DCIT (OSD) 8(1), MUMBAI V. FUND TECH INDIA LATD, MUMBAI

ITA 4466/MUM/2014

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 3495 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-01-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2008-2009
• Appeal Filed On: 27-06-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: M P LOHIA SHRI NIKHIL TIWARI; RAJIV NARAYANAN
• Keywords: Depreciation; Business expenditure; Rectification of order; Revenue expenditure; Capital expenditure
• Section: 143(3); 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES J MUMBAI BEFORE SHRI C.N. PRASAD (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 4508/MUM/2014 ASSESSMENT YEAR: 2008-09 M/S. FUND TECH INDIA LTD., VS. DCIT (OSD) 8(1), FORMERLY KNOWN AS CASH TECH R NO. 204, 2 ND FLOOR, SOLUTIONS (INDIA) LTD., AAYAKAR BHAVAN, M.K. ROA D, 604-605, 6 TH FLOOR, POWAI PLAZA MUMBAI-400020 HIRANANDANI COMPLEX, POWAI MUMBAI - 400076 PAN: AAACS7155D (APPELLANT) (RESPONDENT) ITA NO. 4466/MUM/2014 ASSESSMENT YEAR: 2008-09 DCIT (OSD) 8(1), VS. M/S. FUND TECH INDIA LTD., R NO. 204, 2 ND FLOOR, FORMERLY KNOWN AS CASH TECH AAYAKAR BHAVAN, M.K. ROAD, SOLUTIONS (INDIA) LTD ., MUMBAI 400020 604-605, 6 TH FLOOR, POWAI PLAZA HIRANANDANI COMPLEX, POWAI MUMBAI-400076 (APPELLANT) (RESPONDENT) REVENUE BY : SHRI RAJESH OJHA, DR ASSESSEE BY: SHRI M.P. LOHIA, SHRI NIKHIL TIWARI & SHRI RAJIV NARAYANAN, DATE OF HEARING : 19/1 0/2016 DATE OF PRONOUNCEMENT: 16/01/2017 ORDER PER N.K. PRADHAN, AM THE CAPTIONED CROSS-APPEALS BY THE ASSESSEE AND THE REVENUE ARE DIRECTED AGAINST THE ORDER OF THE COMMISSIONER (APPEALS) 16 ITA NO. 4508 & 4466/MUM/2014 2 MUMBAI DATED 28.03.2014 WHICH, IN TURN, HAS ARISEN FROM THE ORDER DATED 10.12.2010 PASSED BY THE ASSESSING OFFICER (A O) U/S 143(3) OF THE INCOME TAX ACT 1961, (THE ACT). REGARD BEING HAD TO THE SIMILITUDE OF ISSUES IN THESE APPEALS, THEY WERE HE ARD TOGETHER AND DISPOSED OF BY A COMMON ORDER. 2. WE SHALL FIRST TAKE UP ASSESSEES APPEAL. THE 1 ST GROUND RAISED BY THE ASSESSEE IN THIS APPEAL IS THAT THE LEARNED CIT(A) HAS ERRED IN UPHOLDING THE CONSULTANCY EXPENDITURE AS CAPITAL EX PENDITURE INSTEAD OF REVENUE EXPENDITURE. 2.1. BRIEFLY STATED, THE FACTS ARE THAT ASSESSEE-CO MPANY FILED ITS RETURN OF INCOME FOR THE A.Y. 2008-09 ON 30.09.2008 DECLARING LOSS OF RS. 1,42,78,056/-. THE NATURE OF BUSINESS IS SOFTWA RE DEVELOPMENT AND RELATED ACTIVITIES. THE AO ON EXAMINATION OF TH E DETAILS OF BILLS SUBMITTED BY THE ASSESSEE-COMPANY ALONG WITH COPY O F AGREEMENT FOR SERVICES, NOTICED THAT IT HAD INCURRED AN EXPENDITU RE OF RS. 3,98,41,574/- FOR PRODUCT DEVELOPMENT AND CUSTOMIZE D SOFTWARE DEVELOPMENT AND LATER ON IT MARKETED THE SAME TO IT S CLIENTS. THE AO HAS NARRATED THE DETAILS AT PAGE 3-5 OF THE ASSESSM ENT ORDER DATED 10.12.2010 PASSED BY HIM. THE AO HELD THE SAID EXPE