RHC IT Solutions Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 2755/DEL/2017

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 0051 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 7 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Assessment Year: 2012-2013
• Appeal Filed On: 04-05-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Keywords: Business expenditure; Revenue expenditure; Set aside
• Section: 143(3); 274

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F NEW DLEHI BEFORE SHRI G.S. PANNU, VICE PRESIDENT AND SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER ITA.NO2755DEL/2017 ASSESSMENT YEAR: 2012-13 RHC IT SOLUTIONS PVT. LTD., VS ACIT, CIRCLE-20(2 ) 54, JANPATH, NEW DELHI NEW DELHI-110001 PAN AAECR4314B (APPELLANT) (RESPONDENT) APPELLANT BY: NONE RESPONDENT BY: SH. SURENDER PAL, SR. DR. DATE OF HEARING:03/12/2019 DATE OF ORDER : 31/12/2019 ORDER PER K. NARASIMHA CHARY, J.M. AGGRIEVED BY THE ORDER DATED 2 ND OF MARCH 2017, IN APPEAL NO. 111/16-17 OLDAPPEAL NO. 359/15-16, PASSED BY THE LE ARNED COMMISSIONER OF INCOME TAX (APPEALS)-11, NEW DELHI (LD. CIT(A)), FOR THE ASSESSMENT YEAR 2012-13, M/S RHC IT SOLUTIONS P RIVATE LIMITED (THE ASSESSEE) FILED THIS APPEAL STATING THAT THE AUTHO RITIES BELOW FAILED TO APPRECIATE THE FACT AND GENERAL PRINCIPLE OF BUSINE SS THAT THE BUSINESS CONSTITUTES A CONTINUOUS COURSE OF ACTIVITIES AND A LL THE ACTIVITIES NEED 2 NOT NECESSARILY BE STARTED SIMULTANEOUSLY IN ORDER TO ESTABLISH THAT THE BUSINESS IS ACTUALLY SET UP. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT, MAINTENANCE AND S UPPORT SERVICES. FOR THE ASSESSMENT YEAR 2012-13, IT HAD FILED ITS R ETURN ON 28/9/2012 DECLARING A LOSS OF RS. 67,98, 512/-. ASSESSMENT WA S, HOWEVER, COMPLETED BY AN ORDER DATED 2/3/2015 UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT) AT AN INCOME OF RS. 1,27 0/- BY DISALLOWING THE BUSINESS LOSS OF RS. 67,99,783/-, ON THE GROUND THA T THE ASSESSEE FAILED TO SUBMIT THE EVIDENCE FOR COMMENCEMENT OR FOR SETUP O F THE SOFTWARE DEVELOPMENT BUSINESS. 3. AGGRIEVED BY THE SAME, ASSESSEE PREFERRED AN APP EAL BEFORE THE LD. CIT(A) AND ARGUED THAT THE ACTUAL OPERATIONS OF THE ASSESSEE WERE ALREADY COMMENCED FROM THE PRECEDING FINANCIAL YEAR . I.E.,FINANCIAL YEAR 2010-11 ONLY AND THE ASSESSEE HAD STARTED SOFTWARE PRODUCTS USEFUL FOR FINANCIAL MARKET AS PER THE MAIN OBJECT CLAUSE GIVE N IN THE MEMORANDUM OF ASSOCIATION OF THE ASSESSEE. IT WAS FURTHER SUBM ITTED THAT FOR THE BUSINESS OPERATIONS OF THE ASSESSEE, THEY HAVE PUT SUFFICIENT INFRASTRUCTURE IN PLACE, NAMELY, IT HAS TAKEN