DCIT, Cochin V. M/s.GAC Shipping (India) P.Ltd, Cochin

ITA 317/COCH/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 86426 (ITAT-COCHIN)
• Duration Of Justice: 8 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-03-2015
• Appeal Filed By: Department
• Bench Allotted: DB
• Next Hearing Date: 13-11-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 27-06-2014
• Court: TRIBUNAL
• Department Lawyers: K K JOHN
• Keywords: Capital asset; Depreciation; Business expenditure; Capital receipt; Revenue expenditure; Capital expenditure
• Section: 201(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRI BUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND CHANDRA POOJ ARI, AM I.T.A. NOS. 803&804/COCH/2013 ASSESSMENT YEAR : 2006-07 M/S. GAC SHIPPING (INDIA) PVT. LTD., GAC HOUSE, P.O. BOX NO. 515, SUBRAMANIAN ROAD, WILLINGDON ISLAND, KOCHI-682 003. [PAN:AABCG 4164H] VS. THE JOINT COMMISSIONER OF INCOME-TAX, CIRCLE-1(2), KOCHI. (ASSESSEE-APPELLANT) (REVENUE-RESPONDENT) I.T.A. NOS.317&361 /COCH/2014 ASSESSMENT YEARS : 2006-07 & 2008-09 THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1(2), KOCHI. VS. M/S. GAC SHIPPING (INDIA) PVT. LTD., GAC HOUSE, P.O. BOX NO. 515, SUBRAMANIAN ROAD, WILLINGDON ISLAND, KOCHI-682 003. [PAN:AABCG 4164H] (REVENUE-APPELLANT) (ASSESSEE-RESPONDENT) ASSESSEE BY SHRI R.SREENIVASAN, CA REVENUE BY SHRI K.K. JOHN, SR. DR DATE OF HEARING 14/01/2015 DATE OF PRONOUNCEMENT 06/03/2015 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER: THE APPEALS IN I.T.A. NOS. 803/COCH/2013 &317/COCH /2014 ARE CROSS APPEALS DIRECTED AGAINST THE ORDER DATED 20-10-2013 PASSED BY THE CIT(A)-II, KOCHI FOR THE I.T.A. NOS.803&804/COCH/2013 & 317&361/COCH/2014 2 ASSESSMENT YEAR 2006-07. THE APPEAL IN I.T.A. NO. 804/COCH/2013 FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 21-10- 2013 PASSED BY THE CIT(A)-II, KOCHI FOR THE ASSESSMENT YEAR 2006-07. THE APPEAL IN I.T.A. NO. 361/COCH/2014 FILED BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 30-03-2014 PASSED BY THE CIT(A)- II, KOCHI FOR THE ASSESSMENT YEAR 2008-09 . I.T.A. NO. 803/COCH/2013- ASSESSEE APPEAL (A.Y. 200 6-07) 2. THE FIRST GROUND IN I.T.A. NO. 803/COCH/2013 IS WITH REGARD TO DISALLOWANCE OF NETWORK SUPPORT SERVICE CHARGES ON THE REASON THAT THERE WAS NO DEDUCTION OF TDS FOR PAYMENT OF THE SAME BEFORE DUE DATE OF FILING T HE RETURN. 3. THE BRIEF FACTS OF THE ISSUE ARE THAT AN AMOUNT OF RS.21,26,805/-CLAIMED BY THE ASSESSEE UNDER THE HEAD ADMINISTRATIVE EXPENSES TOW ARDS FEES FOR INTERNATIONAL NET WORK SUPPORT CHARGES WAS DISALLOWED BY THE ASSESSIN G OFFICER AS THE APPROVAL FROM THE GOVT. OF INDIA HAS NOT BEEN OBTAINED FOR PAYMEN T OF SUCH SUM OUTSIDE INDIA. FURTHER, THE EXPENDITURE IS ONLY A PROVISION MADE I N THE BOOKS OF ACCOUNT AND THERE WAS NO DEDUCTION OF TDS ON THE ABOVE PAYMENTS AND THE TDS WAS REMITTED TO THE GOVT. ACCOUNT ONLY ON 03/01/2007 INSTEAD OF PAYMENT BEFORE 31 ST MAY 2006. ACCORDINGLY, THE EXPENDITURE WAS DISALLOWED BY THE ASSESSING OFFICER BY INVOKING THE PROVISIONS OF SECTION 40(A)(I) OF THE ACT. I.T.A. NOS.803&804/COCH/2013 & 317&361/COCH/2014 3 4. ON APPEAL, THE CIT(A) OBSERVED THAT THE ASSESSEE HAS OBTAINED PROPER APPROVAL FROM FIPB UNIT OF DEPARTMENT OF ECONOMIC AF FAIRS, MINISTRY OF FINANCE FOR PAYMENT OF INTERNATIONAL NETWORK SUPPORT SERVICE FE ES TO M/S. GULF AGENCY COMPANY LIMITED , BUT EXISTENCE OF SUCH APPROVAL IN NO WAY CONNECTED WITH THE TAXABILITY OF THIS AMOUNT FOR THE INCOME TAX PURPOSES. FURTHER, THE C IT(A) FOUND THAT THE AMOUNT WAS ACTUALLY PAID TO THE PARTY AND CREDITED TO THE PART YS ACCOUNT BEFORE 31-03-2006, I.E., DURING THIS ASSESSMENT YEAR WITHOUT DEDUCTING TAX O N THE SAME . SINCE THE PAYMENT WAS IN THE NATURE OF NETWORK SUPPORT CHARGES AND FE E FOR TECHNICAL SERVICES IN ACCORDANCE WITH SECTION 195 OF THE I.T. ACT, WHILE MAKING THIS PAYMENT, THE ASSESSEE FAILED TO DEDUCT TAX AT SOURCE AND TO PAY THE SAME TO GOVT. ACCOUNT. ACCORDINGLY, THE CIT(A) CONFIRMED THE DISALLOWANCE OF RS.21,26,805/- MADE BY THE ASSESSING OFFICER UNDER SECTION 40(A)(I) OF THE ACT. 5. THE LD. AR SUBMITTED THAT THE AO WAS NOT CORRECT IN INVOKING THE PROVISIONS OF SEC. 40(A)(I) OF THE ACT. THE LD. AR SUBMITTED THAT THE EXPENDITURE IS NOT IN THE NATURE OF STATUTORY LIABILITY COMING WITHIN THE MEA NING OF SEC.43B SO AS TO WARRANT DISALLOWANCE. 