NDITURE AS INTANGIBLE ASSET U/S 32(1)(II) AND ALLOWED DEPRECIA TION @25% ON THE ABOVE AND MADE ADDITION OF RS. 2,98,81,181/- (RS. 3 ,98,41,574/- MINUS RS. 99,60,393/-) 2.2 THE ASSESSEE-COMPANY PREFERRED AN APPEAL AGAINS T THE ORDER OF THE AO BEFORE THE LEARNED CIT(A). IN RESPECT OF TRE ATMENT OF CONSULTANCY EXPENDITURE OF RS. 3,98,41,574/- AS CAP ITAL EXPENDITURE AND CONSIDERING THE SAME AS AN INTANGIBLE ASSETS, T HE LEARNED CIT(A) SENT A COPY OF WRITTEN SUBMISSION AND ADDITIONAL EV IDENCE FILED BY THE OF THE ASSESSEE- COMPANY BEFORE HER TO THE AO FOR E XAMINATION AND ITA NO. 4508 & 4466/MUM/2014 3 CALLED FOR A REMAND REPORT. AFTER CONSIDERING THE A SSESSMENT ORDER, THE REMAND REPORT OF THE AO, THE CONTENTIONS OF THE ASSESSEE AND MATERIALS ON RECORD, THE LEARNED CIT(A) NOTED THAT THE ASSESSEE- COMPANY CLAIMED THAT IT HAD CONTRACTED WITH FUNDTEC H CORPORATION, US, FOR PROVIDING SOFTWARE DEVELOPMENT SERVICES FOR FEES, AND THE ASSESSEE-COMPANY IN TURN OUTSOURCED SOME OF THESE A CTIVITIES FOR WHICH IT HAD PAID CONSULTANCY CHARGES, AS SUCH THE AMOUNT PAID SHOULD BE TREATED AS REVENUE EXPENSES FOR EARNING F EES FROM FUNDTECH CORPORATION. THE ASSESSEE-COMPANY PROVIDED SOFTWARE PRODUCTS NOT ONLY TO FUNDTECH CORPORATION, BUT ALSO TO ITS INDIAN CUSTOMERS. THERE IS NOTHING BROUGHT ON RECORD TO SH OW THAT THE ASSESSEE-COMPANY HAD TRANSFERRED ALL THE RIGHTS IN THE PRODUCT SOFTWARE INCLUDING INTELLECTUAL PROPERTY IN SUCH SO FTWARE TO ITS CUSTOMERS. THE LEARNED CIT(A) THUS CAME TO A FINDIN G THAT THE ASSESSEE-COMPANY HAD DEVELOPED SOFTWARE AND PROVIDE D SERVICES TO ITS CLIENTS, HENCE IN PRINCIPLE SHE AGREED WITH THE AOS ACTION IN TREATING EXPENSES ON SOFTWARE DEVELOPMENT OF THE AS SESSEES PRODUCTS AS CAPITAL EXPENDITURE. THUS COMING TO SPE CIFIC INVOICES LISTED AT SERIAL NO. 1 TO 39, SHE HELD THE RELATED EXPENSES AS CAPITAL EXPENDITURE. REGARDING INVOICES AT SERIAL NO. 40 & 45, THE LEAR NED CIT(A) ARRIVED AT A FINDING THAT THE SAME RELATED TO PRODU CT IMPLEMENTATION FOR SECURITY CHECKS OF THE SOFTWARE AFTER SALE OF T HE PRODUCT FOR SECURITY ASSESSMENT AND HENCE CANNOT BE HELD TO BE FOR SOFTWARE DEVELOPMENT AND THUS ALLOWABLE AS REVENUE EXPENSES. AS REGARDS INVOICE AT SERIAL NO. 46 FOR RS. 8,42,700/-, THE PA YMENT BEING TO DELOITTE HASKINS AND SELLS FOR TAX CONSULTATION AND TAX RELATED ISSUES, THE SAME CANNOT BE HELD AS FOR SOFTWARE DEVELOPMENT AND THEREFORE, SHE ALLOWED IT AS REVENUE EXPENDITURE. THE LEARNED CIT(A) HELD IN ITA NO. 4508 & 4466/MUM/2014 4 RESPECT INVOICES AT SERIAL NO. 41 TO 49 AND 51 THAT THESE WERE FOR MARKETING SERVICES AND THE SAME CANNOT BE HELD AS F OR SOFTWARE DEVELOPMENT AND HELD THE AOS ACTION TREATING THE S AME AS CAPITAL EXPENDITURE AS INCORRECT. SHE ALSO HELD THE INVOICE AT SERIAL NO. 50 OF RS. 2,33,836/- FOR ONLINE SUPPORT SERVICES TO BE FO R PROVIDING ANNUAL MAINTENANCE SERVICES AND FOR IMPLEMENTATION OF THE PRODUCT AFTER SALES AND HENCE HELD THE SAME AS REVENUE EXPENDITUR E. THE LEARNED CIT(A) ALSO DIRECTED THE AO TO TAKE NO TE OF THE ASSESSEES EXPLANATION REGARDING CANCELLATION OF IN VOICE/S BY M/S. I- FLEX SOLUTIONS LTD. AND RAISING OF FRESH INVOICE AN D FOR AMOUNTS ADJUSTED AGAINST PROVISIONS MADE AND RE-COMPUTE DIS ALLOWANCE ACCORDINGLY AFTER DUE VERIFICATION. 