NECES SARY REGISTRATIONS FROM REGULATING AUTHORITIES IN INDIA, TAKEN PREMISE ON R ENT, HIRED EMPLOYEES WITH REQUISITE KNOWLEDGE AND SKILLS, ENTERED INTO A N AGREEMENT WITH INFORMATION TECHNOLOGY (IT) COMPANIES FOR ASSISTANC E IN SOFTWARE DEVELOPMENT, PURCHASED THE IT AND OFFICE EQUIPMENT REQUIRED FOR THE OPERATIONS AND STARTED DEVELOPMENT OF THE SOFTWARE PRODUCT, APART FROM PERFORMING THE REQUIRED STATUTORY AND ROUTINE COMPL IANCES LIKE AN AUDIT 3 OF ACCOUNTS, CONDUCTING ANNUAL GENERAL MEETING AND FILING OF VARIOUS RETURNS WITH REGULATORY AUTHORITIES IN THE ORDINARY COURSE OF BUSINESS. 4. IT WAS FURTHER SUBMITTED BY THE ASSESSEE BEFORE THE LD. CIT(A) THAT THE EXPENSES INCURRED DIRECTLY IN RELATION TO SOFTW ARE DEVELOPMENT TO THE TUNE OF RS. 10,31,41,613/-WAS CAPITALISED AND RECOR DED IN THE ASSETS SIDE AS INTANGIBLE ASSETS UNDERDEVELOPMENT IN THE BOOK S OF ACCOUNT; WHEREAS THE GENERAL BUSINESS EXPENDITURE LIKE RENT, ELECTRICITY AND WATER, POSTAGE ON TELEPHONE, PRINTING AND STATIONERY, ADVE RTISING ETC TO THE TUNE OF RS. 67,98,512/- WAS CHARGED TO THE PROFIT AND LO SS ACCOUNT (P&L ACCOUNT) AND CLAIMED AS REVENUE EXPENDITURE IN THE RETURN OF INCOME. ASSESSEE CONTENDED THAT SINCE THE OPERATIONS OF THE ASSESSEE WERE ALREADY COMMENCED, ALL THE REVENUE EXPENDITURE INCU RRED FOR THE BUSINESS PURPOSE SHOULD BE ALLOWED AS PER THE PROVI SIONS OF THE ACT. 5. LD. CIT(A), HOWEVER, BY WAY OF IMPUGNED ORDER DI D NOT AGREE WITH THE CONTENTIONS OF THE ASSESSEE AND OBSERVED THAT E VEN ACCORDING TO THE ASSESSEE DURING THE SUBSEQUENT FINANCIAL YEARS, NAM ELY, FINANCIAL YEARS 2012-13 AND 2013-14, THE ASSESSEE HAD HIRED ADDITIO NAL EMPLOYEES AND CONSULTANTS, ACQUIRED MORE ASSETS INCLUDING COMPUTE RS, LAPTOPS, SOFTWARE, BIOMETRIC ATTENDANCE SYSTEM ETC, BESIDES WHICH THE ASSESSEE WAS ACQUIRING SOFTWARE TOOLS WHICH WERE REQUIRED BY A SOFTWARE DEVELOPMENT. LD. CIT(A) FURTHER OBSERVED THAT THE A SSESSEE COULD COMPLETE THE SOFTWARE ON 31/3/2016 AND IT STARTED E ARNING REVENUE FROM THE FINANCIAL YEAR 2016-17 CORRESPONDING TO T HE ASSESSMENT YEAR 2017-18. HE, THEREFORE, INFERRED THAT WITHOUT THESE EQUIPMENT AND TOOLS, THE ASSESSEE WOULD NOT HAVE BEEN IN A POSITION TO U NDERTAKE THE DEVELOPMENT OF SOFTWARE AND THEREFORE, HE CONCLUDED THAT IT CANNOT BE 4 SAID THAT THE BUSINESS OF THE ASSESSEE WAS SET UP T ILL THE END OF THE FINANCIAL YEAR 2011-12 RELEVANT FOR THE ASSESSMENT YEAR 2012-13. HE ACCORDINGLY UPHELD THE ASSESSMENT ORDER AND DISMISS ED THE APPEAL. 