ACIT 1(3)(1), MUMBAI V. ROSMERTA TECHNOLOGIES PVT. LTD., MUMBAI

ITA 2664/MUM/2016

• Counselvise Citation: [2018] 112 COUNSELVISE.COM (IT) 5806 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 7 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-12-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2007-2008
• Appeal Filed On: 11-04-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: CHAITNYA ANJARIA
• Keywords: Business expenditure; Revenue expenditure; Capital expenditure; Set aside
• Section: 201

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES D , MUMBAI BEFORE S HRI R.C. SHARMA (AM) AND SHRI RAM LAL NEGI (JM) ITA NO. 2664/MUM/2016 ASSESSMENT Y EAR: 2007 - 08 THE ASSISTANT COMMISSIONER OF INCOME TAX 1(3)(1), ROOM NO. 540, 5 TH FLOOR, AAYAKAR BHA WAN, M.K. ROAD, MUMBAI - 400020 VS. M/S ROSMERTA TECHNOLOGIES PVT. LTD., UNIT NO. 401, 4 TH FLOOR, TOWER - 2, ONE INDIABULLS BUSINESS CENTRE, SENAPATI BAPAT MARG, ELPHINSTONE ROAD (W), MUMBAI - 400013 PAN: AADCR2917D (APPELLANT) (RESPONDENT) REVENUE BY : SHRI CHAITNYA ANJARIA ( D R ) ASSESSEE BY : SHRI VARTIK CHOKSI (A R ) DATE OF HEARING: 12 /09 /201 8 DATE OF PRONOUNCEMENT: 07 / 12 /201 8 O R D E R PER RAM LAL NEGI, JM THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE ORDER DATED 22.01.2016 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS) - 3 (FOR SHORT THE CIT ( A) , MUMBAI, FOR THE ASSESSMENT YEAR 2007 - 08 , WHEREBY THE LD. CIT(A) HAS PARTLY ALLOWED T HE APPEAL FILED BY THE ASSESSEE AGAINS T THE ASSESSMENT ORDER PASSED U/S 143 (3) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT). 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY ENGAGED IN THE BUSINESS OF ISSUING VEHICLE REGISTRATION CERTIFICATE ON SMART OPTICAL CARDS IN VARIOUS S TATE GOVT. PROJECTS, FILED ITS RETURN OF INCOME OF THE ASSESSMENT YEAR UNDER CONSIDERATION DECLARING NIL INCOME. SINCE, THE CASE WAS SELECTED FOR SCRUTINY, THE AO ISSUED NOTICES U/S 143 (2) AND 142 (1) OF THE ACT CALLING FOR DETAILS AND PRODUCE EVIDENCE IN SUPPORT OF THE CLAIMS MADE IN THE RETURN. IN 2 ITA NO. 2 664 / MUM/2016 ASSESSMENT YEAR: 2007 - 08 RESPONSE THEREOF , THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE APPEARED BEFORE AO AND SUBMITTED THE DETAILS CALLED FOR. IT WAS NOTICED THAT THE ASSESSEE COMPANY HAD CLAIMED AN EXPENDITURE OF RS. 19,42,420/ - ON ACCOUNT OF FILING FEES. THE AO AFTER HEARING OF THE ASSESSEE DISALLOWED THE SAME AND ADDED THE AMOUNT TO THE INCOME OF THE ASSESSEE HOLDING THAT THE EXPENSES INCURRED IS CAPITAL EXPENDITURE. IT WAS FURTHER OBSERVED THAT THE ASSESSEE HAD CLAIMED EXPENDITUR E AMOUNTING TO RS. 2,18,97,000/ - ON ACCOUNT OF LEGAL AND PROFESSIONAL FEES. THE AO AFTER HEARING THE ASSESSEE DISALLOWED THE EXPENDITURE AND ADDED THE SAID AMOUNT TO THE INCOME OF THE ASSESSEE. ACCORDINGLY, THE AO INTER ALIA MAKING OTHER DISALLOWANCE DETER MINED THE TOTAL INCOME OF THE ASSESSEE AT RS. 1,60,45,629/ - . THE ASSESSEE CHALLENGED THE ASSE SSMENT ORDER BEFORE THE LD. CIT (A). THE LD. CIT (A) PARTLY ALLOWED THE APPEAL OF THE