HTS SECURITIES P. LTD, MUMBAI V. ITO 4(1)(2), MUMBAI

ITA 3168/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 54880 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 01-08-2011
• Assessment Year: 2000-2001
• Appeal Filed On: 23-04-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V V SHASTRI
• Assessee Lawyers: RA JEEV WAGLAY
• Keywords: Depreciation; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 143(3); 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H, MUMBAI BEFORE SHRI P.M.JAGTAP, ACCOUNTANT MEMBER & SHRI R.S.PADVEKAR, JUDICIAL MEMBER. I.T.A. NO. 3168/MUM/2010. ASSESSMENT YEAR : 2000-01. HTS SECURITIES PVT. LTD., THE INCOME TAX OFFICER,, C/O GAWANDE CONSULTANTS PVT. LTD., VS. 4(1)(2), MUMBAI. 801-MAHALAXMI CHAMBERS, 22 BHULABHAI DESAI ROAD, MUMBAI 400026. PAN AAACH 2781C APPELLANT. RESPONDENT. APPELLANT BY : SHRI RAJEEV WAGLAY. RESPONDENT BY : SHRI V.V. SHASTRI. DATE OF HEARING : 01-08-2011. DATE OF PRONOUNCEMENT : 12-08-2011 O R D E R. PER P.M. JAGTAP, A.M. : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF LEARNED CIT(APPEALS)-8, MUMBAI DATED 09-02-2010 AND THE GRI EVANCE OF THE ASSESSEE IS PROJECTED IN THE FOLLOWING GROUNDS RAISED THEREIN : 1. THAT THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF RS.4,26,730/- OF Y2K EXPENSES MADE BY AO. 2. THAT THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF RS.5,26,872/- OF BAD DEBTS. 3. THAT THE LEARNED CIT(A) HAS ERRED IN STATING THAT T HE BAD DEBT AMOUNTS ARE NOT ALLOWABLE AS IT IS NOT BONAFIDE AND IS NOT BASED ON COMMERCIAL WISDOM OR EXPEDIENCY IN VIEW OF THE DECISION OF MUM BAI HIGH COURT IN 2 ITA NO.3168/MUM/2010 ASSESSMENT YEAR : 2000-01. CASE OF DIT(IT) VS OMAN INTERNATIONAL 313 ITR 128 ( BOM) AND HELD THAT THE CONDITIONS OF SECTION 36(1)(VII) IS NOT FULFILL ED. 4. THAT THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF RS.42,267/- ALLOCATING EXPENSES IN THE RATIO OF OWN TRADING TURNOVER TO TOTAL TURNOVER BY THE A.O. 5. THAT THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE SOFTWARE EXPENSES OF RS.80,405/- AS CAPITAL EXPENDITURE AND CAPITALIZ ED THE SAME AND ALLOWED DEPRECIATION BY THE AO. 2. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. AS REGARDS THE ISSUE RAISED IN GROUND NO.1 RELATING TO DISALLOWANCE OF Y2K EXPENSES, IT IS OBSERVED THAT THE SAID DISALLOWANCE WAS MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(APPEALS) MAINLY ON THE GROUND THAT THE ASSESSEE DID NOT FURNISH THE REQUIRED AUDIT REP ORT ALONG WITH ITS RETURN OF INCOME. THE SAID AUDIT REPORT, HOWEVER, WAS FURNISH ED BY THE ASSESSEE BEFORE COMPLETION OF ASSESSMENT BY THE AO U/S 143(3) READ WITH SECTION 147 AND THE SAME, THEREFORE, WAS ADMITTEDLY AVAILABLE TO THE AO WHILE MAKING THE ASSESSMENT. IT IS OBSERVED THAT A SIMILAR REQUIREMENT WAS THERE FOR THE PURPOSE OF CLAIMING DEDUCTION U/S 80J AND IN THAT CONTEXT IT WAS HELD B Y THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. SHIVANANDAN ELECTRONIC S REPORTED IN 209 ITR 63 THAT CONDITION REGARDING FURNISHING OF THE AUDIT REPORT ALONG WITH THE RETURN OF INCOME IS DIRECTORY AND NOT MANDATORY. IT WAS HELD THAT IF SUCH AUDIT REPORT HAD BEEN SUBMITTED BY THE ASSESSEE BEFORE COMPLETION OF THE RELEVANT ASSESSMENT, THE CONDITION COULD BE TAKEN AS SATISFIED FOR THE PURPO SE OF CLAIMING DEDUCTION U/S 80J. TO THE SIMILAR EFFECT ARE THE DECISIONS OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. GUJRAT OIL & ALLIED INDUSTRIES 201 ITR 325 AND IN THE CASE OF ZENITH PROCESSING MILLS VS. CIT 219 ITR 721. RESPECTFULLY FOLLOWING THE RATIO OF THESE JUDICIAL PRONOUNCEMENTS, WE DIRECT THE AO TO ALLOW Y2K EXPENSES CLAIMED BY THE ASSESSEE. GROUND NO. 1 IS ACCORDINGLY ALLOWED. 3 ITA NO.3168/MUM/2010 ASSESSMENT YEAR : 2000-01. 3. AS REGARDS GROUND NOS. 2 AND 3 RELATING TO THE A SSESSEES CLAIM FOR BAD DEBS, IT IS OBSERVED THAT THE SAID CLAIM WAS DISALLOWED B Y THE AO AS WELL AS BY THE LEARNED CIT(APPEALS) ON THE GROUND THAT THE ASSESSE E COULD NOT ESTABLISH THAT THE RELEVANT DEBTS HAD ACTUALLY BECOME BAD IN THE YEAR UNDER CONSIDERATION. THE OTHER REASON GIVEN BY THE AUTHORITIES BELOW WAS THAT THE ASSESSEE HAVING INCLUDED IN HIS TOTAL INCOME ONLY THE BROKERAGE AMOUNT, THE CONDITI ON STIPULATED IN SECTION 36(2) WAS NOT SATISFIED. AS REGARDS THE FIRST REASON GIVE N BY THE AUTHORITIES BELOW, THE LEARNED REPRESENTATIVES OF BOTH THE SIDES HAVE AGRE ED THAT THIS ISSUE NOW STANDS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF HONBLE SUPREME COURT IN THE CASE OF TRF LTD. 323 ITR 397 (SC) WHER EIN IT WAS HELD THAT EVERY ASSESSEE PRIOR TO 1-4-1989 HAD TO ESTABLISH, AS A M ATTER OF FACT, THAT DEBT ADVANCED BY HIM HAD IN FACT BECOME IRRECOVERABLE. AS FURTHER HELD BY THE HONBLE SUPREME COURT, THIS POSITION, HOWEVER, GOT ALTERED BY THE D ELETION OF THE WORD ESTABLISHED WHICH EARLIER EXISTED IN SECTION 36(1)(VII). THE HO NBLE SUPREME COURT HAS HELD THAT IT IS, THEREFORE, NOT NECESSARY FOR THE ASSESS EE WITH EFFECT FROM 1-4-1989 TO ESTABLISH THAT THE DEBT IN FACT HAS BECOME IRRECOVE RABLE AND IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNT S OF THE ASSESSEE. AS REGARDS THE OTHER REASON GIVEN BY THE AUTHORITIES BELOW FOR DIS ALLOWING CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF BAD DEBS WRITTEN OFF U/ S 36(1)(VII), IT IS OBSERVED THAT THIS ISSUE ALSO NOW STANDS SQUARELY COVERED BY THE DECISION OF SPECIAL BENCH OF ITAT, MUMBAI IN THE CASE OF SHREYAS S. MORAKHIA RE PORTED IN 131 TTJ 641 WHEREIN IT WAS HELD THAT THE AMOUNT RECEIVABLE BY T HE ASSESSEE, WHO IS A SHARE BROKER, FROM HIS CLIENTS AGAINST THE TRANSACTIONS O F PURCHASE OF SHARES ON THEIR BEHALF, CONSTITUTES DEBT WHICH IS A TRADING DEBT. I T WAS HELD THAT THE BROKERAGE/COMMISSION INCOME ARISING FROM SUCH TRANS ACTIONS VERY MUCH FORMS PART OF THE SAID DEBT AND WHEN THE AMOUNT OF SUCH B ROKERAGE/COMMISSION HAS BEEN 4 ITA NO.3168/MUM/2010 ASSESSMENT YEAR : 2000-01. TAKEN INTO ACCOUNT IN COMPUTATION OF INCOME OF THE ASSESSEE OF THE RELEVANT PREVIOUS YEAR OR IN AN EARLIER YEAR, IT SATISFIES T HE CONDITION STIPULATED IN SECTION 36(2) AND THE ASSESSEE IS ENTITLED TO DEDUCTION U/S 36(1)(VII) BY WAY OF BAD DEBTS AFTER HAVING WRITTEN OFF THE SAID DEBTS FROM HIS BO OKS OF ACCOUNT AS IRRECOVERABLE. RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF TRF LTD. (SUPRA) AS WELL AS THAT OF THE SPECIAL BEN CH OF ITAT IN THE CASE OF SHREYAS S. MORAKHIA (SUPRA), WE SET ASIDE THE IMPUG NED ORDER OF THE LEARNED CIT(APPEALS) ON THIS ISSUE AND DIRECT THE AO TO ALL OW DEDUCTION CLAIMED BY THE ASSESSEE ON ACCOUNT OF BAD DEBS. GROUND NOS. 2 AND 3 OF THE ASSESSEES APPEAL ARE ACCORDINGLY ALLOWED. 4. GROUND NO. 4 RAISED BY THE ASSESSEE IN THIS APPE AL HAS NOT BEEN PRESSED BY THE LEARNED COUNSEL FOR THE ASSESSEE AT THE TIME OF HEARING BEFORE US. THE SAME IS ACCORDINGLY DISMISSED AS NOT PRESSED. 5. AS REGARDS GROUND NO. 5 RELATING TO THE DISALLOW ANCE MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(APPEALS) ON ACCOUNT OF EXPENDITURE INCURRED BY THE ASSESSEE ON COMPUTER SOFTWARE TREATING THE SAME AS OF CAPITAL NATURE, IT IS OBSERVED THAT A SIMILAR ISSUE RELATING TO THE NATURE OF SOFT WARE EXPENSES WHETHER CAPITAL OR REVENUE HAS BEEN CONSIDERED AND DECIDED BY THE DELH I BENCH OF THE ITAT IN THE CASE OF AMWAY INDIA ENTERPRISES 111 ITD 112 WHEREIN THE CONCLUSIONS DRAWN BY THE SPECIAL BENCH OF ITAT AFTER TAKING INTO CONSIDE RATION ALL THE RELEVANT ASPECTS OF THE MATTER HAVE BEEN SUMMARIZED AS UNDER : (I) WHEN THE ASSESSEE ACQUIRES A COMPUTER SOFTWARE FOR THAT MATTER THE LICENSE TO USE SUCH SOFTWARE, HE ACQUIRE S A TANGIBLE ASSET AND BECOMES OWNER THEREOF AS HELD ABOVE RELYI NG ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TC S (SUPRA). (II) HAVING REGARD TO THE FACT THAT SOFTWARE BECOME S OBSOLETE WITH TECHNOLOGICAL INNOVATION AND ADVANCEMENT WITHI N A SHORT SPAN OF TIME, IT CAN BE SAID THAT WHERE THE LIFE OF THE COMPUTER 5 ITA NO.3168/MUM/2010 ASSESSMENT YEAR : 2000-01. SOFTWARE IS SHORTER SAY LESS THAN 2 YEARS), IT MAY BE TREATED AS REVENUE EXPENDITURE. ANY SOFTWARE HAVING ITS UTILI TY TO THE ASSESSEE FOR A PERIOD BEYOND TWO YEARS CAN BE CONSI DERED AS ACCRUAL OF BENEFIT OF ENDURING NATURE. HOWEVER, TH AT BY ITSELF WILL NOT MAKE THE EXPENDITURE INCURRED ON SOFTWARE AS CAPITAL IN NATURE AND THE FUNCTIONAL TEST AS DISCUSSED ABOVE A LSO NEEDS TO BE SATISFIED. (III) ONCE THE TESTS OF OWNERSHIP AND ENDURING BENE FIT ARE SATISFIED, THE QUESTION WHETHER EXPENDITURE INCURRE D ON COMPUTER SOFTWARE IS CAPITAL OR REVENUE HAS TO BE SEEN FROM THE POINT OF VIEW OF ITS UTILITY TO A BUSINESSMAN AND HOW IMPORT ANT AN ECONOMIC OR FUNCTIONAL ROLE IT PLAYS IN HIS BUSINES S. IN OTHER WORDS, THE FUNCTIONAL TEST BECOMES MORE IMPORTANT A ND RELEVANT BECAUSE OF THE PECULIAR NATURE OF THE COMPUTER SOFT WARE AND ITS POSSIBLE USE IN DIFFERENT AREAS OF BUSINESS TOUCHIN G EITHER CAPITAL OR REVENUE FIELD OR ITS UTILITY TO A BUSINESSMAN WH ICH MAY TOUCH EITHER CAPITAL OR REVENUE FIELD. KEEPING IN VIEW THE DECISION OF THE SPECIAL BENCH O F ITAT IN THE CASE OF AMWAY INDIA ENTERPRISES (SUPRA) ON A SIMILAR ISSUE, WE SE T ASIDE THE IMPUGNED ORDER OF THE LEARNED CIT(APPEALS) ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE AO WITH A DIRECTION TO CONSIDER THE SAME AFRESH IN THE LIGH T OF THE GUIDELINES LAID DOWN BY THE SPECIAL BENCH IN THE SAID CASE. GROUND NO. 5 IS ACCORDINGLY TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. \. ORDER PRONOUNCED ON THIS 12 TH DAY OF AUGUST, 2011. SD/- SD/- (R.S. PADVEKAR)) (P.M . JAGTAP) JUDICIAL MEMBER A CCOUNTANT MEMBER MUMBAI, DATED: 12 TH AUGUST, 2011. 6 ITA NO.3168/MUM/2010 ASSESSMENT YEAR : 2000-01. COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, I-BENCH. (TRUE COPY ) BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI BENC HES, MUMBA I. WAKODE