6. WHEN THIS MATTER IS CALLED, NEITHER THE ASSESSEE NOR THE AUTHORISED REPRESENTATIVE IS PRESENT. NOTICE WAS IS SUED TO THE ADDRESS GIVEN IN FORM 36. IF THE ASSESSEE IS AVAILABLE IN S UCH ADDRESS, SUCH NOTICE SHOULD HAVE BEEN SERVED ON THE ASSESSEE. IF FOR ANY REASON, THE ASSESSEE IS NOT AVAILABLE THERE, IT IS FOR THE ASSESSEE TO M AKE ARRANGEMENTS FOR SERVICE OF SUCH NOTICE BY FURNISHING THE ADDRESS WH ERE THE ASSESSEE WOULD BE AVAILABLE, OR TO DELIVER IT TO SOME AUTHOR ISED PERSON, OR BY MAKING REQUEST TO THE POSTAL DEPARTMENT TO DETAIN T HE MAIL TILL THE ASSESSEE CLAIMS THE SAME. SINCE THE ASSESSEE DOES N OT SEEM TO HAVE ADOPTED ANY OF THESE METHODS, WE ARE OF THE CONSIDE RED OPINION THAT NO TIME COULD BE GRANTED. BASING ON THE RECORD WE PROC EED TO HEAR THE REVENUE AND DECIDE THE MATTER ON MERITS. 7. LD. DR PLACED HEAVY RELIANCE ON THE ORDERS OF TH E AUTHORITIES BELOW AND IN LINE WITH THE FINDINGS OF THE LD. CIT( A) SUBMITTED THAT UNLESS AND UNTIL THE ASSESSEE IS COMPLETE IN ALL RE SPECTS TO START THE BUSINESS, IT CANNOT BE SAID THAT THEY HAVE SETUP OR COMMENCED THE BUSINESS AND THEREFORE, IN VIEW OF THE FINDINGS OF THE LD. CIT(A) THAT THE ASSESSEE WAS IN THE PROCESS OF RECRUITING THE PERSO NNEL AND ACQUIRING THE FIXED ASSETS AND SOFTWARE TOOLS TILL THE FINANCIAL YEAR 2013-14, IT CANNOT BE SAID THAT THE ASSESSEE SETUP THE BUSINESS IN THE RELEVANT ASSESSMENT YEAR. 5 8. WE HAVE GONE THROUGH THE RECORD IN THE LIGHT OF THE SUBMISSIONS MADE ON EITHER SIDE. IT WAS SUBMITTED BY THE ASSESS EE BEFORE THE LD. CIT(A) THAT THE ASSESSEE HIRED THE PREMISES, ACQUIR ED THE OFFICE FURNITURE AND EQUIPMENT, ENGAGED THE PERSONNEL WITH REQUISITE SKILLS AND QUALIFICATIONS AND AS A MATTER OF FACT ENTERED INTO AGREEMENTS WITH IT COMPANIES TO DEVISE ARCHITECTURE AND THE BLUEPRINT OF THE PROPOSED PRODUCTS AND ASSIST IN DEVELOPMENT ACTIVITIES. IT C OULD BE FOUND FROM THE IMPUGNED ORDER THAT THE ASSESSEE FURNISHED THE COPY OF AGREEMENTS IT ENTERED WITH THE IT COMPANIES. IT WAS ALSO STATED B EFORE THE LD. CIT(A) THAT THE 1 ST ANNUAL GENERAL MEETING OF THE ASSESSEE WAS HELD ON 23/08/2010FOR ADAPTATION OF AUDITED FINANCIAL OF FI NANCIAL YEAR 2009-10. ABOVE ALL, IN UNEQUIVOCAL TERMS THE ASSESSEE CONTEN DED BEFORE THE LD. CIT(A) THAT IT HAD ENTERED INTO AN AGREEMENT WITH T RAVCIONTECHNOLOGIES ON 31/1/2012 FOR SOFTWARE DEVELOPMENT AND SUPPORT S ERVICES AND A COPY OF THE INVOICE AND AGREEMENT WAS ALSO FURNISHE D BEFORE THE LD. CIT(A). 