ASSESSEE AND DECIDED ISSUE REGARDING FILING FEES IN F A V OUR OF THE ASSESSEE HO LDING THAT IN VIEW OF THE PROVISIONS OF SECTION 35D(2)(C)(IV) OF THE ACT , T HE ASSESSEE IS ENTITLED TO AMORTIZE THE PRELIMINARY EXPENSES OF CAPITAL NATURE , WHICH IS REQUIRED TO BE AMORTIZE TO THE EXTENT OF 1/5 TH OF THE EXPENDITURE CLAIMED. ACCORDINGLY, HE D IRECTED THE AO TO AMORTIZED 1/5 TH OF THE EXPENDITURE INCURRED FOR FILING FEES FOR INCREASING AUTHORIZED SHARE CAPITAL AS EXPENDITURE OF CAPITAL NATURE. 3. SO FAR AS THE SECOND DISALLOWANCE IS CONCERNED, THE CIT (A) DELETED THE DISALLOWANCE OF RS. 1,86,1 0,958/ - OUT OF THE TOTAL DISALLOWANCE OF RS. 2,18,97,000/ - MADE BY THE AO HOLDING THAT TH E REMAINING EXPENSES ARE NOT RE L A TED TO THE BUSINESS ACTIVITIES CARRIED OUT BY THE PROJECT OF THE COMPANY. 4 . AGGRIEVED BY THE ORDER OF LD. CIT (APPEAL S ), THE REVEN UE HAS PREFERRED THIS APPEAL BEFORE THE TRIBUNAL ON THE FOLLOWING EFFECTIVE GROUNDS : - 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON LAW, THE LD. CIT (A) ERRED IN NOT CONSIDERING FILING FEES EXPENSES AS CAPITAL EXPENDITURE FOR INCREASE IN SHAR E CAPITAL, WHICH WAS HELD 3 ITA NO. 2 664 / MUM/2016 ASSESSMENT YEAR: 2007 - 08 AS CAPITAL EXPENDITURE BY THE HONBLE SUPREME COURT IN THE CASE OF PSIDC VS. CIT IN 140 CTR 594 (S.C.)/225 ITR 792 (S.C.), THEREFORE, THE SAME IS NOT COVERED BY SECTION 35D(2)(IV) AS HELD BY THE LD. CIT (A). 2. WHETHER ON FACTS AND IN CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT (A) ERRED IN DELETING RS. 1,86,10,958/ - CONSIDERING AS REVENUE EXPENDITURE ON ACCOUNT OF LEGAL AND PROFESSIONAL FEES AS INCURRED AT THE PRE - IMPLEMENTATION STAGE FOR OBTAINING NEW LICENSES IN OTHER STATES AND THEREFORE, THE EXPENDITURE SHOULD BE CAPITALIZED AND COULD NOT BE CLAIMED AS REVENUE EXPENDITURE. 5. THE LD. DEPARTMENTAL REPRESENTATIVE (DR) SUBMITTED BEFORE US THAT THE FINDINGS OF THE LD. CIT (A) IS CONTRARY TO THE JUDGMENT OF THE HONBLE SUPREM E COURT IN THE CASE OF PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD. VS. COMMISSIONER OF INCOME TAX 225 ITR 0792 (SC) IN WHICH IT HAS BEEN HELD THAT AMOUNT PAID TO THE REGISTRAR OF COMPANIES AS FILING FEE FOR ENHANCEMENT OF CAPITAL IS A CAPITAL EXPE NDITURE. THEREFORE, THE FINDINGS OF THE LD. CIT (A) ARE LIABLE TO BE SET ASIDE. 6. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSESSEE RELIED ON THE ORDER PASSED BY THE LD. CIT (A). 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND GONE THROUGH THE MATERIAL ON RECORD INCLUDING THE CASE RELIED UPON BY THE REVENUE. AS POINTED OUT BY THE LD. DR IN THE CASE OF PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD. VS. COMMISSIONER OF INCOME TAX (SUPRA ), THE QUESTION BEFORE THE HONBLE SUPREME COURT WAS WHE THER IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS RIGHT IN LAW IN HOLDING THAT THE AMOUNT OF RS. 1,50,000/ - PAID TO THE REGISTRAR OF COMPANIES AS FILING FEE FOR ENHANCEMENT OF CAPITAL WAS NOT REVENUE EXPENDITURE. THE HONBEL COURT DECIDED THIS ISSUE IN FAVOUR OF THE REVENUE HOLDING AS UNDER: - 5. WE