5.1 THE LD. DR RELIED ON THE ORDER OF THE LOWER AUT HORITIES. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED T HE RECORD. IN THIS CASE, THERE IS NO DISPUTE THAT THE ASSESSEE IS LIABLE TO DEDUCT TDS O N THE AMOUNT OF RS. 21,26,805/- I.T.A. NOS.803&804/COCH/2013 & 317&361/COCH/2014 4 PAID TO THE PARENT COMPANY M/S. GAC SHIPPING CO., V ADUZ, GREECE TOWARDS INTERNATIONAL NETWORK SUPPORT SERVICE CHARGES AND T ECHNICAL FEES. THE ASSESSEE MADE THE PROVISION IN THE BOOKS OF ACCOUNT AND CREDITED TO THE PARTYS ACCOUNT ON THE LAST DATE OF THE FINANCIAL YEAR. THE TIME LIMIT FOR REM ITTING THE TDS IS UPTO 31 ST MAY, I.E., THE SUCCEEDING FINANCIAL YEAR. IN THIS CASE, THE A SSESSEE REMITTED THE TAX AMOUNT ONLY ON 03/01/2007, I.E., AFTER 31 ST MAY, 2006, WHICH IS BELATEDLY REMITTED BY THE ASSESSEE. BEING SO, THE PROVISIONS OF SECTION 40(A )(I) IS APPLICABLE. HENCE, IN OUR OPINION, THE LOWER AUTHORITIES ARE JUSTIFIED IN DIS ALLOWING THE EXPENDITURE ON THIS COUNT. THIS GROUND OF THE ASSESSEE IS DISMISSED. 7. HOWEVER, THE LD. AR SUBMITTED BEFORE US THAT THE AMENDMENT TO SECTION 40(A)(IA) BY FINANCE ACT, 2010 IS RETROSPECTIVE IN NATURE SO DISALLOWANCE IS UNWARRANTED AS THE TAX HAS BEEN REMITTED WITHIN THE DUE DATE OF FILING OF THE RETURN . HOWEVER, WE ARE NOT IN AGREEMENT WITH THE ASSESSEE S COUNSEL IN VIEW OF THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CA SE OF PRUDENTIAL LOGISTICS AND TRANSPORTS VS. ITO IN I.T.A. NO. 01 OF 2014 DATED 1 3 TH JAN. 2014 WHEREIN THE HIGH COURT IN PARAS 5 & 6 HAS OBSERVED AS UNDER: 5. READING OF SECTION 40(A)(IA) ALONG WITH 2 ND PROVISO AND SEC. 201(1) ALONG WITH PROVISO, IT WOULD MEAN THAT THE MANDATE OR REQUIREMENT ON THE PART OF THE PAYER TO DEDUCT TAX AT SOURCE IS NO T SO STRICT IF THEY ARE ABLE TO SHOW THAT THE PAYEE OR THE RECIPIENT OF THE AMOUNT HAS PAID TAX IN ACCORDANCE WITH THE PROVISIONS OF SECTION 201(1) AND THE PROVISO. 6. THIS WAS NOT THE CLAIM MADE BY THE ASSESSEE BEF ORE THE ASSESSING OFFICER. THE CLAIM WAS ON A DIFFERENT STAND, INITI ALLY REFLECTING THE I.T.A. NOS.803&804/COCH/2013 & 317&361/COCH/2014 5 AMOUNTS AS LOAN IN THE ACCOUNT BOOKS THOUGH SHOWN A S FREIGHT CHARGES IN THE RETURNS AND LATER EXPLAINED THAT IT WAS NOT THE LOAN AMOUNT BUT FREIGHT CHARGES. IT WAS NEVER THE CASE OF THE ASSE SSEE THAT THERE WAS NO MANDATE SUBSEQUENT TO AMENDMENT, TO DEDUCT TAX A S TDS IN THE LIGHT OF ABOVE PROVISIONS. THE ASSESSMENT YEAR IN QUESTION IS 2007-08 AND THE AMENDMENT GIVING BREATHING SPACE TO PAYER O F AMOUNTS IS WITH EFFECT FROM 1.4.2013. THEREFORE, THE SAID BENEFIT IS NOT APPLICABLE TO THE ASSESSEE. EVEN OTHERWISE, ON FACTUAL SITUATION, THE VERY FACT THAT THESE AMOUNTS WERE CLAIMED AS LONG INITIALLY, TILL THE SE CURITY CAME UP FOR CONSIDERATION BEFORE ASSESSING AUTHORITY WOULD ONLY INDICATE THE REAL INTENTION OF THE ASSESSEE FIRM I.E., NOT TO DISCLOS E THIS AMOUNT AS FREIGHT CHARGES BUT SOMETHING ELSE AS REPAYMENT OF LOAN. 7.1 IN VIEW OF THE ABOVE JUDGMENT OF THE JURIS DICTIONAL HIGH COURT, WE ARE INCLINED TO DECIDE THE ISSUE AGAINST THE ASSESSEE. FURTHER, IN THIS CASE, THE ASSESSEE IS REQUIRED TO REMIT THE DEDUCTED TAX BEFORE THE EX PIRY OF TIME LIMIT PRESCRIBED UNDER SUB-SECTION (1) OF SECTION 200 READ WITH RULE 30 WH ICH IS NOT COMPLIED WITH BY THE ASSESSEE AND THEREFORE, THE DISALLOWANCE MADE BY TH E LOWER AUTHORITIES IS JUSTIFIED. ACCORDINGLY, THIS GROUND OF THE ASSESSEE IS DISMISS ED. 8. THE NEXT GROUND IS WITH REGARD TO RESTRICTION OF RATE OF DEPRECIATION TO 50% ON SOFTWARE. THE ASSESSEE CLAIMED DEPRECIATION FOR FU LL YEAR IN RESPECT OF COST OF SOFTWARE AND LICENSES. HOWEVER, THE ASSESSING OFFI CER OBSERVED THAT INVOICES FOR THE ABOVE EXPENDITURE WAS DATED 31/12/2005 AND THE ASSE T WAS USED ONLY FOR LESS THAN 180 DAYS DURING THE YEAR AND HENCE, RESTRICTED THE DEPRECIATION TO 50% OF THE ELIGIBLE SUM (30%). 9. ON APPEAL, THE CIT(A) CONFIRMED THE SAME. I.T.A. NOS.803&804/COCH/2013 & 317&361/COCH/2014 6 10. THE LD. AR SUBMITTED THAT THE SOFTWARE WAS INST ALLED MUCH EARLIER AND THE INVOICE WAS RECEIVED ONLY LATER AND ACCOUNTED ON 31 /12/2005. THE LD. AR SUBMITTED THAT DEPRECIATION IS TO BE ALLOWED @ 60% FOR FULL Y EAR ON RS.22,43,000/- TOWARDS COST OF SOFTWARE AND LICENSES. 11. THE LD. DR RELIED ON THE ORDER OF THE LOWER AUT HORITIES. 12. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORD. IN THIS CASE, THE PURCHASE BILL FOR THE SOFTWARE WAS DATED 31-12-2005 . HOWEVER, THE ASSESSEE TOOK THE PLEA THAT THE SOFTWARE WAS INSTALLED BEFORE 30-09-2 005. HOWEVER, NO EVIDENCE IS PLACED BEFORE US TO SHOW THAT THE SOFTWARE WAS INST ALLED AND PAYMENT WAS MADE BEFORE 30-09-2005 SO AS TO OWN THE SOFTWARE AND USE IT FOR BUSINESS PURPOSES. HENCE, THE APPLICABLE RATE OF DEPRECIATION IS TO BE 50% OF THE PRESCRIBED RATE ARRIVED AT BY THE LOWER AUTHORITIES. ACCORDINGLY, THIS GROUND O F THE ASSESSEE IS DISMISSED. 13. THE LAST GROUND IS WITH REGARD TO DISALLOWANCE MADE U/S. 41(1) OF THE I.T. ACT ON THE AMOUNT OUTSTANDING IN THE NAME OF SUNDRY CRE DITORS. 14. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS ING OFFICER NOTICED THAT THE AMOUNT OF RS.10,61,041/- RELATING TO OLD BALANCE CA RRIED FORWARD AND AN AMOUNT OF I.T.A. NOS.803&804/COCH/2013 & 317&361/COCH/2014 7 UNPAID CANCELLED CHEQUES OF RS.5,29,708/- WERE APPE ARING AS SUNDRY CREDITORS. THE ASSESSING OFFICER MADE THE ADDITION BY OBSERVING AS UNDER: PROFITS U/S. 41(1): THE BREAKUP OF SUNDRY CREDITORS SHOWED THE FOLLOWING: A) DY. COLLECTOR OF CUSTOMS, CUDDALOR E- OLD BALANCE BROUGHT FORWARD RS.10,61,041/- B) OUTDATED/UNPAID/CANCELLED CHEQUES RS. 5,29,708/- THOUGH THE ASSESSEE CLAIMED THAT THE AMOUNT PAYABLE TO COLLECTOR OF CUSTOMS HAS BEEN TREATED AS INCOME FOR THE FINANCIAL YEAR 2005- 06 RELEVANT TO THIS ASSESSMENT YEAR, IT WAS NOTICED THAT SUCH SUM HAS NOT BEEN CRE DITED TO THE PROFIT AND LOSS ACCOUNT. THE ASSESSEES COUNSEL CLARIFIED THAT THIS SUM, AS WELL AS THE UNPAID/OUTDATED CHEQUES WERE TREATED AS INCOME OF T HE FINANCIAL YEAR ENDING 31-03- 2008. THERE IS NO DISPUTE THAT THE ABOVE LIABILITI ES HAVE CEASED TO EXIST AND ARE NO LONGER PAYABLE. SINCE THE SUMS HAVE ALREADY BEEN C LAIMED AS EXPENDITURE AND AS ON 31-03-2006 ITSELF, THEY WERE NOT PAYABLE, THEY SHOU LD BE CONSIDERED AS INCOME FOR THE CURRENT YEAR. ACCORDINGLY, THESE WERE TREATED AS A SSESSEES INCOME U/S. 41(1) OF THE ACT. 15. THE CIT(A) OBSERVED THAT ASSESSEE HAD ACCEPTED BEFORE THE ASSESSING OFFICER THAT THIS AMOUNT OF RS.10,61,041 WAS PAID ON THEIR BEHALF BY THEIR PRINCIPALS. ACCORDING TO THE CIT(A), ALTHOUGH IT WAS SHOWN TO H AVE DEBITED TO JOB IN PROGRESS ACCOUNT BUT THESE ACCOUNTS WOULD HAVE BEEN SUBSEQUE NTLY SETTLED WITH THE PRINCIPALS. I.T.A. NOS.803&804/COCH/2013 & 317&361/COCH/2014 8 THE CIT(A) OBSERVED THAT IN ANY CASE SINCE THE REFU ND OF THIS AMOUNT WAS RECEIVED BY THE ASSESSEE IN THIS YEAR, THE SAME HAS TO BE TAXED IN THIS ASSESSMENT YEAR AND NOT IN FINANCIAL YEAR ENDING 31-03-2008. AS REGARDS CHEQU ES ISSUED BUT CANCELLED, WHEN THE CHEQUES WERE CANCELLED IN THE YEAR 2005-06, THE CIT (A) OBSERVED THAT THE EFFECT OF SUCH CANCELLATION NEEDS TO HAVE BEEN ACCOUNTED FOR IN THE INCOME OF THE SAME YEAR AND NOT IN ANY LATER YEAR. ACCORDING TO THE CIT(A) NO DOCUMENTARY EVIDENCE WAS FURNISHED TO SUPPORT THE CLAIM OF THE ASSESSEE THAT THE CHEQUES WERE REISSUED IN THIS YEAR ONLY. ACCORDINGLY, THE CIT(A) CONFIRMED THE AD DITION OF RS.10,61,041/- AND RS.5,29,708/-. AGAINST THIS, THE ASSESSEE IS IN APP EAL BEFORE US. 16. THE LD. AR SUBMITTED THAT NONE OF THE AMOUNTS H AVE BEEN CLAIMED AS EXPENDITURE IN ANY OF THE EARLIER YEARS, THE PROVIS IONS OF SEC. 41(1) ARE NOT APPLICABLE. THE LD. AR SUBMITTED THAT AS REGARDS DISALLOWANCE O F RS.5.29 LAKHS, ONLY AN AMOUNT OF RS.45,204/- HAS BEEN WRITTEN BACK IN THE FINANCI AL YEAR 2008-09 AND AN AMOUNT OF RS.4,83,568/- AND RS. 875.94/- HAVE BEEN REISSUED T O THE CONCERNED PARTIES IN OCTOBER 2006 AND JUNE 2006 AND THEREFORE CANNOT BE TREATED AS INCOME OF THE ASSESSEE. ACCORDING TO THE LD. AR, THE AMOUNT HAS BEEN ENCASHED BY THE PARTY FROM THE COMPANYS BANK ACCOUNT ON 01/11/2006. 17. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORD. THE ARGUMENT OF THE ASSESSEES COUNSEL IS DEVOID OF MERIT. IN OUR OPINION, THESE CREDITS CONTINUE TO BE CARRIED FORWARD YEAR AFTER YEAR AND THERE WAS NO CLAIM FROM THE PERSON TO I.T.A. NOS.803&804/COCH/2013 & 317&361/COCH/2014 9 WHOM IT WAS OWING. GENERALLY, IN THE NORMAL COURSE , NOBODY WOULD ORDINARILY NOT CLAIM HIS DUES AND USUALLY THEY TAKE STEPS TO R ECOVER THE DUES IF IT IS A GENUINE LIABILITY. IN THIS CASE, THE LIABILITY IS OUTSTANDING IN THE BOOKS OF ACCOUNT OF THE ASSESSEE YEAR AFTER YEAR. 17.1 THE HONBLE DELHI HIGH COURT AS PER ITS RECENT DECISION IN THE CASE OF CIT VS. CHIPSOFT TECHNOLOGY (P.) LTD. [2012] 210 TAXMAN 173 (DEL), EXAMINING THE LEGAL ASPECT OF THE MATTER, HAS CLARIFIED THAT THE VIEW THAT MERELY BECAUSE A LIABILITY OUTSTANDS IN BOOKS, AND THAT LAPSE OF TIM E BARS THE REMEDY BUT DOES NOT EFFACE THE LIABILITY, IS AN ABSTRACT AND THEORETICA L ONE WHICH DOES NOT GROUND ITSELF IN REALITY. THE INTERPRETATION OF LAW, PARTICULARLY FISCAL AND COMMERCIAL LEGISLATION, IS TO BE BASED ON PRAGMATIC REALITIES. IT WOULD BE INDEED PARADOXICAL, IF NOT ILLOGICAL, TO ALLOW THE ASSESSEE-DEBTOR TO, WHILE A VOIDING A LIABILITY ON THE BASIS THAT IT IS NO LONGER ENFORCEABLE IN LAW, YET CLAIM HIS STATUS AS A DEBTOR, SO THAT HE WAS INDEED LIABLE FOR THE AMOUNT REFLECTED AS A LIA BILITY IN ACCOUNTS. 17.2 IN THE PRESENT CASE, THE ASSESSEE HAS DRAWN BALANCE SHEET BASED ON ITS BOOKS OF ACCOUNTS IN WHICH THE ABOVE AMOUNTS WERE B EING CLAIMED AS LIABILITIES DUE TO THE VARIOUS PARTIES AS AT THE END OF THE ACC OUNTING YEAR UNDER DISPUTE. HOWEVER, THE ASSESSEE FAILED TO ESTABLISH THE GENUI NENESS OF THESE LIABILITIES BY CITING CREDIBLE EVIDENCE. SIMPLY THE LIABILITIES B EING REFLECTED AGAINST CERTAIN NAMES IN ITS BOOKS OF ACCOUNTS WOULD NOT ESTABLISH THE GENUINENESS OF SUCH LIABILITIES. ON THE OTHER HAND, THE ASSESSING OFFI CER WENT TO THE ROOT OF THE ISSUE I.T.A. NOS.803&804/COCH/2013 & 317&361/COCH/2014 10 AND CAME TO THE CONCLUSION THAT THE ALLEGED CREDITO RS WERE NOT GENUINE. THE ASSESSEE WAS NOT ABLE TO ESTABLISH THE EXISTENCE OF THESE LIABILITIES. IN THE CIRCUMSTANCES, THE LOWER AUTHORITIES ARE JUSTIFIED IN TREATING THE LIABILITIES AS INCOME U/S. 41(1) OF THE I.T. ACT. BEING SO, THE L OWER AUTHORITIES ARE JUSTIFIED IN HOLDING THAT SUCH LIABILITIES DID NOT EXIST AT THE END OF THE ACCOUNTING YEAR UNDER DISPUTE AND RIGHTLY ADDED THE SAID LIABILITIES WHIC H HAD CEASED TO EXIST. HENCE, WE DO NOT FIND ANY INFIRMITY IN THE ORDERS OF THE L OWER AUTHORITIES AND ACCORDINGLY, THIS GROUND OF THE ASSESSEE IS REJECTE D. ACCORDINGLY, THE ASSESSEE APPEAL IN I.T.A. NO. 803/COCH/2013 IS DISMISSED. I.T.A. NO. 804/COCH/2013 ASSESSEE APPEAL (A.Y. 20 08-09) 18. THE FIRST GROUND IN I.T.A. NO.804/COCH/2013 IS WITH REGARD TO TREATMENT OF THE EXPENDITURE INCURRED FOR OBTAINING THE LINEAR AGENC Y BUSINESS AS CAPITAL EXPENDITURE AND TREATMENT OF AMOUNT OF COMPENSATION RECEIVED FO R PREMATURE TERMINATION OF THE AGENCY AS REVENUE IN NATURE. 19. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE HAS BEEN OFFERED LINER BUSINESS OF HAMBURG SUED LINE GERMANY BY THEIR EXIS TING AGENT M/S. ADSTEAM AGENCY (INDIA) PVT. LTD., MUMBAI WHICH WAS TRANSFER RED TO THE ASSESSEES NAME IN JANUARY 2005. ON 30 TH JUNE, 2005, THE ASSESSEE LOST THE BUSINESS OF HAMB URG SUED AGENCY. THE NET LOSS IN THIS REGARD CAME TO RS. 68, 29,960/- WHICH WAS WRITTEN OFF. THE LOSS WAS INCURRED IN THE COURSE OF CARRYING ON OF THE BUSINESS AND WAS VERY MUCH INCIDENTAL TO THE BUSINESS ACTIVITIES OF THE ASSESS EE AND HENCE IT IS NOT CAPITAL I.T.A. NOS.803&804/COCH/2013 & 317&361/COCH/2014 11 EXPENDITURE. WITH REGARD TO THE BUSINESS AMORTIZATI ON EXPENSES, THE ASSESSEE PAID FOR THE LINER BUSINESS AN AMOUNT OF RS.1,30,17,000/- ON TWO OCCASIONS. ON 3 RD JUNE, 2005, THE AGENCY BUSINESS OF ADSTEAM WAS LOST TO TH E ASSESSEE FOR WHICH THEY PAID AN AMOUNT OF RS. 59,69,040/- AND AN AMOUNT OF RS.2,18, 000/- WAS AMORTIZED DURING F.Y. 2004-05. THE BALANCE AMOUNT OF RS.68,29,960/- AMOR TIZED DURING THE CURRENT ASSESSMENT YEAR 2006-07. THE ASSESSEE DID NOT MAIN TAIN SEPARATE PROFIT AND LOSS ACCOUNT ON THIS SCORE. THE ASSESSING OFFICER WENT I NTO THE DETAILS OF NATURE OF SUCH EXPENDITURE, CONSIDERED THE AGREEMENT THAT WAS ENTE RED INTO BY THE ASSESSEE FOR TAKING THIS AGENCY, POINTWISE SUBMISSIONS OF THE AS SESSEE AND AFTER GIVING DETAILED REASONING AND FINDING ON EACH POINT HELD THAT THE E XPENDITURE MADE FOR ACQUIRING THE AGENCY RIGHTS FOR THE COMPANY IS CAPITAL IN NATURE. 19.1 REGARDING COMPENSATION OF RS.59,69,040/- RECEI VED ON TERMINATION OF THE AGENCY, THE ASSESSING OFFICER TREATED THIS AMOUNT A S REVENUE IN NATURE. THE ASSESSING OFFICER HOLDING THAT ONE EXPENDITURE BEIN G CAPITAL IN NATURE AND ANOTHER IN REVENUE, THE PAYMENT WAS MADE TO ONE PARTY AND COMP ENSATION IS RECEIVED FROM ANOTHER PARTY, HELD THAT THE TWO PAYMENTS CANNOT BE NETTED OFF. ACCORDING TO THE ASSESSING OFFICER, THE PAYMENT MADE FOR ACQUIRING THE AGENCY RIGHTS FROM ADSTEAM IS A CAPITAL EXPENDITURE, AND THE COMPENSATION RECEIVE D FROM THE PARENT COMPANY FOR TERMINATION OF AGENCY, WHICH IS DIFFERENT FROM WHOM THE AGENCY WAS TAKEN IS REVENUE IN NATURE IN THE LIGHT OF THE SPECIFIC PROVISIONS O F SEC 28(III)(C) OF THE I.T. ACT. I.T.A. NOS.803&804/COCH/2013 & 317&361/COCH/2014 12 20. THE LD. AR RELIED ON VARIOUS CASE LAW WHICH ARE KEPT ON RECORD. 21. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT IN A.Y. 2005-06, THE ASSESSEE HAS ON ITS OWN NOT TREATED PART OF THIS EXPENDITURE AS REVENUE AND HENCE THERE IS NO JUSTIFICATION OF TREATING IN THE NATURE OF REVENUE EXPENDITURE IN THE SUBSEQUENT YEAR. THE LD. DR SUBMITTED THAT THE COPY OF AGREEMENT CLE ARLY REVEALS THAT IT IS A CASE OF TRANSFER OF AGENCY FOR WHICH PROPER AGENCY AGREEME NT WAS SIGNED AND HENCE THE PAYMENT IS CLEARLY FOR ACQUIRING THE AGENCY RIGHTS. ACCORDING TO THE LD. DR, THE AGENCY HAS BEEN TAKEN ON A LONG TERM BASIS AND THUS ITS TERMINATION AT AN EARLY STAGE WOULD NOT CHANGE THE INTENT AND NATURE OF THE TRANS ACTION. AT THE TIME OF MAKING THIS PAYMENT, IT WAS AN EXPENDITURE FOR ACQUIRING AGENCY RIGHTS ON A LONG TERM BASIS AND ITS PREMATURE TERMINATION WOULD NOT IN ANY WAY CHAN GE THE BASIC CHARACTER AT THE TIME OF INITIAL ACQUISITION OF AGENCY RIGHTS AT THE POINT OF OCCURRENCE, WHERE BENEFIT OF AN ENDURING NATURE ON LONG TERM BASIS WAS ENVISAGED . THE LD. DR RELIED ON THE JUDGMENTS OF SUPREME COURT IN THE CASE OF M.K. BROT HERS PVT. LTD. (86 ITR 38) AND CIT VS. JALA TRADING CO. (P) LTD. (1985) 155 ITR 53 6 HOLDING THAT PAYMENT FOR A SOLE SELLING AGENCY IS CAPITAL IN NATURE. THUS, ACCORDI NG TO THE LD. DR, EXPENDITURE FOR ACQUIRING AGENCY RIGHTS HAS RIGHTLY BEEN TREATED AS CAPITAL IN NATURE EVEN THOUGH IT GOT TERMINATED AT AN EARLY STAGE. ACCORDING TO THE LD. DR, THE WRITE OFF OF THIS EXPENDITURE OVER THE YEARS OF THE EXPENDITURE MADE FOR OBTAINING AGENCY RIGHTS IS NOT PERMITTED UNDER ANY PROVISION OF THE I.T. ACT I.T.A. NOS.803&804/COCH/2013 & 317&361/COCH/2014 13 22. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORD. IN THIS CASE, THE ASSESSEE HAS PAID AN AMOUNT OF RS.1,30,17,000/- FO R THE PURPOSE OF TAKING LINER BUSINESS OF HAMBURG SUED LINE GERMANY FROM THEIR EX ISTING AGENT M/S. ADSTEAM AGENCY (INDIA) PVT. LTD., MUMBAI WHICH WAS TRANSFER RED TO THE ASSESSEES NAME IN JANUARY 2005. HOWEVER, THE ASSESSEE LOST THE BUSIN ESS OF HAMBURG SUED AGENCY ON 30 TH JUNE, 2005. ON TERMINATION OF THE AGENCY, THE ASS ESSEE RECEIVED COMPENSATION OF RS.59,69,040/- FROM THE PARENT COMPANY. THE ASSE SSEE SET OFF THE COMPENSATION RECEIVED OUT OF THE PAYMENT MADE FOR THE PURPOSE OF SECURING THE AGENCY BUSINESS AND CLAIMED THE AMOUNT AS REVENUE EXPENDITURE. ADMI TTEDLY, THE ASSESSEE PAID AN AMOUNT OF RS.1,30,17,000/- FOR THE PURPOSE OF SECUR ING THE AGENCY BUSINESS WHICH BROUGHT ENDURING BENEFIT TO THE ASSESSEE. THE TREAT MENT OF EXPENDITURE WHETHER CAPITAL OR REVENUE DEPENDS UPON THE NATURE AND PURP OSE OF PAYMENT AND NOT THE END RESULT. IN OTHER WORDS, THE DECISIVE FACTOR DETERM INING THE NATURE OF THE EXPENDITURE IS THE PURPOSE FOR WHICH IT WAS INCURRED. THE EXPE NDITURE WOULD BE IN THE NATURE OF CAPITAL, IF IT IS MADE WITH A VIEW TO BRING IN A PR OFIT MAKING ASSET OR BUSINESS ASSET OR ENDURING ADVANTAGE TO THE ASSESSEE. IN THE PRESENT CASE, THE EXPENDITURE WAS INCURRED WITH A VIEW TO BRING IN AN ASSET OR ADVANT AGE IN THE NATURE OF AGENCY. IT IS NOT NECESSARY THAT THE ASSESSEE SHOULD HAVE FINAL R ESULT. ADMITTEDLY IN THIS CASE, THE BUSINESS WAS SECURED BY THE ASSESSEE FROM HAMBURG S UED LINE GERMANY AND WAS TERMINATED FOR WHICH THE ASSESSEE HAS RECEIVED COMP ENSATION FROM THE PARENT COMPANY. THE PURPOSE OF INCURRING EXPENDITURE WAS TO ACQUIRE A CAPITAL ASSET. THE TRUE TEST TO BE APPLIED IS THAT THE EXPENSES INCURR ED FOR THE PURPOSE OF, OR WITH A VIEW I.T.A. NOS.803&804/COCH/2013 & 317&361/COCH/2014 14 TO, ACQUIRING A CAPITAL ASSET WHETHER IT ULTIMATELY PRODUCES CAPITAL ASSET OR NOT, MUST BE REGARDED AS ONE IN THE NATURE OF CAPITAL EXPENDI TURE ONLY. IN THIS CASE, AN UNFORESEEN CANCELLATION OF AGREEMENT AND RECEIPT OF COMPENSATION CANNOT BE SET OFF AGAINST CAPITAL EXPENDITURE BECAUSE SUCH RECEIPT CA N NEVER GO INTO THE MAKING OF THE EXPENDITURE INCURRED FOR SECURING THE AGENCY BUSINE SS. THE COMPENSATION RECEIVED BY THE ASSESSEE IS NOT FROM THE PERSON TO WHOM THE PAYMENT OF RS.1,30,17,000/- WAS MADE FOR SECURING THE AGENCY BUSINESS AND HAS NOTHI NG TO DO WITH ACQUIRING OF AGENCY. THE COMPENSATION RECEIVED BY OTHER THAN TH E PERSON TO WHOM PAYMENT WAS MADE AND RECEIVED ON TERMINATION OF THE AGENCY AGRE EMENT HAS NOTHING TO DO WITH THE EXPENDITURE MADE TOWARDS SECURING AGENCY BUSINE SS. BEING SO, THE COMPENSATION RECEIVED ON TERMINATION OF THE AGENCY BUSINESS CANN OT BE SAID TO BE CAPITAL RECEIPT. HENCE, IN OUR OPINION, THE TREATMENT GIVEN BY THE A SSESSING OFFICER OF THE EXPENSES INCURRED FOR SECURING THE BUSINESS AS CAPITAL EXPEN DITURE AND THE RECEIPT OF COMPENSATION ON TERMINATION OF THE AGENCY BUSINESS AS REVENUE IN NATURE IS JUSTIFIED. ACCORDINGLY, THIS GROUND OF THE ASSESSEE IS DISMISS ED. ACCORDINGLY, THE ASSESSEE APPEAL IN I.T.A. NO. 804/COCH/2013 IS DISMISSED. I.T.A. NO. 317/COCH/2014 REVENUE APPEAL (A.Y. 2006 -07) 23. COMING TO THE REVENUE APPEAL IN I.T.A. NO. 317/ COCH/2014, THE ONLY GROUND IS WITH REGARD TO DELETION OF ADDITION MADE U/S. 40(A) (IA) OF THE ACT. I.T.A. NOS.803&804/COCH/2013 & 317&361/COCH/2014 15 24. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE HAS CLAIMED AN AMOUNT OF RS. 22,43,000/- AS FEES FOR TECHNICAL SERVICES THE SUM HAS BEEN PAID TO M/S. GAC VADUZ OUTSIDE INDIA. THE TAX DEDUCTED ON THE ABOVE PAYME NT WAS REMITTED ONLY ON 02-06- 2006. AS PER THE PROVISIONS OF SEC. 40(A)(IA) OF T HE ACT, PAYMENTS MADE OUTSIDE INDIA, ON WHICH TDS IS NOT MADE/REMITTED WITHIN THE DUE DATE, WOULD NOT BE ALLOWED AS AN EXPENDITURE IN COMPUTING THE ASSESSEES INCOM E SINCE THE TAX WAS NOT REMITTED IN THE ABOVE CASE WITHIN THE DUE DATE, I.E., 31-05- 2006, THE ABOVE PAYMENT AMOUNTING TO RS.22,43,000/- WAS DISALLOWED AND ADDE D BACK TO THE ASSESSEES INCOME. 25 THE LD. DR RELIED ON THE ORDER OF THE ASSESSING OFFICER. 26. BEFORE THE CIT(A), THE ASSESSEE SUBMITTED THAT THE THIS IS AN EXPENDITURE THAT HAS BEEN INCURRED TOWARDS PURCHASE OF SOFTWARE WHIC H HAS BEEN CAPITALIZED AND DEPRECIATION CLAIMED AT THE APPROPRIATE RATE. THUS IT WAS SUBMITTED THAT THIS EXPENDITURE WAS NOT CLAIMED AS REVENUE EXPENDITURE AND HENCE THERE IS NO BASIS FOR DISALLOWING THE SAME. THE ASSESSEE FURTHER SUBMIT TED THAT THE ENTIRE FEE FOR NETWORK SUPPORT CHARGES AND TECHNICAL SERVICES AMOUNTING TO RS. 21,26,805/- HAS ALREADY BEEN DISALLOWED BY THE ASSESSING OFFICER. 27. THE CIT(A) OBSERVED THAT THE PAYMENT OF THE AMO UNT OF RS.22,43,000/- IS THE COST OF SOFTWARE DEVELOPMENT AND LICENCES FOR VARIO US MODULES AND THE ASSESSEE I.T.A. NOS.803&804/COCH/2013 & 317&361/COCH/2014 16 CLAIMED THAT THIS AMOUNT HAS ALREADY BEEN INCLUDED IN MAKING DISALLOWANCE OF NETWORK SUPPORT CHARGES. ACCORDING TO THE CIT(A) B OTH THE PAYMENTS ARE INDEPENDENT ACCORDING TO THE CIT(A), THE NETWORK SUPPORT SERVICE FEE IS COMPUTED AT 8% OF OPERATING PROFITS WHICH COMES TO RS.22,30, 805/- AND THE TECHNICAL SERVICES FEE IS COMPUTED AT 4% OF THE ANNUAL GROSS OPERATING PROFIT FOR EACH YEAR. THUS, ACCORDING TO THE CIT(A), WHILE COMPUTING THESE CHAR GES AS NETWORK FEE, ASSESSEE COMPUTED THE AMOUNT AT 8% OF THE OPERATING PROFIT, I.E., 27,885,067 X 8% = RS.22,30,805/- AND AS IN THIS HEADING THE ASSESSEE HAS NOT MENTIONED THE HEADING OF TECHNICAL SERVICES FEE, THE ASSESSING OFFICER TREAT ED AND MISTOOK THIS AMOUNT AS NETWORK SUPPORT FEE ONLY AND MADE THE SEPARATE ADDI TION ON ACCOUNT OF TECHNICAL SERVICES FEES. 28. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORD. THE EXPENDITURE WAS NOT IN THE NATURE OF REVENUE EXPENDITURE AND IT WAS CAPITALIZED BY THE ASSESSEE AS IT WAS IN NATURE OF SOFTWARE DEVELOPMENT FEE AND LICEN CE FEE FOR SOFTWARES AND DEPRECIATION HAS ALSO BEEN CLAIMED ON SUCH CAPITAL EXPENDITURE BY THE ASSESSEE. THE ASSESSEE HAS PRODUCED EVIDENCE IN SUPPORT OF ITS CO NTENTION BEFORE THE CIT(A) AND ON OBTAINING THE REQUISITE EVIDENCE FOR TREATING IT AS CAPITAL EXPENDITURE, THE CIT(A) ALLOWED THE SAME. IN OUR OPINION, IT IS PROPER TO REMIT THE ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION IN THE LI GHT OF THE FRESH EVIDENCE PRODUCED BEFORE THE CIT(A). ACCORDINGLY, THIS ISSUE IS REMI TTED BACK TO THE FILE OF THE ASSESSING I.T.A. NOS.803&804/COCH/2013 & 317&361/COCH/2014 17 OFFICER FOR FRESH CONSIDERATION. ACCORDINGLY, THE REVENUE APPEAL IN I.T.A. NO. 317/COCH/2014 IS PARTLY ALLOWED FOR STATISTICAL PUR POSES. I.T.A. NO. 361/COCH/2014 REVENUE APPEAL (A.Y. 200 8-09) 29. THE FIRST GROUND IN I.T.A. NO. 361/COCH/2014 IS WITH REGARD TO DELETION OF ADDITION OF RS. 12,50,000/- BEING CONTRIBUTIONS TO GROUP GRATUITY FUND. 30 THE LD. DR SUBMITTED THAT THE CONTRIBUTION TO TH E GROUP GRATUITY FUND WAS NOT APPROVED BY THE CIT AND HENCE IT IS NOT TO BE ALLOW ED. 31. ON THE OTHER HAND, THE LD. AR SUBMITTED THAT IT WAS NOT A PAYMENT TO THE GRATUITY FUND BUT IT WAS PAID TO LIC BASED ON THE A CTUAL VALUATION AND IN VIEW OF THE JUDGMENT OF SUPREME COURT IN THE CASE OF TEXTOOL CO . LTD. (2013) (35 TAXMAN 639), THE EXPENDITURE IS TO BE ALLOWED. 32. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORD. THE EXPENDITURE WAS DISALLOWED BY THE ASSESSING OFFICER ON THE REASON T HAT THE AMOUNT WAS CONTRIBUTED TO THE GROUP GRATUITY FUND WHICH WAS NOT APPROVED BY T HE CIT. BEFORE THE CIT(A), THE ASSESSEE TOOK THE PLEA THAT IT HAS BEEN PAID TO LIC OF INDIA TOWARDS GRATUITY. THE CIT(A) PLACED RELIANCE ON THE JUDGMENT OF THE SUPRE ME COURT IN THE CASE OF TEXTOOL CO. LTD., CITED SUPRA AND ALLOWED THE CLAIM. IN OU R OPINION, THE PAYMENT TO LIC I.T.A. NOS.803&804/COCH/2013 & 317&361/COCH/2014 18 TOWARDS GRATUITY IS TO BE VERIFIED AND ACCORDINGLY , THIS ISSUE IS REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER TO SEE WHETHER THE PA YMENT HAS BEEN MADE TO THE LIC TOWARDS GRATUITY FUND. ACCORDINGLY, THIS ISSUE IS REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION. THIS GRO UND OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 33. THE NEXT GROUND IS WITH REGARD TO THE AMOUNT OF RS.3,32,116/- WRITTEN OFF WHICH REPRESENT AMOUNT ADVANCED TO AN EX-EMPLOYEE O F THE ASSESSEE. 34. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE HAS CLAIMED AND WRITTEN OFF RS.14,24,276 AS BAD DEBT. ON A PERUSAL, IT WAS SEE N THAT RS.3,32,116/- WAS AN AMOUNT PAID TO AN EMPLOYEE. IT WAS NOTICED THAT TO CLAIM ANY AMOUNT AS BAD DEBT IT SHOULD HAVE BEEN CREDITED AS INCOME IN ANY PREVIOUS YEAR AS PER THE SEC. 36(2)(I). SINCE THE BASIC CRITERIA FOR CLAIMING THE EXPENDITU RE AS BAD DEBT IS NOT FULFILLED THE SAME AMOUNT CANNOT BE ALLOWED AS AN ADMISSIBLE ITEM AND DISALLOWED. SIMILARLY, THE ASSESSING OFFICER DISALLOWED THE AMOUNT OF RS.57,66 8/- . 35. BEFORE THE CIT(A), THE ASSESSEE SUBMITTED THAT ONCE ANY AMOUNT IS WRITTEN OFF IN THE BOOKS OF ACCOUNT AS BAD DEBT, THE SAME IS TO BE ALLOWED AS AN EXPENDITURE. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE CIT(A) DELETED THE ADDITION OF RS.3,89,794/- ON THE REASON BAD DEBT IS ALLOWABLE O N THE BASIS OF A CLAIM MADE IN THE BOOKS OF ACCOUNT. AGAINST THIS, THE REVENUE IS IN APPEAL BEFORE US. I.T.A. NOS.803&804/COCH/2013 & 317&361/COCH/2014 19 36. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORD. IF THE DEBT HAS NOT BEEN TAKEN INTO ACCOUNT WHILE COMPUTING THE INCOME OF THE ASSESSEE IN THE PREVIOUS YEAR OR IN ANY PREVIOUS YEAR IN WHICH THE AMOUNT OF SUCH DEBT IS WRITTEN OFF, THE BAD DEBT CLAIM OF THE ASSESSEE CANNOT BE ALLOWED. BEI NG SO, IT CANNOT BE TREATED AS BAD DEBT U/S. 36(2)(I) OF THE ACT. HOWEVER, IT COULD B E ALLOWED U/S. 37 OF THE I.T. ACT. ACCORDINGLY, THE NATURE OF EXPENDITURE SHOULD BE EX AMINED BY THE ASSESSING OFFICER. IF IT IS A BUSINESS EXPENDITURE, THEN THE SAME SHOULD BE ALLOWED. ACCORDINGLY, THIS ISSUE IS REMITTED BACK TO THE FILE OF THE ASSESSING OFFIC ER FOR FRESH CONSIDERATION. THIS GROUND IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ACCORDINGLY THE REVENUE APPEAL IN I.T.A. NO. 361/COCH/2014 IS PARTLY ALLOWED FOR STAT ISTICAL PURPOSES. 37. IN THE RESULT, THE APPEALS FILED BY THE ASSESSE E ARE DISMISSED AND THE APPEALS FILED BY THE REVENUE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 06/03/2015. SD/- SD/- (N.R.S.GANESAN) (CHANDRA POOJARI) JUDICIAL MEMBER ACC OUNTANT MEMBER PLACE: KOCHI DATED: 06/03/2015 GJ COPY TO: 1. M/S. GAC SHIPPING (INDIA) PVT. LTD., GAC HOUSE, P.O. BOX NO. 515, SUBRAMANIAN ROAD, WILLINGDON ISLAND, KOCHI-682 003. 2. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1( 2), KOCHI. 3. THE JOINT COMMISSIONER OF INCOME-TAX, CIRCLE-1(2 ), KOCHI. 4. THE COMMISSIONER OF INCOME-TAX(APPEALS)-II, KOCH I. I.T.A. NOS.803&804/COCH/2013 & 317&361/COCH/2014 20 5. THE COMMISSIONER OF INCOME-TAX, KOCHI. 6. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 7. GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T., COC HIN