DCIT, New Delhi V. M/s. Max Ateev Ltd., New Delhi

ITA 4249/DEL/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 3953 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-10-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 25-05-2017
• Assessment Year: 2001-2002
• Appeal Filed On: 04-08-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: BHAVITA KUMARADV
• Keywords: Business income; Depreciation; Business expenditure; Opportunity of being heard; Wholly owned subsidiary; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME - TAX APPELLATE TRIBUNAL, DELHI BENCH A , NEW DELHI BEFORE : SHRI AMIT SHUKLA , JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA NO. 4249 /DEL./2014 ASSESSMENT YEAR: 2001 - 02 D.C.I.T., CIRCLE 6(1), NEW DELHI. (APPELLANT) VS. M/S. MAX ATEEV LTD., MAX HOUSE (3 RD FLOOR), 1, DR. JHA MARG, OKHLA, NEW DELHI. PAN - AADCM1048G (RESPONDENT) APPELLANT BY SH. ARUN KUMAR YADAV, SR. DR RESPONDENT BY SH. GAURAV JAIN & MS. BHAVITA KUMAR,ADV. ORDER PER L.P. SAHU, A.M.: THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF LD. CIT(A) - 9, DELHI DATED 21.05.2014 FOR THE ASSESSMENT YEAR 2001 - 02 ON THE FOLLOWING GROUNDS : 1. WHETHER THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF EXPENSES AMOUNTING TO RS.6,14,45,192/ - MADE BY THE ASSESSING OFFICER ON ACCOUNT OF EXPENSES RELATED TO BUSINESS NOT COMMENCED DURING THE RELEVANT FINANCIAL YEAR AND RECEIPTS OF RS.7,17,547/ - RELATED TO BUSINESS DISCONTINUED IN EARLIER YEARS AS INCOME FROM OTHER SOURCES BY GROSSLY IGNORING THE FINDING OF THE ASSESSING OFFICER AND ONLY RELYING UPON THE SUBMISSIONS OF THE ASSESSEE. 2. THAT THE ORDER OF THE LD. CIT(A) IS ERRONEOUS AND IS NOT TENABLE ON FACTS AND IN LAW. DATE OF HEARING 10.08.2017 DATE OF PRONOUNCEMENT 13 .10.2017 4249/DEL./2014 2 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS ENGAGED, INTER ALIA, IN THE BUSINESS OF INFORMATION TECHNOLOGY ENABLED SERVICES. THE APPELLANT COMPANY IS WHOLLY OWNED SUBSIDIARY OF M/S. MAX INDIA LTD. THE NAME OF THE APPELLANT WAS CHANGED FROM M/S. AXIS ELECTRONICS PVT. LTD. TO M/S. FUTURA DEVICES PVT. LTD. AND CHANGED FROM M/S. FUTURA DEVICES PVT. LTD. TO MAX MINDCROSSING INDIA LIMITED W.E.F. 12.05.2000 AND HAS BEEN CHANGED AGAIN FROM M/S. MAX MINDCROSSING INDIA LIMITED TO M/S. MAX ATEEV LIMIT ED W.E.F. APRIL 3, 2001. THE APPELLANT COMPANY WAS REGISTERED WITH SOFTWARE TECHNOLOGY PARKS OF INDIA DIVISION NOIDA AND MOHALI, MINISTRY OF INFORMATION AND TECHNOLOGY, GOVT. OF INDIA. T HE RETURN OF INCOME WAS