DO NOT CONSIDER IT NECESSARY TO EXAMINE ALL THE DECISIONS IN EXTENSO BECAUSE WE ARE OF THE OPINION THAT THE FEE PAID TO THE REGISTRAR FOR EXPANSION OF THE CAPITAL BASE OF THE COMPANY 4 ITA NO. 2 664 / MUM/2016 ASSESSMENT YEAR: 2007 - 08 WAS DIRECTLY RELATED TO THE CAPITAL EXPENDITURE INCURRED BY THE COMPANY AND ALTHOUGH INCIDENTALLY THAT WOULD CERTAINLY HELP IN THE BUSINESS OF THE COMPANY AND MAY ALSO HELD IN PROFIT - MAKING, IT STILL RETAINS THE CHARACTER OF A CAPITAL EXPENDITURE SINCE THE EXPENDITURE WAS DIRE CTLY RELATED TO THE EXPANSION OF THE CAPITAL BASE OF THE COMPANY. WE ARE, THEREFORE, OF THE OPINION THAT THE VIEW TAKEN BY THE DIFFERENT HIGH COURT IN FAVOUR OF THE REVENUE IN THIS BEHALF IS THE PREFERABLE VIEW AS COMPARED TO THE VIEW BASED ON THE DECISION OF THE MADRAS HIGH COURT IN KISENCHAND CHELLARAMS CASE (SUPRA). WE, THEREFORE, ANSWER THE QUESTION RAISED FOR OUR DETERMINATION IN THE AFFIRMATIVE, I.E. IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. 8. SINCE, THE ISSUE INVOLVED IN THE CASE IS SQUAR ELY COVERED IN FAVOUR OF THE REVENUE BY THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE AFORESAID CASE, WE SET ASIDE THE FINDINGS OF THE LD. CIT (A) AND ALLOW THIS GROUND OF APPEAL OF THE REVENUE. 9. VIDE GROUND NO. 2, THE REVENUE HAS CHALLENGED THE ACTI ON OF THE LD.CIT (A) IN DELETING RS. 1,86,10,958/ - TREATING THE EXPENDITURE ON LEGAL AND PROFESSIONAL FEES INCURRED FOR OBTAINING NEW LICENSE IN OTHER STATES AS REVENUE EXPENDITURE. THE LD. DR SUBMITTED THAT SINCE THE COMPANY HAD CLAIMED AN EXPENDITURE AMO UNTING TO RS. 2,18,97,000/ - ON ACCOUNT OF LEGAL AND PROFESSIONAL FEES. THE ASSESSEE WAS ASKED TO SHOW CAUSE AS TO WHY THE EXPENDITURE CLAIMED UNDER THE HEAD LEGAL AND PROFESSIONAL FEES SHOULD NOT BE CAPITALIZED. IN RESPONSE THEREOF THE ASSESSEE SUBMITTED T HAT SINCE THE EXPENDITURE HAS BEEN INCUR RED FOR THE PURPOSE OF BUSINESS, THE SAME ARE ALLOWABLE AS REVENUE EXPENDITURE. MOREOVER, MOST OF THE FEE WAS PAID TOWARDS MONTHLY CONSULTANCY CHARGES, THEREFORE, THE SAME IS REVENUE EXPENDITURE. DURING THE APPELLATE PROCEEDINGS, THE LD. CIT (A) DISALLOWED RS . 32,86,042/ - OUT OF THE TOTAL AMOUNT CLAIMED, HOLDING THAT THE SAID EXPENSES ARE NOT RELATED TO THE BUSINESS ACTIVITIES. 10. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSESSEE RELYING ON THE ORDER PASSED BY THE LD. CIT (A) SUBMITTED THAT SINCE THE LD. CIT (A) HAS EXCLUDED THE 5 ITA NO. 2 664 / MUM/2016 ASSESSMENT YEAR: 2007 - 08 EXPENDITURE WHICH WERE NOT RELATED TO THE BUSINESS, THERE IS NO INFIRMITY IN THE FINDINGS OF THE LD. CIT (A). 11. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO GONE THROUGH THE MATERIAL ON R ECORD IN THE LIGHT OF THE RIVAL CONTENTIONS. THE LD. CIT (A) HAS DELETED RS. 1,86,10,958/ - OUT OF THE TOTAL ADDITION OF RS. 2,18,97,000/ - MADE BY THE AO. THE RELEVANT PARA OF THE FINDINGS OF THE LD. CIT (A) IS REPRODUCED AS UNDER: - 9.3 I HAVE CAREFULLY P ERUSED THE DETAIL OF LEGAL AND PROFESSIONAL EXPENSES AMOUNTING TO RS. 2,18,97,000/ - . I FIND THAT ALL THE EXPENSES INCURRED