9. IN THE IMPUGNED ORDER, NOWHERE THE LD. CIT(A) CO NTROVERTED ANY OF THESE CONTENTIONS RAISED BEFORE HIM, ON FACTUAL VERIFICATION. HE DID NOT COMMENT ON THE VERACITY OF THE DOCUMENTS PRODUC ED BEFORE HIM.HE ALSO DID NOT DISPUTE THE CONTENTION OF THE ASSESSEE THAT BY AY 2012-13 THEY HAVE ACQUIRED OFFICE PREMISES WITH REQUISITE F URNITURE AND EQUIPMENT, SOFTWARE TOOLS AND THE SERVICES OF IT CO MPANIES TO DEVISE ARCHITECTURE AND BLUEPRINT OF THE PROPOSED PRODUCT ALONGSIDE THE RECRUITMENT OF THE SKILLED PERSONNEL, SUPPORTED BY DOCUMENTS REFERRED TO BY THE LD. CIT(A) IN HIS ORDER. 6 10. LD. CIT(A) ENUMERATED THE ACTIVITIES UNDERTOOK BY THE ASSESSEE TILL THE END OF THE YEAR UNDER CONSIDERATION AND SUCH AC TIVITIES INCLUDE,- I. DULY APPOINTING THE AUDITORS AND OPENING OF BANK AC COUNTS; II. REVISION OF A FORMAL BUSINESS PLAN; III. TAKING THE BUSINESS PREMISES ON RENT BY PAYING THE WATER AND ELECTRICITY CHARGES ALONG WITH RENT; IV. RECRUITING THE EMPLOYEES AT VARIOUS LEVELS BY PAYIN G THE SALARIES FOR SOFTWARE DEVELOPMENT AND OTHER WORKS; V. ENTERING INTO VARIOUS AGREEMENTS FOR SOFTWARE DEVEL OPMENT ACTIVITIES AND ALSO HIRING IT CONSULTANTS; VI. ACQUIRING VARIOUS PIXEL ASSETS AND OFFICE EQUIPMENT ; CONDUCTING VARIOUS WORKSHOPS AND SEMINARS WHICH WER E ATTENDED BY THE EMPLOYEES FOR BUSINESS PURPOSES; AN D VII. REGISTRATION WITH VARIOUS REGULATORY AUTHORITIES. FURTHER, IT GOES UNDISPUTED THAT THE ASSESSEE HAD E NTERED INTO AN AGREEMENT WITH TRACCIONTECHNOLOGIES ON 31/1/2012, S UPPORTED BY THE COPY OF INVOICE AND AGREEMENT AS CONTENDED BY THE A SSESSEE BEFORE THE LD. CIT(A). 11. ONLY REASON ASSIGNED BY THE LD. CIT(A) TO REACH THE CONCLUSION THAT THE ASSESSEE HAS NOT SET UP THE BUSINESS AND C OMMENCED THE SAME, IS THAT THE ASSESSEE WAS HIRING ADDITIONAL EMPLOYEE S AND CONSULTANTS, PURCHASING MORE FIXED ASSETS WHICH INCLUDES COMPUTE RS, LAPTOPS, SOFTWARE, BIOMETRIC ATTENDANCE SYSTEM ETC, WAS ACQU IRING SOFTWARE TOOLS WHICH WERE REQUIRED BY IT FOR SOFTWARE DEVELOPMENT DURING THE FINANCIAL YEARS 2012-13 AND 2013-14, AND IT DID NOT COMPLETE THE DEVELOPMENT OF SOFTWARE TILL 31/3/2016. LD. CIT(A), THEREFORE, WAS OF THE OPINION THAT THE ASSESSEE WAS IN THE PROCESS OF ACQUIRING FIXED ASSE TS, MANPOWER AND THE SOFTWARE TOOLS REQUIRED FOR THE DEVELOPMENT OF SOFT WARE TILL THE 7 FINANCIAL YEAR 2013-14 AND THEREFORE INFERRED THAT WITHOUT THESE EQUIPMENT AND TOOLS, THE ASSESSEE WOULD NOT HAVE BE EN IN A POSITION TO UNDERTAKE THE DEVELOPMENT OF THE SOFTWARE. 