M/S. SYS PRO TECHNOLOGIES PVT. LTD, MUMBAI V. THE ITO 2(3)(3), MUMBAI

ITA 318/MUM/2008

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 62288 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 3 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-04-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: J
• Next Hearing Date: 18-04-2012
• Assessment Year: 2003-2004
• Appeal Filed On: 14-01-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D S SUNDER SINGH
• Assessee Lawyers: K SHIVARAM
• Keywords: Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIB UNAL MUMBAI BENCHES J, MUMBAI BEFORE SHRI R.S.SYAL, AM AND SHRI VIJAY PAL RAO, JM ITA NO.318/MUM/2008 : ASST. YEAR 2003-2004 M/S.SYS PRO TECHNOLOGIES PVT. LTD 302, SO LUCKY CORNER CO-OP PREMISES SOCIETY, ANDHERI KURLA ROAD, CHAKALA ANDHERI (EAST), MUMBAI 400 099. PAN : AAACB4501E. THE INCOME TAX OFFICER WARD 2(3)(3) MUMBAI. (APPELLANT) VS. (RESPONDENT) APPELLANT BY : SHRI K.SHIVARAM RESPONDENT BY : SHRI D.S.SUNDER SINGH DATE OF HEARING : 18.04.2012 DATE OF PRONOUNCEMENT : 25.04.2012 O R D E R PER R.S.SYAL, AM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) ON 22.11.2007, IN RELATION TO THE ASSESSMENT YEAR 2003-2004. 2. THE ONLY GROUND IS AGAINST THE CONFIRMATION OF D ISALLOWANCE OF ` 13,17,687 BEING THE EXPENDITURE INCURRED BY THE ASS ESSEE TOWARDS CANCELLATION OF AGREEMENT ENTERED INTO FOR SECURING RIGHTS TO DA TA CENTER FACILITIES. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT THE ASSESSEE WROTE OFF ` 13.17 LAKH, BEING DATA CENTER EXPENSES BY DEBITING THE SAME TO THE PR OFIT AND LOSS ACCOUNT AND MAKING A MENTION IN THE NOTES FORMING PART OF ACCOU NT AS UNDER:- DURING THIS FINANCIAL YEAR COMPANY HAS SUCCESSFULL Y NEGOTIATED & ABLE TO REDUCE THE LICENSE FEES PAYABLE FOR DATA CALL CENTER FACILITIES BY 85%. THE BALANCE AMOUNT OF ` 13,17,687/- OF LICENSE FEES HAS BEEN PAID AND ACCOUNTED AS DEFERRE D REVENUE EXPENDITURE AS IN THE EARLIER YEAR. HOWEVER, CONSID ERING STEEP COMPETITION IN THE DATA CENTRE MARKET THE COMPANY H AS DROPPED THE PLAN OF STARTING DATA CENTER FACILITIES, HENCE THE ENTIRE AMOUNT HAS BEEN FULLY WRITTEN OFF DURING THE YEAR. ITA NO.318/MUM/2008 M/S.SYS PRO TECHNOLOGIES PRIVATE LIMITED. 2 3. ON BEING CALLED UPON TO JUSTIFY THE DEDUCTIBILIT Y OF SUCH AMOUNT, THE ASSESSEE STATED THAT IT SIGNED AGREEMENT WITH M/S.G LOBAL ELECTRONIC COMMERCE SERVICES LTD. (GTL) FOR SECURING RIGHTS TO DATA CEN TER FACILITIES DURING THE FINANCIAL YEAR 2000-2001. WITH A VIEW TO ENCASH THE BUSINESS OPPORTUNITIES IN EMERGING INFORMATION TECHNOLOGY FIELD, THE ASSESSEE AIMED AT GETTING THE CLIENTS WHO WERE FINDING IT DIFFICULT TO SET UP THEIR OWN D ATA CENTER FACILITIES. IT WAS SUBMITTED THAT THE ASSESSEE ENTERED INTO AGREEMENT WITH GTL TO USE SPECIFIED PORTION OF THEIR DATA CENTER. AS IT COULD NOT GET SUFFICIENT NUMBER OF CLIENTS, THE ASSESSEE STATED THAT IT WAS FORCED TO CANCEL THE SA ID AGREEMENT IN FINANCIAL YEAR 2002-2003 RELEVANT TO THE ASSESSMENT YEAR UNDER CON SIDERATION AND EVENTUALLY SETTLED THE DISPUTED PAYMENT TO GTL BY PAYING 15% O F THE AMOUNT OTHERWISE DUE TO THEM AS PER AGREEMENT. GTL WAIVED THE REMAIN ING 85%. THAT IS HOW THE ASSESSEE PAID ` 13.17 LAKH IN THIS YEAR AND CLAIMED DEDUCTION THERE ON. THE ASSESSING OFFICER NOTED IN THE PENULTIMATE PARA OF PAGE 4 OF THE ASSESSMENT ORDER THAT THE AMOUNT PAID BY THE ASSESSEE WAS A CA PITAL EXPENDITURE AND HENCE NOT DEDUCTIBLE. NO RELIEF WAS ALLOWED IN THE FIRST APPEAL. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE ON THE FACT THAT THE AS SESSEE, ENGAGED IN THE BUSINESS OF DATA SERVICE CENTER, ENTERED INTO AN AGREEMENT W ITH GTL FOR USING A SPECIFIED PORTION OF THEIR DATA CENTER CAPACITY WIT H A VIEW TO EXPAND ITS CLIENT BASE. THIS AGREEMENT WAS ENTERED INTO IN THE FINANC IAL YEAR 2000-2001. SINCE THE ASSESSEE COULD NOT GET SUFFICIENT CLIENTS TO US E THE SAID DATA BASE ACQUIRED FROM GTL, IN THE FINANCIAL YEAR RELEVANT TO THE ASS ESSMENT YEAR UNDER CONSIDERATION, IT TERMINATED THE AGREEMENT BY PAYIN G 15% OF THE AMOUNT WHICH WOULD OTHERWISE HAVE BEEN PAYABLE TO GTL HAD THE AL LOTTED DATA CENTER FACILITIES BEEN USED. THE EVENT OF SETTLEMENT WITH GTL TOOK PLACE IN THIS YEAR. IN OUR CONSIDERED OPINION, THERE IS ABSOLUTELY NO B ASIS FOR HOLDING SUCH EXPENDITURE TO BE OF CAPITAL NATURE BECAUSE BY INCU RRING THIS EXPENDITURE THE ITA NO.318/MUM/2008 M/S.SYS PRO TECHNOLOGIES PRIVATE LIMITED. 3 ASSESSEE DID NOT ACQUIRE ANY TANGIBLE ASSET BUT SIM PLY TRIED TO GET RID OF THE LIABILITY WHICH WAS INCURRED IN CONNECTION WITH THE EXPANSION OF ITS CUSTOMER BASE BY LEAVING ITS FIXED CAPITAL INTACT. OUR VIEW IS FORTIFIED BY THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF EMPIRE JUTE CO. LTD. V. CIT [(1980) 124 ITR 1 (SC)] IN WHICH IT HAS BEEN HELD THAT IF THE ADVANTAGE FA CILITATES IN CARRYING ON BUSINESS MORE EFFICIENTLY AND PROFITABL Y LEAVING FIXED CAPITAL INTACT, THE EXPENDITURE SO INCURRED IS TO BE CONSIDERED AS REVENUE IN NATURE. SINCE THE EVENT OF SETTLEMENT OF DISPUTE WITH GTL, AN UNRELAT ED PARTY, TOOK PLACE IN THIS YEAR, IN OUR CONSIDERED OPINION, THE ASSESSEE WAS R IGHT IN CLAIMING DEDUCTION FOR THE SAID AMOUNT FOR WHICH THE LIABILITY GOT CRYSTAL LIZED AND CAME TO BE DISCHARGED IN THE CURRENT FINANCIAL YEAR. 5. THE LEARNED AR HAS PLACED ON RECORD A COPY O F AN ORDER PASSED BY THE TRIBUNAL IN ITS SISTER-CONCERN NAMELY NETWORK TELE LINK PVT. LTD. V. ITO DEALING WITH SIMILAR QUESTION. IN THIS ORDER DATED 23.09.2011, DELIVERED BY THIS VERY BENCH, SIMILAR GROUND WAS RAISED AND THE TRIBU NAL FINALLY ACCEPTED THE ASSESSEES CONTENTION BY HOLDING SUCH EXPENDITURE T O BE OF REVENUE NATURE. FOLLOWING THE PRECEDENT AND THE LEGAL POSITION AS D ISCUSSED ABOVE, WE SET ASIDE THE IMPUGNED ORDER ON THIS ISSUE AND ORDER FOR THE GRANTING OF DEDUCTION FOR THE SUM OF ` 13,17,687. 6. IN THE RESULT, THE APPEAL IS ALLOWED. ORDER PRONOUNCED ON THIS 25 TH DAY OF APRIL, 2012. SD/- SD/- (VIJAY PAL RAO) (R.S.SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI : 25 TH APRIL, 2012. DEVDAS* ITA NO.318/MUM/2008 M/S.SYS PRO TECHNOLOGIES PRIVATE LIMITED. 4 COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT CONCERNED 4. THE CIT(A) - XXX, MUMBAI. 5. THE DR/ITAT, MUMBAI. 6. GUARD FILE. TRUE COPY. BY ORDER ASSISTANT REGISTRAR, ITAT, MUMBAI.