AFTER THE ACQUISITION OF LICENSE RIGHTS AND IN THE NATURE OF BUSINESS EXPENDITURE AND HENCE A REVENUE EXPENDITURE. HOWEVER, NUMBER O F EXPENSES INCURRED DOES NOT RELATE TO THE PROJECT CARRIED OUT BY THE APPELLANT AND NO JUSTIFICATION HAS BEEN GIVEN BY THE APPELLANT FOR DEBITING SUCH EXPENSES. THEREFORE, THE SAME DESERVE TO BE DISALLOWED. THE DETAILS OF SUCH EXPENSES ARE GIVEN AS UNDER: - S. N O . NAME NATURE OF SERVICES RENDERED AMOUNT (IN RS.) 1. RASHME OBEROI PROVIDED BUSINESS DEVELOP CONSULTANCY SERVICES 7,81,315/ - 2. PARAS KUHAD & ASSOCIATES LEGAL CHARGES PAID FOR U P VRC PROJECT 67,000/ - 3. GOPAL JAIN ADVOCATE MONTHLY RETAINERSHI P FOR LEGAL SERVICES PAID ON MONTHLY BASIS. 7,58,400/ - 4. ABHISHEK MANU SINGHVI PROFESSIONAL CHARGES TOWARDS LEGAL SERVICES FOR VRC PROJECT 14,00,000/ - 6 ITA NO. 2 664 / MUM/2016 ASSESSMENT YEAR: 2007 - 08 5. ARUNABH CHAUDHERY LEGAL CHARGES PAID FOR UP VRC PROJECT 57,500/ - 6. KOCHI KUNNEL ASSOCIATES LEGA L SERVICES FOR KERALA VRC PROJECT 71,000/ - 7. ZION EXPRESS CARGO PVT. LTD. CARGO SERVICES PAID FOR IMPORTING SMART CARD 28,377/ - 8. SANTEESH KUMAR LEGAL SERVICES FOR VRC PROJECT IN THE STATE OF UP 75,000/ - 9. SMRITI MISHRA LEGAL SERVICES FOR VRC PROJECT IN THE STATE OF UP 47,450/ - TOTAL 32,86,042/ - SINCE, THE ABOVE MENTIONED EXPENSES ARE NOT RELATED TO THE BUSINESS ACTIVITIES CARRIED OUT BY THE PROJECT OF THE COMPANY, THEREFORE, AMOUNT OF RS. 32,86,042/ - IS DISALLOWED. THEREFORE, GROUND NO.L 4 IS PARTLY ALLOWED. 12. THE LD. CIT (A) HAS OBSERVED THAT THE EXPENSES AMOUNTING TO RS. 1,86,10958 / - HAVE BEEN INCURRED AFTER THE ACQUISITION OF LICENSE RIGHTS BY THE ASSESSEE AND THE SAME ARE IN THE NATURE OF BUSINESS EXPENDITURE AND THEREFORE REVENUE EXPEN DITURE. MOREOVER, T HE LD. CIT (A) HAS DISALLOWED THE EXPENDITURES WHICH DO NOT RELATE TO THE PROJECT CARRIED OUT BY THE APPELLANT /ASSESSEE. T HE LD. CIT (A) HAS WORKED OUT THE SAID EXPENDITURE TO THE TUNE OF RS. 32,86,042/ - . WE FURTHER NOTICE THAT THE ASSES SEE HAS INCURRED THE EXPENDITURE FOR THE SERVICES AVAILED BY IT AND DEDUCTED THE TAX AT SOURCE WHILE MAKING EACH AND EVERY PAYMENT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. WE FURTHER NOTICE THAT THE PAYMENTS HAVE BEEN MADE THROUGH ACCOUNT PAYEE CHEQUE S AND ALL THE EXPENSES HAVE BEEN PROPERLY VOUCHED AND ENTERED IN THE BOOKS OF ACCOUNT. WE THEREFORE DO NOT FIND ANY REASON TO INTERFERE WITH THE FINDINGS OF THE LD. CIT (A). 7 ITA NO. 2 664 / MUM/2016 ASSESSMENT YEAR: 2007 - 08 HENCE, WE UPHOLD THE FINDINGS OF THE LD. CIT (A) AND DISMISS THIS GROUND OF APPEAL OF THE REVENUE. IN THE RESULT, APPEAL FILED BY THE REVENUE FOR ASSESSMENT YEAR 2007 - 2008 IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH DECEMBER , 2018. SD/ - SD/ - ( R.C. SHARMA ) ( RAM LAL NEGI ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI ; DATED: 07 / 12 / 201 8 ALINDRA, PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A ) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . / BY ORDER, //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI