M/S. DOTEX INTERNATIONAL LTD, MUMBAI V. THE ACIT ACT CIR 8(1), MUMBAI

ITA 3214/MUM/2008

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6222 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 07-04-2010
• Assessment Year: 2003-2004
• Appeal Filed On: 09-05-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JI TENDRA YADAV
• Assessee Lawyers: ARVIND SONDE
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure

Judgement Text

I.T.A NO. 3214 MUM/2008 ASSESSMENT YEAR: 2003-04 1 IN THE INCOME TAX APPELLATE TRIBUNAL, D BENCH, MUMBAI. BEFORE SHRI N.V.VASUDEVAN (JUDICIAL MEMBER) AND PRAMOD KUMAR(ACCOUNTANT MEMBER) I.T.A NO. 3214 MUM/2008 ASSESSMENT YEAR: 2003-04 M/S. DOTEX INTERNATIONAL LIMITED, . APPELLANT, EXCHANGE PLAZA, BANDRA KURLA COMPLEX, BANDRA (EAST), MUMBAI-51. PA NO.AABCD 2222 R VS ASST. COMMISSIONER OF INCOME TAX, . RESPONDENT CIRCLE 8(1), MUMBAI. APPELLANT BY: SHRI ARVIND SONDE RESPONDENT BY : SHRI JITENDRA YADAV O R D E R PER PRAMOD KUMAR: 1. THIS IS AN APPEAL FILED BY THE ASSESSEE AND IT C HALLENGES CORRECTNESS OF CIT (A)S ORDER DATED 5 TH FEBRUARY, 2008, FOR THE ASSESSMENT YEAR 2003-04. 2. IN THE FIRST GROUND OF APPEAL, ASSESSEE HAS RAIS ED THE FOLLOWING GRIEVANCE:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED CIT (A) ERRED IN CONFIRMING THE DISALLOWANCE OF ` .8,44,131/- CLAIMED BY THE APPELLANT BEING THE COST INCURRED FOR DEVELOPING WAP MODULES FOR ITS WEB PORTAL, SHOWN AS CAPITAL WORK IN PROGRESS WRITTEN OFF IN TH E PREVIOUS YEAR DUE TO TECHNOLOGICAL OBSOLESCE, BY HOLDING THE SAME AS CAP ITAL LOSS AND THE REASONS ASSIGNED BY HIM FOR DOING SO ARE WRONG AND CONTRARY TO THE FACTS AND CIRCUMSTANCES OF THE CASE, PROVISIONS OF INCOME TAX ACT, 1961, AND RULES MADE THEREUNDER. 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAS CLAIMED DEDUCTION OF ` .8,44,131/- IN RESPECT OF CAPITAL WORK IN PROGRESS WRITTEN OFF . IN RESPONSE TO ASSESSING OF FICERS REQUISITION TO SHOW CAUSE AS TO WHY THE SAID CLAIM NOT BE DECLINED, IT WAS SUBMITTED BY THE ASSESSEE THAT THE COMPANY WAS I.T.A NO. 3214 MUM/2008 ASSESSMENT YEAR: 2003-04 2 DEVELOPING WAP MODULES TO ITS WEB PORTAL, AND THE COSTS OF ` .8,44,131/- INCURRED FOR THE SAID PURPOSES, TILL 31.3.2002, WAS SHOWN AS CAPITAL WORK IN PROGRESS. HOWEVER, AS THE SAID PROJECT WAS ABANDONED DURING THE YEAR AS SAID MODU LE COULD NOT BE ENABLED AND INTEGRATED WITH THE WEB PORTAL. THESE SUBMISSIONS DID NOT IMP RESS THE ASSESSING OFFICER, AND HE REJECTED THE SAME BY, INTER ALIA, OBSERVING AS FOLL OWS: 5.4 . IT IS OBSERVED THAT IN THE DEPRECIATION TA BLE THE ASSESSEE HAS TREATED WEB PORTAL AS A DEPRECIATION ASSET ON WHICH DEPRECIATION @ 60% HAS BEEN CLAIMED. THE WAP MODULE BEING DEVELOP ED WAS TO BE INTEGRATED WITH THE WEB PORTAL. THEREFORE, THE ASS ESSEE ITSELF TREATED THE EXPENDITURE AS CAPITAL EXPENDITURE AND HAD SHOW N THE SAME AS CAPITAL WORK IN PROGRESS IN THE ASSESSMENT YEAR 200 2-03. IF ANY CAPITAL ASSET IS WRITTEN OFF, IT IS A CAPITAL LOSS WHICH CA NNOT BE CHARGED TO P&L ACCOUNT. IN THIS REGARD, THE PROVISIONS OF INCOME TAX ACT ARE CLEAR. ONLY THE REVENUE EXPENSES AND REVENUE LOSSES ARE AL LOWABLE AS EXPENDITURE. WHEN THE ASSESSEE ITSELF TREATS THE E XPENDITURE AS CAPITAL EXPENDITURE, THERE CANNOT BE DIFFERENT AND CONTRADI CTORY TREATMENT IN THE SUBSEQUENT YEAR. THEREFORE, AN AMOUNT OF ` `` ` .8,44,131/ IS TREATED AS CAPITAL LOSS AND IS THEREFORE DISALLOWED . 4. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT (A) BUT WITHOUT ANY SUCCESS. THE CIT (A) CONFIRMED THE ACTION OF THE A SSESSING OFFICER AND, IN HIS BRIEF ORDER, OBSERVED AS FOLLOWS: I HAVE CAREFULLY EXAMINED THE ISSUE AND UPHOLD THE DECISION MADE BY THE A.O. IT IS INCOMPREHENSIBLE AS TO HOW THE APPELLAN T HAS EVEN CLAIMED THE EXPENDITURE AS A REVENUE EXPENDITURE ESPECIALLY WHE N IT HAD ITSELF BEEN TREATING THE SAID EXPENDITURE AS CAPITAL EXPENDITUR E AND AS CAPITAL WORK IN PROGRESS. THE CLAIM IS DEVOID OF ANY MERIT. TH E STAND OF THE AO IS UPHELD AND SO IS THE DISALLOWANCE. THE GROUND IS D ECIDED AGAINST THE APPELLANT. 5. THE ASSESSEE IS NOT SATISFIED AND IS IN FURTHER APPEAL BEFORE US. 6. HAVING HEARD THE RIVAL CONTENTIONS, AND HAVING P ERUSED THE MATERIAL ON RECORD, WE FIND THAT THE OBJECTIONS TAKEN BY THE AUTHORITIES B ELOW ARE INDEED DEVOID OF ANY LEGALLY SUSTAINABLE MERITS. WHAT IS CLAIMED AS CAPITAL EXP ENDITURE AT ONE STAGE DOES ACTUALLY BECOME A DEDUCTIBLE REVENUE ITEM WHEN THE PROJECT, ON WHICH CAPITAL EXPENDITURE IS SO INCURRED, ITSELF IS ABANDONED DURING THE COURSE OF BUSINESS. THERE IS, THUS NO CONTRADICTION IN AS EXPENDITURE BEING CAPITAL IN NATURE, AND THE SAME CAPITAL EXPENDITURE WRITE OFF BEING ALLOWED AS A REVENUE DEDUCTION, AS THE PROJECT BEI NG ABANDONED DURING THE COURSE OF BUSINESS. IT HAS BEEN SO HELD BY THE HONBLE MADRA S HIGH COURT IN THE CASES OF CIT VS. SESHASAYEE PAPER & BOARDS LTD.(243 ITR 421) AND B. NAGI REDDI V CIT (199 ITR 451). A CO- ORDINATE BENCH OF THIS TRIBUNAL, IN THE CASE OF MUK TA ARTS PVT LTD V ACIT (105 ITD 533) HAS ALSO ALLOWED DEDUCTION IN RESPECT OF ABANDONED PROJ ECT AS BUSINESS LOSS. ON THE FACTS OF THE I.T.A NO. 3214 MUM/2008 ASSESSMENT YEAR: 2003-04 3 PRESENT CASE, THERE IS NO DISPUTE THAT THE EXPENDIT URE ON WAP MODULE DID IN FACT BECOME USELESS AS THE PROJECT TO MAKE THESE MODULES A PART OF WEB PORTAL WAS ABANDONED FOR COMMERCIAL CONSIDERATION. ONCE COMMERCIAL EXPEDIEN CY OF THIS DECISION IS NOT IN DISPUTE, EXPENDITURE INCURRED ON THE ABANDONED PROJECT HAS T O BE ALLOWED AS DEDUCTION IN BUSINESS PROFITS. IN VIEW OF THESE DISCUSSION, AND BEARING IN MIND ENTIRETY OF THE CASE, WE DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED DISALLOWAN CE. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. 7. GROUND NO.1 IS THUS ALLOWED. 8. IN GROUND NO.2, THE ASSESSEE HAS RAISED THE FOLL OWING GRIEVANCE:- (2)(A) ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE LEARNED CIT (A) ERRED IN CONFIRMING THE DISALLOWANCE OF ` .8,66,667/- CLAIMED BY THE APPELLANT BEING BALANCE AMOUNT OF AMORTIZQATIONS TO WARDS ONE TIME SERVICE CHARGES PAID FOR AVAILABILITY OF BUSINESS CETNRE FO R A PERIOD OF 33 MONTHS CHARGED TO PROFIT AND LOSS ACCOUNT DURING THE PREVI OUS YEAR ON THE TERMINATION OF THE AGREEMENT AND THE REASONS ASSIGN ED BY HIM FOR DOING SO ARE WRONG AND CONTRARY TO THE FACTS AND CIRCUMSTANC ES OF THE CASE, PROVISIONS OF INCOME TAX ACT, 1961, AND RULES MADE THEREUNDER. (B) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE AUTHORITIES BELOW ERRED IN OBSERVING THAT THE RENT PAID IN ADVANCE WA S NOT THE LIABILITY OF THE YEAR UNDER CONSIDERATION AND AS SUCH THE APPELLANT HAS CLAIMED EXPENSES, WHICH ARE NOT RELATABLE TO THE BUSINESS OF THE YEAR UNDER CONSIDERATION WITHOUT APPRECIATING THE FACT THAT NO BENEFIT WILL BE AVAILABLE IN THE FUTURE YEARS AS THE CONTRACT WAS TERMINATED IN THE YEAR UN DER CONSIDERATION AND THE ADVANCE RENT PAID WAS TOWARDS ONE TIME SERVICE CHARGES, WHICH WAS NOT REFUNDABLE AND THE REASONS ASSIGNED FOR DOING SO AR E WRONG AND CONTRARY TO THE FACTS AND CIRCUMSTANCES OF THE CASE, PROVISIONS OF INCOME TAX ACT, 1961, AND RULES MADE THEREUNDER. 9. SO FAR AS THIS DISALLOWANCE IS CONCERNED, RELEV ANT MATERIAL FACTS ARE AS FOLLOWS. DURING THE FINANCIAL YEAR 2001-02, THE ASSESSEE HAD ENTERED INTO A BUSINESS CENTRE AGREEMENT FOR USE OF OFFICE PREMISES IN TERMS OF WH ICH A LUMPSUM AMOUNT OF ` .11 LAKHS WAS PAID UPFRONT AS NON REFUNDABLE CONSIDERATION. THIS ARRANGEMENT WAS AMORTIZED OVER THE PERIOD OF ARRANGEMENT. IT WAS IN THIS BACKGROUND T HAT THE ASSESSEE CARRIED FORWARD A PART OF THE SAID EXPENDITURE, AS DEFERRED REVENUE EXPEND ITURE, AMOUNTING TO ` .8.67 LAKHS AS ON 31.3.2002. HOWEVER, AS THE BUSINESS CENTRE ARRANG EMENT WAS TERMINATED DURING THE YEAR, ENTIRE BALANCE EXPENDITURE WAS CLAIMED AS DEDUCTION DURING THE YEAR. THE ASSESSING OFFICER, HOWEVER, DISALLOWED THE SAME ON THE GROUND THAT IT DOES NOT PERTAIN TO THE RELEVANT PREVIOUS YEAR. WHEN THE MATTER WAS CARRIED IN APPE AL BEFORE THE CIT (A), HE ALSO CONFIRMED THE ACTION OF THE ASSESSING OFFICER AND OBSERVED AS FOLLOWS:- I.T.A NO. 3214 MUM/2008 ASSESSMENT YEAR: 2003-04 4 I HAVE CAREFULLY EXAMINED THE ISSUE AND UPHOLD THE DISALLOWANCE MADE BY THE AO. IT IS NOT UNDERSTOOD HOW EXPENDITURE CA N BE CLAIMED ON A DEFERRED REVENUE BASIS ESPECIALLY WHEN THE EXPENDIT URE WAS INCURRED IN AN EARLIER YEAR ALTHOUGH FOR A PERIOD OF 33 MONT HS. THE LIABILITY HAD TO BE CLAIMED IN TOTAL IN THE YEAR WHEN THE SAME WA S INCURRED. THE FACT THAT THE TAX WAS DEDUCTED AT SOURCE ON THE ENTIRE A MOUNT AND CLAIMED IN THE EARLIER YEAR ALSO INDICATE THAT THE EXPENDIT URE WAS TO BE CLAIMED IN THE EARLIER YEAR. THE PLEA OF THE APPELLANT IS REJECTED AND THE STAND OF THE AO APPROVED. THE GROUND IS DECIDED AGAINST THE APPELLANT. 10. NOT SATISFIED WITH THE STAND SO TAKEN BY THE CI T (A), THE ASSESSEE IS IN APPEAL BEFORE US. 11. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING P ERUSED THE MATERIAL ON RECORD, WE SEE NO MERIT IN THIS DISALLOWANCE EITHER. ONCE IT IS NOT IN DISPUTE THAT THE BUSINESS CENTRE ARRANGEMENT WAS TERMINATED IN THE RELEVANT PREVIOUS YEAR, THERE CANNOT BE ANY QUESTION OF CARRYING FORWARD THE DEFERRED REVENUE EXPENDITURE A NY FURTHER. AS A MATTER OF FACT, IF CIT (A)S STAND IS TO BE UPHELD, THE ENTIRE DEDUCTION W ILL HAVE TO BE ALLOWED IN THE YEAR IN WHICH BUSINESS CENTRE ARRANGEMENT IS ENTERED INTO. HOWEV ER, THE ASSESSEE, DESPITE THE UNCHALLENGED FINDINGS OF THE CIT (A), IS FAIR ENOUG H TO CONTEND THAT THE BALANCE EXPENDITURE IS TO BE ALLOWED AS DEDUCTION IN THE YEAR IN WHICH BUSINESS CENTRE ARRANGEMENT IS TERMINATED, AS THE AMOUNT PAID BY THE ASSESSEE WILL CEASE TO YIELD ANY BENEFITS ANY FURTHER. ONCE AGAIN, THERE IS NO DISPUTE THAT ARRANGEMENT IS TERMINATED DURING THE COURSE OF BUSINESS AND IT IS NOT EVEN ALLEGATION OF THE ASSES SING OFFICER THAT IT WAS A COLLUSIVE ARRANGEMENT MEANT FOR UNDUE BENEFIT TO THE CONTRACT PARTY. ON THESE FACTS, AND BEARING IN MIND ENTIRETY OF THE CASE, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED DISALLOWANCE OF ` .8,66,667/-. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. 12. GROUND NO.2 IS THUS ALLOWED. 13. IN THE RESULT, APPEAL IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 30 TH NOVEMBER, 2010 SD/- (N.V.VASUDEVAN) (JUDICIAL MEMBER) SD/- (PRAMOD KUMAR) (ACCOUNTANT MEMBER) MUMBAI, DATED NOVEMBER, 2010 PARIDA I.T.A NO. 3214 MUM/2008 ASSESSMENT YEAR: 2003-04 5 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS)-VIII, MUMB AI 4. COMMISSIONER OF INCOME TAX-MC-VIII , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH D, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI I.T.A NO. 3214 MUM/2008 ASSESSMENT YEAR: 2003-04 6