FILED BY THE ASSESSEE ON 29.11.2001. THE CASE WAS TAKEN UP FOR SCRUTINY AND ORDER U/S. 143(3) OF THE IT ACT WAS PASSED ON 19.01.2004, ASSESSING THE TOTAL INCOME OF RS.9,96,142/ - BY TREATING THE INCOME OF RS.2,78,625/ - EARNED DURING THE YEAR AS ASSESSABLE UNDER THE HEAD INCOME FROM OTHER SOURCES AND RS.7,17,547/ - UNDER THE HEAD BUSINESS INCOME . THE AO FURTHER DISALLOWED THE ENTIRE LOSS CLAIMED BY THE ASSESSEE UNDER THE HEAD PROFIT AND GAINS FROM BUSINESS OR PROFESSION . THE MATTER TRAVELLED UPTO THE STAGE OF TRIBUNAL AND THE TRIBUNAL REMANDED THE MATTER TO THE AO. PURSUANT TO THE ORDER OF TRIBUNAL, T HE ASSESSING OFFICER COMPLETED THE ASSESSMENT VIDE ORDER DATED 07.12.2010 ON THE SAME GROUNDS/REASONS AS GIVEN IN THE ORIGINAL ASSESSMENT ORDER AND 4249/DEL./2014 3 DISALLOWED THE BUSINESS LOSS CLAIMED BY THE APPELLANT IN THE RETURN OF INCOME. THE AO BROUGHT TO TAX THE ENTIRE RECEIPTS AGGREGATING TO RS.9,96,142/ - UNDER THE HEAD INCOME FROM OTHER SOURCES ON THE GROUND THAT SAME WERE EARNED IN THE PRE - OPERATIVE PHASE OF SETTING UP OF THE BUSINESS OF THE APPELLANT AND THE APPELLANT DID NOT CARRY ON ANY BUSINESS DURING THE YEAR. FURTHER, THE AO DISALLOWED ALL THE EXPENSES ON THE GROUND THAT THE APPELLANT FAILED TO JUSTIFY THE NEXUS OF SUCH EXPENSES WITH THE BUSINESS OF THE APPELLANT. DURING THE IMPUGNED YEAR, THE ASSESSEE H AD SHOWN SERVICE INCOME OF RS.717,547/ - RECEIVED FROM M/S. MIND CROSSING INC. AND M/S. HEALTH COST LLC, USA AND IN THE CORRESPONDING PREVIOUS YEAR, THE ASSESSEE HAD SHOWN SERVICE INCOME OF RS.1,35,024/ - . THE COMPANY HAS NOT REPORTED ANY SALES INCOME. THE A O OBSERVED FROM THE DETAILS FILED BY THE ASSESSEE THAT THE ASSESSEE HAS CLAIMED DEDUCTION OF THE EXPENSES WHICH WERE INCURRED BY THE PARENT COMPANY, I.E., M/S. MAX INDIA LTD., OF WHICH THE ASSESSEE WAS A WHOLLY OWNED SUBSIDIARY COMPANY. THE EXPENSES OF RS. 1,95,07,940/ - TOWARDS PERSONAL COST AND RS.99,15,497/ - TOWARDS OVERHEADS HAVE BEEN PASSED ON TO THE ASSESSEE BY CLAIMING THAT THESE WERE FOR UTILIZATION OF COMMON SERVICES AND THE ASSESSEE HAD SHARED THE SERVICES OF SOME OF THE EMPLOYEES AND FACILITIES OF THE PARENT COMPANY. THE ASSESSEE HAS ALSO SUBMITTED THAT OVERHEAD AND PERSONAL EXPENSES INCURRED BY MAX INDIA ON ACCOUNT OF ASSESSEE WERE IN RESPECT OF 4249/DEL./2014 4 SETTING UP OF ITS OPERATIONS IN INITIAL STAGES, BUT THE ASSESSEE COULD NOT FURNISH THE DETAILS FROM WHIC H THE NATURE OF EXPENSES MAY BE A N ALY Z ED. THUS, THE AO CONCLUDED THAT THE CLAIM OF THESE EXPENSES AS BUSINESS EXPENSES IS NOT A GENUINE CLAIM. SOME OF THE EMPLOYEES , WHO WORKED IN SUBSIDIARY COMPANY, WERE THE EMPLOYEES OF THE PARENT COMPANY. THE AO FURTHER OBSERVED THAT THEIR SERVICES WERE TRANSFERRED TO THE ASSESSEE COMPANY W.E.F. 01.04.2001 WHICH IS BEYOND THE FINANCIAL YEAR 2000 - 01 WITH SAME TERMS AND CONDITIONS OF THEIR EARLIER EMPLOYMENT . DURING THE IMPUGNED YEAR, THE APPELLANT MADE EXPENDITURE AGGREGATING TO RS.6,14,45,192/ - UNDER FOLLOWING VARIOUS HEADS : ADMINISTRATION AND OTHER EXPENSES RS.5,73,28,153.03 FINANCIAL EXPENSES RS. 1,82,726.90 DEPRECIATI ON RS. 39,34,312.45 ------------------------ RS.6,14,45,192.38 ------------------------ 3. THE ADMINISTRATION & OTHER EXPENSES INCLUDE RENT EXPENDITURE, ADVERTISEMENT, RECRUITMENT, SERVICES CHARGES, MISCELLANEOUS EXPENSES, P ERSONAL EXPENSES, LICENSE & REGISTRATION FEES. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS ALSO NOT BROUGHT ANY RECORD AS TO WHAT ACTIVITIES WERE DONE BY IT FOR WHICH HUGE AMOUNT OF MORE THAN RS.6.00 CRORES WAS SPENT. NO WORK IN PROCESS OR ANY OTH ER STOCK IN HAND AT THE YEAR END HAS BEEN SHOWN BY THE ASSESSEE. THE ABOVE EXPENDITURE WHICH INCLUDES ALSO ADMINISTRATION & 4249/DEL./2014 5 OTHER EXPENSES, WERE CHARGED BY THEIR HOLDING COMPANY TO ITS SUBSIDIARY COMPANY FOR THE SERVICES RENDERED BY THE HOLDING COMPANY. TH ESE EXPENDITURES WERE CHARGED BY THE ASSESSEE TO THE PROFIT AND LOSS ACCOUNT. AGGRIEVED BY THE ORDER OF ASSESSING OFFICER U/S. 254/143(3) DATED 07.12.2010 , THE ASSESSEE APPEALED BEFORE THE LD. CIT(A), WHO AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE A LLOWED THE APPEAL OF THE ASSESSEE. THEREFORE, THE REVENUE HAS CHALLENGED THE IMPUGNED ORDER BY WAY OF THIS APPEAL BEFORE THE TRIBUNAL. 4. THE LD. DR SUBMITTED THAT THE ASSESSEE DID NOT START ITS BUSINESS ACTIVITIES UPTO THE IMPUGNED YEAR. NO ANY SALE PRO CEEDS HAVE BEEN RECEIVED BY THE ASSESSEE. THE SERVICE INCOME, WHATSOEVER, SHOWN BY THE ASSESSEE RELATES TO THE PREVIOUS YEAR. THEREFORE, THE AO IS JUSTIFIED TO DISALLOW THE CLAIM OF ASSESSEE AS REVENUE EXPENDITURE, AS NO BUSINESS ACTIVITY WAS UNDERTAKEN BY THE ASSESSEE. HE FURTHER SUBMITTED THAT THE ASSESSEE COULD NOT ESTABLISH THE APPORTIONMENT OF THE EXPENSES INCURRED BY HOLDING COMPANY AND CHARGED TO THE ASSESSEE COMPANY. THE ASSESSEE HAS CHARGED HUGE AMOUNT OF RS.5,73,28,153.03 TO THE PROFIT AND LOSS AC COUNT. NO ANY AGREEMENT WAS PRODUCED BEFORE THE AO REGARDING UTILIZATION OF SERVICES OF THE HOLDING COMPANY. THE ASSESSEE HAS ALSO NOT SHOWN ANY WORK - IN - PROCESS OR ANY STOCK 4249/DEL./2014 6 IN HAND IN HIS PROFIT AND LOSS ACCOUNT WHEREAS HUGE AMOUNT OF REVENUE EXPENDITURE HAS BEEN CHARGED TO THE PROFIT AND LOSS ACCOUNT. IT REQUIRES FURTHER VERIFICATION FOR WHAT TYPE OF SERVICES WERE RENDERED BY THE EMPLOYEES DEPUTED FROM THE HOLDING COMPANY AND WHAT WAS THE NECESSITY TO INCUR HUGE AMOUNT OF EXPENDITURE BY THE ASSESSEE COMPA NY , WHICH ARE NOT TENABLE AS COMPARED TO THE TURNOVER OF THE ASSESSEE COMPANY . HE ALSO SUBMITTED THAT THE ASSESSEE HAS PAID GRATUITY OF RS.1,84,962/ - WHICH IS HIGHLY OBJECTIONABLE BECAUSE THERE WAS NO ANY EMPLOYER AND EMPLOYEE RELATIONSHIP EXISTING BETWEEN THE ASSESSEE COMPANY AND EMPLOYEES OF THE HOLDING COMPANY. REITERATING THE GROUND OF APPEAL, THE LD. DR SUBMITTED THAT THE RECEIPTS OF RS.7,17,547/ - RELATED TO BUSINESS WHICH WAS DISCONTINUED IN EARLIER YEARS AND, HENCE, NO EXPENDITURE ARE ALLOWABLE TO THE ASSESSEE AS BUSINESS EXPENDITURE WHEN THERE WAS NO BUSINESS ACTIVITY OF THE ASSESSEE COMPANY DURING THE DISPUTED YEAR. 5. ON THE OTHER HAND, THE LD. AR RELIED ON THE ORDER OF THE LD. CIT(A) AND REITERATED THE SUBMISSIONS MADE BEFORE HIM AND THE PAPER BOOK CONTAINING 185 PAGES BEFORE US. HE FURTHER SUBMITTED THAT IT WAS THE INITIAL YEAR OF THE ASSESSEE COMPANY. THEREFORE, THERE WAS NO PERMANENT EMPLOYEE ON THE COMPAN Y S ROLL. MOST OF THE EMPLOYEES OF THE HOLDING COMPANY HAD BEEN 4249/DEL./2014 7 UTILIZED FOR THE PURPOS E OF BUSINESS OF THE ASSESSEE. THE ASSESSEE COMPANY WAS NEWLY ESTABLISHED AND IT BEING A SOFTWARE COMPANY WAS REQUIRED TO HAVE EXPERTISE HANDS AT THE INITIAL STAGE. THIS FACT LED THE ASSESSEE TO UTILIZE THE EMPLOYEES OF THE HOLDING COMPANY, WHOSE SERVICES WERE UTILIZED IN THE PREVIOUS YEAR, WHICH WERE TAKEN PERMANENTLY ON THE PAY ROLL OF ASSESSEE COMPANY W.E.F. 01.04.2001 ON THE SAME TERMS OF EMPLOYMENT. THE REVENUE OF THE ASSESSEE COMPANY HAS INCREASED GRADUALLY IN SUBSEQUENT YEARS. 6. AFTER HEARING BOTH THE SIDES AND PERUSING THE MATERIALS AVAILABLE ON RECORD, WE FIND THAT IT IS CLEAR FROM THE DOCUMENTS SUBMITTED BY ASSESSEE THAT THE BUSINESS WAS STARTED DURING THE F.Y. 2000 - 01. IN SUPPORT OF ITS CLAIM THAT THE REVENUE RECEIVED BY THE ASSESSEE WAS BUSINE SS INCOME AND THE EXPENDITURE INCURRED BY HIM WERE IN NATURE OF REVENUE EXPENDITURE, THE ASSESSEE HAS RELIED ON SEVERAL CASE LAWS. THE ASSESSEE HAS DEBITED RS.5,73,28,153.03 UNDER THE HEAD ADMINISTRATION AND OTHER EXPENSES , FINANCIAL EXPENDITURE OF R S.1, 82,726.90 AND DEPRECIATION OF RS.39,34,312.45, TOTALING TO RS.6,14,45,192.38. THE SERVICE S OF THE EMPLOYEE OF THE HOLDING COMPANY HA V E BEEN UTILIZED BY THE ASSESSEE. DURING THE COURSE OF HEARING, BOTH THE PARTIES FAIRLY AGREED TO MAKE RE - EXAMINATION OF T HE ISSUE BEFORE HOLDING THE IMPUGNED EXPENDITURE AS REVENUE EXPENDITURE OR OTHERWISE. WE 4249/DEL./2014 8 OBSERVE FROM THE PROFIT AND LOSS ACCOUNT THAT THE ASSESSEE HAS SHOWN ONLY A SUM OF RS.7,17,547/ - UNDER THE HEAD SERVICE INCOME AND NO ANY STOCK IN PROCESS OR STOCK IN HAND IS APPEARING IN THE FINANCIAL STATEMENT OF THE ASSESSEE WHEREAS HUGE AMOUNT OF EXPENDITURE HAS BEEN CLAIMED BY THE ASSESSEE. KEEPING IN VIEW THE REVENUE RECEIPTS AND THE EXPENDITURE INCURRED BY THE ASSESSEE, COUPLED WITH THE CONTENTION OF ASSESSEE THA T THE IMPUGNED EXPENDITURE WERE INCURRED AT THE STAGE OF BUSINESS INCEPTION ELIGIBLE F O R DEDUCTION, WE FIND THAT THE MATTER REQUIRES THOROUGH INVESTIGATION AT THE STAGE OF ASSESSING OFFICER ON THE COUNTS (I) WHETHER THE SERVICE INCOME OF RS.7,17,547/ - RELA TES TO THE RECEIPTS OF CURRENT YEAR OR PREVIOUS FINANCIAL YEAR; (II) WHAT TYPE OF WORK /SERVICES WERE RENDERED BY THE EMPLOYEES OF HOLDING COMPANY FOR THE ASSESSEE; (II I ) WHAT WAS THE BASIS OF ALLOCATION OF EXPENDITURE BETWEEN THE HOLDING COMPANY AND ASSESSEE COMPANY ; (I V ) THAT WHAT WAS THE NEXUS OF SUCH HUGE EXPENDITURE WITH THE BUSINESS OF ASSESSEE AND WHAT WAS THE TRUE NATURE OF EXPENSES INCURRED BY THE ASSESSEE WHETHER PRE - OPERATIVE EXPENSES OR CAPITAL EXPENDITURE OR REVENUE EXPENDITURE; AND ( V ) WHETHER THERE EXISTED ANY AGREEMENT REGARDING UTILIZATION OF THE SERVICES AND FACILITIES OF HOLDING COMPANY AND ALLOCATION OF EXPENDITURE COMMONLY INCURRED BY BOTH THE COMPANIES; AND (VI) WHETHER THE CREDIT AND DEBIT ENTRIES IN THE BOOKS OF BOTH HOLDING CO MPANY AND THE ASSESSEE COMPANY REGARDING THE IMPUGNED 4249/DEL./2014 9 EXPENDITURE CROSS - TALLY WITH EACH OTHER. ON INVESTIGATION OF ALL THESE FACTS, THE AO SHALL DECIDE THE ISSUE DE NOVO AFTER GIVING REASONABLE OPPORTUNITY OF BEING HEARD. THE ASSESSEE IS ALSO DIRECTED TO F URNISH ALL THE NECESSARY EVIDENCES REQUIRED BY THE AO FOR VERIFICATION. ACCORDINGLY, THE APPEAL OF THE REVENUE DESERVES TO BE ALLOWED FOR STATISTICAL PURPOSES. 7. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 13. 10.2017 . SD/ - SD/ - ( AMIT SHUKLA ) (L.P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 13.10.2017 *AKS* COPY OF ORDER FORWARDED TO: (1) THE APPELLANT (2) THE RESPONDENT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES, NEW DELHI