITH THE ACTION OF THE A.O. ASSESSEE PREFERRED APPE AL BEFORE THE CIT (A). I TA NO.2549 /AHD/2007 . ASSESSMENT Y EAR 2002- 03 . 4 3. BEFORE CIT (A) IT WAS SUBMITTED THAT THE EXPENDI TURE IN DISPUTE WAS INCURRED AFTER SETTING UP OF THE BUSINESS. THE ASSE SSEE HAD RECEIVED THE STP LICENCE ON 14-2-2001, DOT PERMISSION WAS RECEIV ED ON 23-4-2000, BSNL PERMISSION WAS RECEIVED ON 23-4-2001 AND THE C USTOM BONDED WAREHOUSE LICENCE WAS RECEIVED ON 20-4-2001. THE AS SESSEE HAD ACQUIRED OPERATIONAL SOFTWARE ON 29-3-2001 AND THE ENTIRE MARKETING EXPENSES WERE INCURRED FROM APRIL, 2001 ONWARDS. IT WAS FURTHER SUBMITTED THAT THE ENTIRE INFRASTRUCTURE WAS IN PLACE AND THE PILOT PROJECT COMMENCED FROM APRIL, 2001 AND THEREFORE THE MARKET EXPENSES INCURRED WAS AFTER SETTING UP OF THE BUSINESS FROM APRIL, 2001 AND WAS THEREFORE, ALLOWABLE AS REVENUE EXPENDITURE. AFTER CONSIDERING THE SUBMISSI ONS MADE BY THE ASSESSEE CIT (A) ALLOWED THE APPEAL OF THE ASSESSEE BY HOLDING AS UNDER:- 3.3.1. AS REGARDS THE FIRST ISSUE, IT IS CLEAR FR OM THE ASSESSMENT ORDER AS WELL AS THE SUBMISSIONS THAT IT WAS FULLY IN CONNECTION WITH MARKET EXPLORATIONS THOUGH PRIOR TO COMMENCEMENT OF PRODUCTION. BUT AS CLAIMED BY THE APPELLANT, THE BUSINESS WAS S ET UP WITH NECESSARY OFFICE AND OTHER INFRASTRUCTURE AND THE P ERMISSIONS FROM THE NECESSARY AUTHORITIES WERE ALL IN PLACE IN APRI L, 2001. THE TREATMENT IN THE BOOKS OF ACCOUNTS AS DEFERRED REVE NUE EXPENDITURE CANNOT DECIDE THE ISSUE EVEN AS OBSERVED BY THE A.O . IN HIS ORDER. THE CRUCIAL ASPECT IS WHETHER THE BUSINESS WAS SET UP BEFORE COMMENCING THE MARKET SURVEY EXPENSES. IT IS CLEAR THAT THE EXPENSES INCURRED TOWARDS MARKETING SURVEY WERE ALL OUTSIDE THE COUNTRY ESPECIALLY IN CONNECTION WITH THE ESTABLISH MENT OF CALL CENTERS. NOTHING COULD BE ATTRIBUTED TO SETTING UP OF THE BUSINESS OR IN CONNECTION WITH ANY CAPITAL ASSET. IN THAT VIEW OF THE MATTER, THE INITIAL MARKETING EXPENSES AT RS.132.62 LACS WILL HAVE TO B E CONSIDERED AS EXPENSES INCURRED AFTER SETTING UP OF THE BUSINESS AND HENCE WILL HAVE TO BE CONSIDERED AS INCURRED AS EXPENSES AFTE R SETTING UP OF THE BUSINESS AND HENCE THE DECISION RELIED ON BY TH E APPELLANT CITED IN THE PRECEDING PARAGRAPHS ARE OF ASSISTANCE TO TH EIR CLAIM AND I TA NO.2549 /AHD/2007 . ASSESSMENT Y EAR 2002- 03 . 5 ACCORDINGLY I HOLD THAT THE SUM OF RS.132.62 LACS I S ALLOWABLE AS REVENUE EXPENDITURE AND IN OTHER WORDS, SECTION 35 D WILL NOT HAVE ANY APPLICATION TO THIS ISSUE. THE A.O. IS HENCE DI RECTED TO TREAT THE MARKETING EXPENSES AS REVENUE EXPENDITURE AND REVER SE THE TREATMENT GIVEN BY HIM U/S. 35D. 4. AGGRIEVED BY THE ORDER OF CIT (A) THE REVENUE IS NOW IN APPEAL BEFORE US. 5. AS GROUND NO.1 AND 2 ARE INTERCONNECTED THEY ARE BEING DISPOSED OF TOGETHER FOR THE SAKE OF CONVENIENCE. 6. BEFORE US LD. D.R. SUBMITTED THAT THE A.O. WAS R IGHT IN DISALLOWING THE EXPENDITURE BECAUSE MAJORITY OF THE EXPENDITURE AMOUNTING TO RS.96.55 LACS WAS INCURRED BEFORE THE COMMENCEMENT OF COMMER CIAL PRODUCTION. LD. D.R. FURTHER SUBMITTED THAT THE NARRATION GIVEN ON THE VOUCHERS INDICATE THAT THE EXPENSES RELATED TO SALARIES, RENT, TRAVEL EXPE NSES, LEGAL FEES ETC. THESE EXPENSES ARE COVERED BY THE PROVISIONS OF SEC . 