ACIT, New Delhi V. M/s. Comvia Technologies Ltd., New Delhi

ITA 2804/DEL/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2701 (ITAT-DELHI)
• Duration Of Justice: 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-04-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 10-12-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 07-06-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ARCHANA S AWASTHI SENIOR
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH B : NEW DELHI) SHRI R.P. TOLANI, JUDICIAL MEMBER AND BEFORE SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NO.2804/DEL./2012 (ASSESSMENT YEAR : 2008-09) ACIT, CIRCLE 3(1), VS. M/S. CONVIVA TECHNOLOGIES LTD., NEW DELHI. ARAVALI CRESCENT, 1, NELSON MANDELA ROAD, NEW DELHI. (PAN : AABCB0102A) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI ANIL BHALLA, CA REVENUE BY : MS. ARCHANA S. AWASTHI, SENIOR DR ORDER PER B.C. MEENA, ACCOUNTANT MEMBER : THIS APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF CIT (APPEALS)-VI, NEW DELHI DATED 15.03.2012. 2. THE ASSESSEE COMPANY FILED RETURN OF INCOME ELEC TRONICALLY ON 30.09.2008 DECLARING INCOME AT RS.14,35,62,922/-. THE ASSESSMENT U/S 143(3) WAS FINALIZED ON 10.12.2012. DURING THE REL EVANT PERIOD, THE COMPANY WAS ENGAGED IN THE BUSINESS OF COMPUTER SOFTWARE DE VELOPMENT AND TRADING OF BOUGHT OUT PRODUCTS. THE ASSESSING OFFICER MADE TW O DISALLOWANCES WHILE MAKING THE ORDER U/S 143(3) OF THE ACT, ONE U/S 14A AND THE OTHER FOR ITA NO.2804/DEL./2012 2 PROVISION FOR WARRANTY EXPENSES. THE CIT (A) GRANT ED THE RELIEF TO THE ASSESSEE ON BOTH THE ISSUES. NOW, THE REVENUE IS I N APPEAL BEFORE US BY TAKING THE FOLLOWING GROUNDS :- 1. THE LD. CIT (A) HAS ERRED ON FACTS AND IN LAW I N DELETING ADDITION MADE BY THE A.O. AMOUNTING TO RS.36,32,968 /- U/S 14A OF THE I.T. ACT, 1961. 2. THE LD. CIT (A) HAS ERRED ON FACTS AND IN LAW IN DELETING ADDITION MADE BY THE A.O. AMOUNTING TO RS.23,25,339 /- ON ACCOUNT OF DISALLOWANCE OF PROVISION FOR WARRANTY E XPENSES. 3. THE APPELLANT CRAVES LEAVE FOR RESERVING THE RIG HT TO AMEND, MODIFY, ALTER, ADD OR FOREGO ANY GROUND(S) O F APPEAL AT ANY TIME BEFORE OR DURING THE HEARING OF THIS APPEA L. 3. IN THE GROUND NO.1, THE ISSUE INVOLVED IS DELETI NG THE ADDITION OF RS.36,32,968/- MADE BY ASSESSING OFFICER U/S 14A OF THE INCOME-TAX ACT, 1961. 4. WHILE PLEADING ON BEHALF OF THE REVENUE, THE LD. DR SUBMITTED THAT DURING THE YEAR, THE ASSESSEE COMPANY HAS EARNED DI VIDEND INCOME OF RS.3,42,31,282/-. THE LD. DR SUBMITTED THAT EARNIN G SUCH HUGE INCOME, THE ASSESSEE MUST HAVE INCURRED EXPENSES ON MANAGEMENT/ ESTABLISHMENT AND OTHER OFFICE HEADS. LD. DR SUBMITTED THAT THE POSS IBILITY OF INCURRING CERTAIN EXPENDITURE UNDER THE HEAD ADMINISTRATIVE EXPENSES ON EARNING OF DIVIDEND INCOME CANNOT BE RULED OUT. SUCH DISALLOWANCES ARE NECESSARY. ASSESSEE HAD NOT MAINTAINED SEPARATE ACCOUNTS FOR SUCH EXPENSES. THE ASSESSEE HAS FAILED TO SUBMIT ANY DETAILS IN THIS REGARD. THE ASSESSME NT YEAR IS 2008-09 IN ITA NO.2804/DEL./2012 3 WHICH PROVISIONS OF RULE 8D ARE APPLICABLE. THE DI SALLOWANCES HAS TO BE WORKED OUT AS PER THE RULE 8D OF THE INCOME-TAX RUL ES. THE ASSESSING OFFICER HAS RIGHTLY DONE SO BY TAKING THE 0.5% AVER AGE VALUE OF INVESTMENTS AS DISALLOWABLE EXPENSES U/S 14A READ WITH RULE 8D. THEREFORE, THE CIT (A) WAS NOT JUSTIFIED IN DELETING THE SAME. 5. ON THE OTHER HAND, THE LD. AR RELIED ON THE ORDE R OF THE CIT (A) AND ALSO SUBMITTED THAT ASSESSEE HAS SUO MOTO DISALLOWE D RS.1 LAC ON ESTIMATE BASIS ON ACCOUNT OF MISC. ADMINISTRATIVE AND RELATE D EXPENSES FOR EARNING THE DIVIDEND INCOME. LD. AR ALSO SUBMITTED THAT THE AS SESSING OFFICER HAS SIMPLY APPLIED RULE 8D OF INCOME-TAX RULES WITHOUT BRINGING ANY COGENT MATERIAL ON RECORD RELATING TO EXEMPTED INCOME. LD . AR ALSO SUBMITTED THAT RULE 8D CAN BE MADE APPLICABLE ONLY WHEN CERTAIN SP ECIFIC CONDITIONS ARE FULFILLED. THE ASSESSING OFFICER HAS TO BE NOT SAT ISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPEND ITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. 6. WE HAVE HEARD BOTH THE SIDES ON THIS ISSUE. HON 'BLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. VS. CIT [20 11] 203 TAXMANN 364 (DELHI) IN PARAS 41 & 42 HAS HELD AS UNDER :- 41. SUB-SECTION (2) OF SECTION 14A, AS WE HAVE SEE N, STIPULATES THAT THE ASSESSING OFFICER SHALL DETERMINE THE AMOU NT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WITH SUCH M ETHOD AS MAY BE PRESCRIBED. OF COURSE, THIS DETERMINATION CAN O NLY BE UNDERTAKEN IF THE ASSESSING OFFICER IS NOT SATISFIE D WITH THE ITA NO.2804/DEL./2012 4 CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. THIS PART OF SECTION 14A(2) WHICH EXPL ICITLY REQUIRES THE FULFILLMENT OF A CONDITION PRECEDENT I S ALSO IMPLICIT IN SECTION 14A(1) [AS IT NOW STANDS] AS ALSO IN ITS INITIAL AVATAR AS SECTION 14A. IT IS ONLY THE PRESCRIPTION WITH REGAR D TO THE METHOD OF DETERMINING SUCH EXPENDITURE WHICH IS NEW AND WH ICH WILL OPERATE PROSPECTIVELY. IN OTHER WORDS, SECTION 14A , EVEN PRIOR TO THE INTRODUCTION OF SUB-SECTIONS (2) & (3) WOULD REQUIRE THE ASSESSING OFFICER TO FIRST REJECT THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXTENT OF SUCH EXPENDITURE AND SUCH R EJECTION MUST BE FOR DISCLOSED COGENT REASONS. IT IS THEN THAT TH E QUESTION OF DETERMINATION OF SUCH EXPENDITURE BY THE ASSESSING OFFICER WOULD ARISE. THE REQUIREMENT OF ADOPTING A SPECIFIC METHOD OF DETERMINING SUCH EXPENDITURE HAS BEEN INTRODUCED BY VIRTUE OF SUB-SECTION (2) OF SECTION 14A. PRIOR TO THAT, THE ASSESSING WAS FREE TO ADOPT ANY REASONABLE AND ACCEPTABLE METHOD. 42. THUS, THE FACT THAT WE HAVE HELD THAT SUB-SECTI ONS (2) & (3) OF SECTION 14A AND RULE 8D WOULD OPERATE PROSPECTIV ELY (AND, NOT RETROSPECTIVELY) DOES NOT MEAN THAT THE ASSESSI NG OFFICER IS NOT TO SATISFY HIMSELF WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE WITH REGARD TO SUCH EXPENDITURE. IF HE IS SATISFIED THAT THE ASSESSEE HAS CORRECTLY REFLECTED THE AMOUNT OF SUCH EXPENDITURE, HE HAS TO DO NOTHING FURTHER. ON THE O THER HAND, IF HE IS SATISFIED ON AN OBJECTIVE ANALYSIS AND FOR CO GENT REASONS THAT THE AMOUNT OF SUCH EXPENDITURE AS CLAIMED BY T HE ASSESSEE IS NOT CORRECT, HE IS REQUIRED TO DETERMINE THE AMO UNT OF SUCH EXPENDITURE ON THE BASIS OF A REASONABLE AND ACCEPT ABLE METHOD OF APPORTIONMENT. IT WOULD BE APPROPRIATE TO RECALL THE WORDS OF THE SUPREME COURT IN WALFORT (SUPRA) TO THE FOLLOWI NG EFFECT:- THE THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON-TAXABLE HAS, IN PRINCIPLE, BEEN NOW WIDENED UNDER SECTION 14A.' SO, EVEN FOR THE PRE-RULE8D PERIOD, WHENEVER THE IS SUE OF SECTION 14A ARISES BEFORE AN ASSESSING OFFICER, HE HAS, FIRST OF ALL, TO ASCERTAIN THE CORRECTNESS OF THE CLAIM OF T HE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SA ID ACT. EVEN WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE HAS B EEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T OTAL INCOME, ITA NO.2804/DEL./2012 5 THE ASSESSING OFFICER WILL HAVE TO VERIFY THE CORRE CTNESS OF SUCH CLAIM. IN CASE, THE ASSESSING OFFICER IS SATISFIED WITH THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NO E XPENDITURE, AS THE CASE MAY BE, THE ASSESSING OFFICER IS TO ACCEPT THE CLAIM OF THE ASSESSEE INSOFAR AS THE QUANTUM OF DISALLOWANCE UNDER SECTION 14A IS CONCERNED. IN SUCH EVENTUALITY, THE ASSESSING OFFICER CANNOT EMBARK UPON A DETERMINATION OF THE A MOUNT OF EXPENDITURE FOR THE PURPOSES OF SECTION 14A(1). IN CASE, THE ASSESSING OFFICER IS NOT, ON THE BASIS OF OBJECTIVE CRITERIA AND AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY, SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HE SH ALL HAVE TO REJECT THE CLAIM AND STATE THE REASONS FOR DOING SO . HAVING DONE SO, THE ASSESSING OFFICER WILL HAVE TO DETERMINE TH E AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. HE IS REQUIRED TO DO SO ON THE BASIS OF A REASONABLE AND ACCEPTABLE METH OD OF APPORTIONMENT. HERE, ON THE ONE HAND, ASSESSEE CLAIMS THAT NO EXPE NDITURE WAS INCURRED FOR EARNING DIVIDEND INCOME AND ON THE OTHER HAND, DISA LLOWS SUO MOTO RS.1 LAC TOWARDS EARNING SUCH INCOME. THE ASSESSING OFFICER HAS TO REJECT THE CLAIM OF ASSESSEE AND APPORTION THE EXPENDITURE ON REASON ABLE AND ACCEPTABLE METHOD. IN OUR CONSIDERED VIEW, THIS ISSUE REQUIRE D TO BE RESTORED TO THE FILE OF THE ASSESSING OFFICER TO DECIDE AFRESH. WE ORDE R ACCORDINGLY. IN THE RESULT, THIS GROUND OF REVENUES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 7. THE GROUND NO.2 IS AGAINST THE DELETION OF ADDIT ION MADE BY ASSESSING OFFICER OF RS.23,25,339/- ON ACCOUNT OF PROVISION F OR WARRANTY EXPENSES. 8. LD. DR RELIED ON THE ORDER OF THE ASSESSING OFFI CER AND ALSO SUBMITTED THAT THE PROVISION HAS BEEN MADE FOR UNASCERTAINED LIABILITY. THE ASSESSEE WAS FAILED TO PROVE THE ACTUAL INCURRENCE OF LIABILITY UNDER THE WARRANTY CLAUSES ON ITA NO.2804/DEL./2012 6 THE BASIS OF FIXING THE PERCENTAGE OF THE TURNOVER. IN ABSENCE OF SUCH DEDUCTIONS, THE CLAIM OF THE ASSESSEE ON THE BASIS OF PERCENTAGE OF THE TURNOVER SHOULD NOT HAVE BEEN ALLOWED. HE ALSO REL IED ON THE ORDER OF HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. TOTORK CON TROLS INDIA LIMITED 293 ITR 311. 9. ON THE OTHER HAND, THE LD. AR RELIED ON THE ORDE R OF THE CIT (A) AND PLEADED THAT THE COMPANY IS DOING THE BUSINESS OF C OMPUTER SOFTWARE DEVELOPMENT AND TRADING OF BOUGHT OUT PRODUCT. THE COMPANY DEVELOPS SOFTWARE FOR THE CUSTOMER ACCORDING TO THEIR SPECIF ICATIONS. SUCH SOFTWARES NEED TO HAVE A PERFORMANCE GUARANTEE. IN VIEW OF T HESE FACTS, THERE WAS A WARRANTY CLAUSE IN THE COMMERCIAL TRANSACTIONS AS T HE SOFTWARE SUPPLIED TO THE CUSTOMERS MIGHT HAVE BUGS/ISSUES, THUS, THE SALE OF THE SOFTWARE AND WARRANTY ARE INEXTRICABLY BOUND BY EACH OTHER. IN VIEW OF T HESE FACTS, ONCE THE SALE HAS BEEN RECORDED. THEN THE LIABILITY IN RESPECT OF TH E WARRANTY HAS ALSO TO BE CONSIDERED AS COST AGAINST THE SALES. SUCH COST F OR WARRANTY IS NOT CONTINGENT LIABILITY. THE QUANTIFICATION OF THE WARRANTY HAS BEEN MADE ON TECHNICAL ESTIMATES BASED ON PAST EXPERIENCE AND THE WARRANTY CLAUSES S CONTAINED IN THE AGREEMENTS OF SALES WITH THE CUSTOMER. LD. AR FURT HER SUBMITTED THAT WARRANTY CLAUSES IMPOSED A LIABILITY ON THE COMPANY TO DISCHARGE ITS OBLIGATION UNDER THE CLAUSES OF THE AGREEMENT FOR T HE PERIOD OF WARRANTY. THUS, THE LIABILITY IS CAPABLE OF BEING CONSTRUED I N DEFINITE TERMS AND HAS ITA NO.2804/DEL./2012 7 ARISEN ON THE SALES EFFECTED IN THE ACCOUNTING YEAR . SINCE THE ASSESSEE IS MAINTAINING BOOKS OF ACCOUNTS ON THE MERCANTILE SYS TEM BASIS, THIS LIABILITY HAS BEEN ACCRUED THOUGH IT SHALL BE DISCHARGED AT A FUTURE DATE. THEREFORE, SUCH CLAIM HAS TO BE CONSIDERED WHILE WORKING OUT T HE PROFIT AND GAIN OF THE BUSINESS FOR THE YEAR UNDER CONSIDERATION. HE RELI ED ON THE DECISION OF CIT (A). 10. WE HAVE HEARD BOTH THE SIDES ON THE ISSUE. THE ASSESSEE COMPANY IS DOING THE BUSINESS OF COMPUTER SOFTWARE AND TRADING OF BOUGHT OUT PRODUCTS. THE COMPANY ALSO PRODUCES SOFTWARES TO ITS CUSTOMER S AS PER THEIR SPECIFICATIONS. THUS, THE ASSESSEE HAS TO PROVIDE PERFORMANCE GUARANTEE AND FOR THE SAME, THE CLAUSES FOR WARRANTY IS PROVIDED. THUS, THE SALES AND WARRANTY WERE INEXTRICABLY RELATED TO EACH OTHER. THE WORKING OF THE WARRANTY IS BASED ON TECHNICAL ESTIMATES AND PAST E XPERIENCE. THE ASSESSEE COMPANY IS MAINTAINING THE ACCOUNTS ON THE MERCANTI LE SYSTEM. THE LIABILITY FOR WARRANTY EXPENSES IS A COMMITTED LIABILITY AT T HE VERY INITIAL STAGE OF THE SALES. THE AMOUNT OF PROVISION BASED ON PAST EXPER IENCE EXHIBITS A DIRECT NEXUS BETWEEN THE CLAIM FOR PROVISION AND OBLIGATIO N ARISING UNDER THE WARRANTY CLAUSE. IN VIEW OF THIS, IT CAN BE SAID T HAT IT IS A LIABILITY WHICH HAS ARISEN IN THE RELEVANT YEAR THOUGH ITS ACTUAL QUANT IFICATION AND DISCHARGE IS DEFERRED TO A FUTURE DATE. THE FACTS ON THE RECORD ALSO DO NOT SHOW THAT SUCH PROVISION HAS BEEN MADE FOR EVADING THE TAX. IN VI EW OF THESE FACTS, WE FIND ITA NO.2804/DEL./2012 8 NO FAULT IN THE ORDER OF CIT (A) AND WE SUSTAIN THE SAME ON THIS ISSUE. THIS GROUND OF REVENUE IS DISMISSED. 11. GROUND NO.3 IS GENERAL IN NATURE AND DOES NOT R EQUIRE ANY ADJUDICATION, HENCE DISMISSED. 12. IN THE RESULT, THE APPEAL OF THE REVENUE IS PAR TLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 30 TH DAY OF APRIL, 2013. SD/- SD/- (R.P. TOLANI) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 30 TH DAY OF APRIL, 2013 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A)-VI, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.