12. IN THE IMPUGNED ORDER LD. CIT(A) NOTICED THE DE CISION OF THE AHMEDABAD BENCH OF THIS TRIBUNAL IN THE CASE OF DCI T VS. INTERLINKED PETROLEUM LTD 83 TTJ 274 (ITAT-AHMED) WHEREIN IT WA S CLEARLY HELD THAT THERE IS A CLEAR DISTINCTION BETWEEN A PERSON COMME NCING BUSINESS AND A PERSON SETTING UP OF THE BUSINESS; THAT THERE MAY B E AN INTERVAL BETWEEN SETTING UP OF BUSINESS AND THE COMMENCEMENT OF BUSI NESS; AND THAT THE ASSESSEE CAN BE SAID TO HAVE SETUP ITS BUSINESS FRO M THE DATE WHEN ONE OF THE ESSENTIAL CATEGORIES OF ITS BUSINESS ACTIVIT IES IS STARTED, AND IT IS NOT NECESSARY THAT ALL CATEGORIES OF ITS BUSINESS ACTIV ITIES MUST START AND SIMULTANEOUSLY OR THAT THE LAST STAGE MUST START BE FORE IT CAN SAID THAT THE BUSINESS WAS A SETUP. IN THIS CASE THE ASSESSEE DID EVERYTHING INCLUDING ACQUISITION OF FIXED ASSETS, SOFTWARE TOO LS, EMPLOYED REQUIRED SKILLED PERSONNEL BESIDES SECURING A CONTRACT WITH THE TRACCIONTECHNOLOGIES ON 31/1/2012 FOR SOFTWARE DEVE LOPMENT AND SUPPORT SERVICES. IT IS ONLY AFTER SECURING ALL THE INFRASTRUCTURE AND THE CONTRACT FOR WORK, THE DEVELOPMENT OF SOFTWARE AND SHALL COMMENCE AND END UP WITH THE SALE OF SOFTWARE AND EARNING RE VENUES. IT CANNOT BE SAID THAT IT IS ONLY ON THE COMPLETION OF THE PROCE SS OF DEVELOPMENT OF SOFTWARE, THE BUSINESS WAS SETUP. WHEN A BUSINESS I S SET UP AND CONTINUING, IT WOULD BE BUT NATURAL THAT THE ASSESS EE WOULD BE PROGRESSIVE IN FURTHER ACQUISITIONS AND FURTHER REC RUITMENTS. THAT DOES NOT MEAN THAT SETTING UP OF A BUSINESS IS COEXTENSI VE WITH THE PROCESS OF EXPANSION. 8 13. WITH THIS VIEW OF THE MATTER WE ARE OF THE CONS IDERED OPINION THAT MERELY BECAUSE THE ASSESSEE WENT ON ACQUIRING MORE ASSETSINCLUDING COMPUTERS, LAPTOPS, SOFTWARE, BIOME TRIC ATTENDANCE SYSTEM ETC, RECRUITING ADDITIONAL EMPLOYEES AND CON SULTANTS AND ALSO ACQUIRING SOFTWARE TOOLS REQUIRED FOR THE SOFTWARE DEVELOPMENT, IT CANNOT BE SAID THAT TILL SUCH TIME THE BUSINESS WAS NOT SET UP. UNLIKE IN ANY OTHER INDUSTRY WHERE WITH THE INSTALLATION OF T HE PLANT AND MACHINERY, THE PRODUCTION WILL GO ON,IN SOFTWARE IN DUSTRY NEW REQUIREMENTS OF CLIENTS NECESSITATE THE ACQUISITION OF NEW SOFTWARE TOOLS AND HIRING OF THE EMPLOYEES WITH SUCH NEW PROGRAMMI NG SKILLS. 14. FOR THESE REASONS, WE FIND IT DIFFICULT TO AGRE E WITH THE LD. CIT(A) IN HIS REASONING OR CONCLUSIONS. WE HOLD THAT WITH THE ACQUISITION OFREQUISITE INFRASTRUCTURE AND ENTERING INTO THE BU SINESS CONTRACT WITH THE TRACCIONTECHNOLOGIES ON 31/1/2012, THE ASSESSEE SETUP ITS BUSINESS AND ENTITLED TO CLAIM THE BUSINESS EXPENSES OF RS. 67,98,512/-. WE ACCORDINGLY SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND DIRECT THE ASSESSING OFFICER TO DELETE THE DISALLOWANCE. GROUN DS OF APPEAL ARE ACCORDINGLY ALLOWED. 15. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. PRONOUNCED IN OPEN COURT ON THIS THE 31 ST DECEMBER, 2019. SD/- SD/- (G.S. PANNU) (K. NARASIMHA CHARY) VICE PRESIDENT JUDICIAL MEMBER DATED: 31/12/2019 AKS