35D (2)(III) AND ACCORDINGLY THE SAME CANNOT BE ALLOWED AS REVENUE E XPENDITURE. LD. D.R. FURTHER SUBMITTED THAT THE ASSESSEE GOT ENDURING BE NEFITS OF THE SAME MARKETING EXPENSES AND THE ASSESSEE ITSELF HAS TREA TED IT AS NOT TO BE OF REVENUE EXPENDITURE IN THE BOOKS OF ACCOUNTS AND AM ORTIZED IT OVER A PERIOD FOR WHICH THE BENEFITS WERE EXPECTED TO BE A CCRUED IN FUTURE TO THE COMPANY. IN VIEW OF THESE FACTS, LD. D.R. SUBMITTED THAT CIT (A) HAS ERRED IN TREATING THE EXPENDITURE AS REVENUE EXPENDITURE. HE THEREFORE URGED THAT THE ORDER OF THE A.O. BE UPHELD. I TA NO.2549 /AHD/2007 . ASSESSMENT Y EAR 2002- 03 . 6 7. ON THE OTHER HAND THE LD. A.R. SUBMITTED THAT TH E BUSINESS OF THE ASSESSEE WAS SET UP IN APRIL, 2001.THE ASSESSEE HAD RECEIVED ON 14-2- 2001 THE APPROVAL FOR SET UP. THE ASSESSEE WAS ALSO GRANTED APPROVAL TO SET UP INTERNATIONAL CALL CENTRE OF BSNL BY ITS LET TER DATED 23-4-2001.THE ASSESSEE WAS GRANTED PERMISSION FOR CUSTOMS BONDED WAREHOUSE ON 20- 4-2001.THE ASSESSEE HAD IMPORTED SOFTWARE FROM US SUPPLIER VIDE ITS INVOICE DATED 29-3-2001. THE ASSESSEE HAD ALSO RECE IVED NECESSARY INFRASTRUCTURE PERMISSION LIKE PREMISES, TECHNICAL SOFTWARE, ELECTRICAL POWER-LOAD MARKETING CONSULTANCY FOR BUSINESS OCCAS ION ETC IN PLACE BY APRIL, 2001. IN VIEW OF THESE FACTS IT WAS SUBMITTE D THAT THE ASSESSEE HAD SET UP THE BUSINESS FROM APRIL, 2001 AND IT HAD OBT AINED ALL REQUISITE APPROVALS TO SET UP ITS CALL CENTER. MARKETING EXPE NSES WERE INCURRED AFTER SET UP OF THE BUSINESS DURING THE PERIOD BETWEEN 23 -4-2001 TO 4-9-2001. IT WAS THEREFORE SUBMITTED THAT THE MARKETING EXPENSES WERE INCURRED AFTER THE SET UP OF THE BUSINESS AND WERE IN THE NATURE O F REVENUE EXPENSES. THE ASSESSEE ALSO RELIED ON THE DECISIONS OF VARIOU S COURTS APART FROM THE DECISION IN THE CASE OF HUGHES ESCORTS COMMUNICATIO NS LTD. V/S. CIT (2007) 165 TAXMAN 318 (DEL.), ESPN SOFTWARE INDIA ( P) LTD. V/S. CIT (2009) 184 TAXMAN 452 (DEL), PREM CONDUCTORS PVT. L TD. V/S. CIT 108 ITR 654 (GUJ.). LD. A.R. THUS SUBMITTED THAT IN VIEW OF THE FACTS THAT THE ASSESSEE HAD SET UP THE BUSINESS DURING APRIL, 2001 ALL THE EXPENSES WERE IN THE NATURE OF REVENUE EXPENSES. HE THUS SUPPORTE D THE ORDER OF CIT (A). 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ASSESSEE HAD MADE AN APPLICATION FOR SE TTING UP OF UNIT IN SOFTWARE TECHNOLOGY PARK. FROM THE MATERIAL PLACED, WE FIND THAT TECHNICAL I TA NO.2549 /AHD/2007 . ASSESSMENT Y EAR 2002- 03 . 7 APPROVAL WAS GRANTED BY MINISTRY OF INFORMATION TEC HNOLOGY, TO SET UP UNIT IN SOFTWARE TECHNOLOGY PARK VIDE LETTER DATED 14-2- 2001. THE ASSESSEE ALSO RECEIVED PERMISSION FROM BSNL LTD. ON 23-4-200 1 FOR STARTING INTERNATIONAL CALL CENTER. THE OFFICE OF THE DEPUTY CENTRAL EXCISE, NOIDA HAD GRANTED LICENCE FOR CUSTOM BONDED WAREHOUSE ON 13-4-2001. IT HAD ALSO IMPORTED THE NECESSARY MACHINERY IN MARCH, 200 1. THE ASSESSEE HAD ALL THE NECESSARY INFRASTRUCTURE LIKE BUILDING, ELE CTRICAL CONNECTION ETC., IN PLACE BY APRIL. THE REVENUE HAS NOT BROUGHT ANY MAT ERIAL ON RECORD TO CONTROVERT THE AFORESAID FACTS. 9. IN THE CASE OF PREM CONDUCTORS PVT. LTD. VS. CIT 108 ITR 651, THE HONBLE GUJARAT HIGH COURT RELYING ON THE DECISION OF CIT VS. SAURASHTRA CEMENT AND CHEMICALS (1973) 91 ITR 170 (GUJ) AND SARABHAI MANAGEMENT CORPORATION LTD. VS. CIT (1976) 102 ITR 25 (GUJ.) HAS HELD THAT THE COMPANY CAN BE SAID TO HAVE SET UP ITS BUS INESS FROM THE DATE WHEN ONE OF THE CATEGORY OF ITS BUSINESS HAS STARTE D AND IT IS NOT NECESSARY THAT ALL THE CATEGORIES TOWARDS BUSINESS CATEGORY MUST START EITHER SIMULTANEOUSLY OR THAT THE LAST STAGE MUST START BE FORE IT CAN BE SAID THAT THE BUSINESS WAS SET UP. THE TEST TO BE APPLIED IS AS TO WHETHER A BUSINESSMAN WOULD REGARD A BUSINESS AS BEING COMMEN CED AND THE APPROACH MUST BE FROM THE COMPANYS POINT OF VIEW . 10 IN THE CASE OF CIT VS CORPORATION BANK LTD. 254 ITR 791 (SC) THE HONBLE APEX COURT HAS HELD THAT THERE IS A DISTINCTION BETWEEN THE SET UP THAN THE COMMENCEMENT OF THE BUSINESS. WHAT IS RELE VANT UNDER THE INCOME TAX ACT IS THE SETTING UP OF THE BUSINESS AN D THE COMMENCEMENT OF I TA NO.2549 /AHD/2007 . ASSESSMENT Y EAR 2002- 03 . 8 THE BUSINESS. THE BUSINESS IS COMMENCED AS SOON AS THE ESSENTIAL ACTIVITY ON THAT BUSINESS HAS STARTED. 11. FOR STARTING THE BUSINESS OF CALL CENTER, APART FROM OTHER IMPORTANT REQUIREMENTS, THE ESSENTIAL REQUIREMENT WAS THE AVA ILABILITY OF THE TELEPHONE LINES AND THE APPROVAL FROM MINISTRY OF I NFORMATION AND TECHNOLOGY TO SET UP INTERNATIONAL CALL CENTER WITH OUT WHICH THE ASSESSEE COULD NOT HAVE STARTED THE BUSINESS. IN VIEW OF THE AFORESAID FACTS AND RELYING ON THE AFORESAID DECISIONS OF THE HIGH COUR TS WE ARE OF THE VIEW THAT THE ASSESSEE HAD COMMENCED THE BUSINESS IN APR IL, 2001. 12. A.O. VIDE ASSESSMENT ORDER HAS STATED THAT THE EXPENSES ARE IN THE NATURE OF SALARIES, PAY-ROLL, TRAVEL EXPENSES, GENE RAL OFFICE EXPENSES AND COMPUTER INSTALLATION, OFFICE BUILDINGS, TELEPHONE RENT ETC. REVENUE HAS NO DISPUTE WITH THE NATURE OF EXPENSES. ITS DISPUTE IS THAT SINCE THE BUSINESS HAD NOT COMMENCED, THE EXPENDITURE IS NOT ALLOWABLE . SINCE WE HAVE ALREADY HELD ABOVE THAT THE ASSESSEE HAD COMMENCED BUSINESS THEREFORE THE EXPENSES WHICH ARE OF REVENUE NATURE ARE THEREF ORE ALLOWABLE. 13. IN VIEW OF THE TOTALITY OF FACTS WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT (A). THUS WE UPHOLD THE ORDER OF THE CIT (A) . THUS THIS GROUND OF THE REVENUE IS DISMISSED. I TA NO.2549 /AHD/2007 . ASSESSMENT Y EAR 2002- 03 . 9 14. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN OPEN COURT ON 30- 11- 2012. SD/- SD/- (G.C.GUPTA) (ANIL CHATURVEDI) VICE PRESIDENT ACCOUNTANT MEMBER AHMEDABAD. S.A.PATKI. COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) VIII, AHMEDABAD. 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHME DABAD 1.DATE OF DICTATION 21 - 9 -2012 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 22 / 10 & 6/11 2012 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S - -2012. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT - -2012 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S - -2012 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK - -2012. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER