ITO, New Delhi V. M/s Creatnet Services Ltd., New Delhi

ITA 2930/DEL/2010

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6643 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 4 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-11-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 14-09-2016
• Assessment Year: 2003-2004
• Appeal Filed On: 11-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AGAINST DATED PASSED
• Keywords: Depreciation; Revenue expenditure
• Section: 43B; 37(1); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: B NEW DELHI BEFORE SHRI S. V. MEHROTRA, ACCOUNTANT MEMBER AND MS. SUCHITRA KAMBLE, JUDICIAL MEMBER ITA NO. 2930/DEL/ 2010 (ASSESSMENT YEAR (2 003-04) ITO WARD 3(4) NEW DELHI (APPELLANT) VS CREATNET SERVICES LTD. 215, SOUTHEX PLAZA-1, SOUTH EXTENSION-II, NEW DELHI AABCC6813B (RESPONDENT) ORDER PER SUCHITRA KAMBLE, JM THIS APPEAL IS FILED BY THE REVENUE AGAINST THE ORD ER DATED 31/3/2010 PASSED BY THE CIT (A)-V, NEW DELHI FOR AS SESSMENT YEAR 2003-04. 2. THE GROUNDS OF APPEAL ARE AS FOLLOWS:- 1. THE LD.CIT(A) ERRED ON FACTS AND IN LAW IN DELE TING THE ADDITION OF RS.71,91,409/- DISALLOWED BY THE A.O IG NORING THE FACT THAT THE SAID EXPENSES DID NOT PERTAIN TO THE RELEVANT PREVIOUS YEAR 2002-03. MOREOVER, THE SAID EXPENSES CLAIMED UNDER THE HEAD SOFTWARE DEVELOPME NT APPELLANT BY SH. ANIL KUMAR SHARMA, SR. DR RESPONDENT BY SH. RAVI JOSHI, CA DATE OF HEARING 14.09.2016 DATE OF PRONOUNCEMENT 09.11.2016 ALSO WERE NOT PROVED TO BE INCURRED WHOLLY & EXCLUS IVELY FOR THE PURPOSE OF ASSESSEES BUSINESS NOR WERE THE SAME ALLOWABLE UNDER THE PROVISIONS OF SECTIONS 35D OR 4 3B OF THE I.T. ACT, 1961. 3. THE ASSESSEE HAD FILED A RETURN FOR ASSESSMENT Y EAR 2003-04 DECLARING LOSS OF RS.1,46,04,165/- ON 2/12/2003. T HE A.O OBSERVED THAT THE ASSESSEE WAS NOT DOING THE BUSINE SS OF SOFTWARE DEVELOPMENT BECAUSE THE ASSESSEE WAS CARRYING ON TH E BUSINESS OF MANUFACTURING, TRADING AND EXPORT OF READYMADE GARM ENTS. THE ASSESSING OFFICER HAS MADE DISALLOWANCE OF SOFTWARE DEVELOPMENT COST IN TWO ASSESSMENT YEARS WHICH WAS AMOUNTING TO RS.71,91,409/-. 4. AGGRIEVED BY THIS, THE ASSESSEE FILED APPEAL BEF ORE THE CIT(A). THE CIT(A) OBSERVED AS FOLLOWS:- 6. I HAVE DISCUSSED THE MATTER WITH THE AR OF THE ASSE SSEE, PERUSED THE ASSESSMENT ORDER, GROUNDS OF APPEAL, WR ITTEN SUBMISSIONS AND PAPER BOOK VERY CAREFULLY. THE ASS ESSEE COMPANY WAS GOING TO DEVELOP SOFTWARE FOR SUPPLY CH AIN MANAGEMENT AND OUTSOURCING FOR APPAREL INDUSTRY IN INDIA OR RETAIL EXPORT MARKETS/STORES IN OTHER DEVELOPED COUNTRIES. THEREFORE, THE COMPANY HAD SPENT RS.71,91,409/- IN ASSESSMENT YEAR 2002-03 AND 2003-04. HOWEVER, THE SOFTWARE AT THE TESTING STATE DEVELOPED TECHNICAL SNAG AND THE ASSESSEE HAD TO AB ANDON THE PROJECT FOREVER. THEREFORE, THE DEFERRED REVENUE E XPENDITURE MADE BY THE ASSESSEE COMPANY OF RS.71,91,409/- HAD BEEN WRITTEN OFF BY THE COMPANY IN ITS BOOKS OF ACCOUNT. THERE IS N O HANKY PANKY ON CLAIM OF THE ASSESSEE OF WRITTEN OFF OF SUCH DEV ELOPMENT EXPENSES. THE AR PRODUCED BOOKS OF ACCOUNTS WHICH ARE MAINTAINED IN COMPUTER AND I VERIFIED THE SAME. TH US I AM SATISFIED THAT THE WRITTEN OFF OF EXPENDITURE ON DE VELOPMENT OF SOFTWARE EXPENSES OF RS.71,97,409/- IS GENUINE AND CORRECT CLAIM, HENCE THE ADDITION MADE BY A.O OF RS.71,97,409/- IS HEREBY DELETED. 5. THE LD. DR SUBMITTED THAT THE ASSESSING OFFICER HAS RIGHTLY DISALLOWED THE SAID SOFTWARE EXPENSES. THE LD. DR RELIED ON THE OBSERVATIONS OF THE ASSESSING OFFICER WHICH ARE AS UNDER: 10. MOREOVER, THE BURDENS ON THE ASSESSEE TO FURNI SH ALL RELEVANT SUPPORTING MATERIAL THAT ESTABLISH ITS CLA IM. IN THE ABSENCE OF SUPPORTING DOCUMENTS THE ASSESSEE IS NOT ENTITLED TO CLAIM THE EXPENSES. IN THIS CASE THE ASSESSEE STAT ED THAT SO MUCH AMOUNT WAS INCURRED ON DEVELOPMENT OF SOFTWARE PROG RAM BUT IN SUPPORT FAILED TO FURNISHED DETAIL TO WHOM THE SAME WAS DEVELOPED, AGREEMENT WITH THE CONCERNED PARTY, ETC. THE ASSESSEE ALSO FAILED TO STATE WHAT WAS HAPPENED TO THE SOFTW ARE IN QUESTION WHOSE DEVELOPING CHARGE WAS ABOUT 1 CRORE. ONCE AN Y SOFTWARE IS DEVELOPED THE SAME CANNOT BE DESTROYED ITS OWN UNLE SS AND UNTIL IT IS DESTROYED. AS PER PROVISION OF THE INCOME TA X ACT ONLY THOSE EXPENSES WHICH ARE INCURRED IN ORDER TO EARN INCOME IS ALLOWABLE. THERE ARE TWO TYPES OF EXPENSES ONE IS REVENUE AND OTHER IS CAPITAL EXPENSES. REVENUE EXPENSES IS ALLOWABLE DU RING THE YEAR IN WHICH IT IS INCURRED AND OTHER EXPENSES WHICH AR E NOT REVENUE MUST BE CAPITALIZED AND DEPRECIATION ON THE SAME IS ALLOWED. IN THE INSTANT CASE THE ASSESSEE NEITHER CLAIMED THESE EXPENSES AS REVENUE NOR CAPITALIZED. THESE EXPENSES PERTAIN TO EARLIER YEARS CANNOT BE ALLOWED IN THE YEAR UNDER CONSIDERATION. ONLY THOSE EXPENSES WHICH ARE COVERED UNDER SECTION 43B OF THE ACT PERTAIN TO EARLIER YEAR IS ALLOWABLE ON PAYMENT BASIS OR TH E EXPENSES WHICH COMES UNDER THE PURVIEW OF SECTION 35D IS ALL OWED IN SUBSEQUENT YEARS. THESE EXPENSES NEITHER COME UNDE R THE AMBIT OF SECTION 43B NOR U/S 35D. MOREOVER THESE ARE NOT COME UNDER ANY OF THE SECTION 28 TO 41 OF THE I.T. ACT. THERE SHOULD A NEXUS BETWEEN THE EXPENSES INCURRED AND THE BUSINESS. SE CTION 37(1) PROVIDES EXPENSES MUST BE INCURRED DURING THE YEAR AND MUST BE OF REVENUE NATURE, SHOULD HAVE BEEN INCURRED DURING THE PREVIOUS YEAR & SHOULD HAVE BEEN INCURRED WHOLLY & EXCLUSIVE LY FOR THE PURPOSE OF BUSINESS OR PROFESSION. KEEPING IN MIND ALL THE AFORESAID FACTS. I, DISALLOWED THE EXPENSES CLAIME D BY THE ASSESSEE AMOUNTING TO RS.71,91,409/-. 6. THUS, THE LD. DR SUBMITTED THAT THE ASSESSING OF FICER HAS RIGHTLY REJECTED THE SAME AFTER VERIFYING RELEVANT DOCUMENTS. THE CIT(A) FAILED TO LOOK INTO THESE ASPECTS. THUS, TH E ORDER OF CIT(A) HAS TO BE QUASHED. 7. THE LD. AR RELIED UPON THE ORDER OF THE CIT(A) A ND SUBMITTED THAT THE ASSESSING OFFICER HAS NOT TAKEN THE COGNIZ ANCE OF THE RELEVANT MATERIAL WHILE MAKING ADDITIONS. THE LD. A R FURTHER SUBMITTED THAT THE ASSESSING OFFICER FAILED TO UNDE RSTAND THE BUSINESS OF THE ASSESSEE BECAUSE THE ASSESSING OFFI CER HAD NEITHER GONE TO THE ASSESSEES BUSINESS PREMISES NOR DISCUS SED THE BUSINESS WITH TOP EXECUTIVES AT THE FACTORY PREMISE S BY DISCUSSING THE MATTER WITH THEM IN PERSON NOR TRIED TO UNDERST AND THE BUSINESS MODEL. THE ASSESSEE WAS A SOLE FACILITATO R TO MATERIAL MOVEMENTS IN GARMENTS INDUSTRIES FROM INDIA TO DEVE LOPED COUNTRIES. THE GARMENTS MANUFACTURE IN INDIA BY MA NY OTHER COMPANIES IS DELIVERED TO RETAIL STORES IN DEVELOPE D COUNTRIES LIKE EUROPE AND USA. THIS IS CALLED SUPPLY CHAIN MANAGE MENT, MANAGED BY THE ASSESSEE. THE ASSESSEE COMPANY HAD TO COLLECT INFORMATIONS FROM DIFFERENT RETAIL STORES OF RENOW NED BRANDS AND COLLECTING THE INFORMATION FROM DIFFERENT COMPANIES MANUFACTURING GARMENTS INN INDIA AND MAKE A LINK BETWEEN THEM. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED ALL T HE RECORDS. IT IS PERTINENT TO NOTE THAT ALL THE RELEVANT MATERIAL WAS BEFORE THE ASSESSING OFFICER. THE ASSESSING OFFICER HAS NOT L OOKED INTO THE ACTUAL BUSINESS ACTIVITY OF THE ASSESSEE COMPANY DU RING THE ASSESSMENT YEAR 2002-03 AND 2003-04. THE ASSESSEE C OMPANY WAS GOING TO DEVELOP SOFTWARE FOR SUPPLY CHAIN MANAGEME NT AND OUTSOURCING FOR APPAREL INDUSTRY IN INDIA OR RETAIL EXPORT MARKETS/STORES IN OTHER DEVELOPED COUNTRIES. THERE FORE, THE COMPANY HAD SPENT RS.71,91,409/- IN ASSESSMENT YEAR 2002-03 AND 2003-04. HOWEVER, THE SOFTWARE AT THE TESTING STATE DEVELOPED TECHNICAL SNAG AND THE ASSESSEE HAD TO ABANDON THE PROJECT FOREVER. THEREFORE, THE DEFERRED REVENUE EXPENDITURE MADE BY THE ASSESSEE COMPANY OF RS.71,91,409/- HAD BEEN WRITTEN OFF BY T HE COMPANY IN ITS BOOKS OF ACCOUNT. THERE IS NO SUSPICION ON CLA IM OF THE ASSESSEE OF WRITTEN OFF OF SUCH DEVELOPMENT EXPENSES. THE A R PRODUCED BOOKS OF ACCOUNTS WHICH ARE MAINTAINED IN COMPUTER AND THE SAME WAS VERIFIED BY THE CIT(A). THUS THE WRITTEN OFF O F EXPENDITURE ON DEVELOPMENT OF SOFTWARE EXPENSES OF RS.71,97,409/- IS GENUINE CLAIM MADE BY THE ASSESSEE. HENCE THE ADDITION MADE BY ASSESSING OFFICER OF RS.71,97,409/- WAS RIGHTLY DELETED BY TH E CIT(A). 9. IN RESULT, APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 09/11/2016. SD/- SD/- (S.V. MEHROTRA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL ME MBER DATED: 09/11/2016 *R. NAHEED* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI DATE 1. DRAFT DICTATED ON 21.10.2016 PS 2. DRAFT PLACED BEFORE AUTHOR 24.10.2016 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER .10.2016 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. .10.2016 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS .10.2016 PS/PS 6. KEPT FOR PRONOUNCEMENT ON .10.2016 PS 7. FILE SENT TO THE BENCH CLERK 11.2016 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.