2.3 BEFORE US, THE LEARNED COUNSELS OF THE ASSESSE E-COMPANY FILED A SUMMARY OF THE DETAILS OF CONSULTANCY CHARGES. BROA DLY STATED IT IS AS UNDER: SL NO. NAME OF THE ENTITY NARRATION AS PER ASSESSMENT ORDER NATURE OF SERVICES 1. GODREJ INFOTECH LTD. OUR CHARGES FOR PROVIDING CONSULTANCY AND TECHNICAL ASSISTANCE FOR PRODUCT DEVELOPMENT AND CUSTOMIZED SOFTWARE DEVELOPMENT TECHNICAL ASSISTANCE FOR PRODUCT DEVELOPMENT AND CUSTOMIZED SOFTWARE DEVELOPMENT 2. QUEXST SOLUTIONS PVT. LTD. THE INVOICE IS TOWARDS SOFTWARE DEVELOPMENT SERVICES OF SOFTWARE PRODUCT PROVISION OF SOFTWARE DEVELOPMENT SERVICES FOR SOFTWARE PRODUCT 3. I-FLEX SOLUTIONS LTD. PROFESSIONAL FEES FOR CONSULTANTS OFFSHORE PROFESSIONAL FEES FOR CONSULTANTS - OFFSHORE SOFTWARE DEVELOPMENT SERVICES SOFTWARE DEVELOPMENT SERVICES 4. DATA SOFTWARE RESEARCH CO. PVT. LTD. TOWARDS SOFTWARE SUPPORT SERVICES PROVIDED BY OUR PERSON CHARGE FOR SOFTWARE SUPPORT SERVICES THE LEARNED COUNSELS OF THE ASSESSEE ALSO SUBMITTED THAT THE LEARNED CIT(A) HAS DIRECTED THE A.O. TO RECTIFY THE ERROR O N ACCOUNT OF THE RE- RAISING THE INVOICE FOR I-FLEX SOLUTIONS LTD. AND T O CONSIDER THE CORRECT ITA NO. 4508 & 4466/MUM/2014 5 AMOUNT FOR CAPITALIZATION I.E. RS. 7,55,350/- VIS-A-VIS THE AMOUNT CONSIDERED BY HIM OF RS. 1,71,08,348/- AND THAT THE DEPARTMENT IS NOT IN APPEAL AGAINST THE SAID DIRECTION OF THE LEARNED CIT(A). 2.4. THE LEARNED DR SUPPORTED THE ORDER PASSED BY T HE LEARNED CIT(A). 2.5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE RELEVANT MATERIAL ON RECORD. THE AO IN THE ASSESSMENT ORDER DATED 10.12.2010 FOR THE IMPUGNED ASSESSMENT YEAR HAS MENTIONED THE NATURE OF BUSINESS OF THE ASSESSEE-COMPANY AS SOFTWARE DEVELO PMENT AND RELATED ACTIVITIES. AS PER FORM NO. 3 CD, THE NATUR E OF BUSINESS OF THE ASSESSEE-COMPANY HAS BEEN MENTIONED AS (A) SOFTWARE DEVELOPMENT AND RELATED ACTIVITIES AND (B) TRADING IN COMPUTER SOFTWARE. 2.6 A PERUSAL OF THE INDEPENDENT CONTRACTOR AGREEM ENT ENTERED INTO ON 24.03.2006 BETWEEN CASHTECH SOLUTION INDIA LTD. (THE FORMER NAME OF THE PRESENT ASSESSEE) AND QUEXST SOLUTIONS PVT. LTD., INDICATE THAT THE FORMER ENGAGES THE LATTER, AS AN INDEPENDE NT CONTRACTOR, TO PERFORM SERVICES, FOR PRODUCT DEVELOPMENT AND CUSTO MIZED SOFTWARE DEVELOPMENT. WE MAY REFER TO CLAUSE 10 OF THE SAID AGREEMENT WHICH SAYS: ALL INTELLECTUAL PROPERTY RIGHTS INCLUDING, RIGHT S AND INVENTIONS, DESIGNS AND IMPROVEMENTS, WHICH THE CONTRACTOR MAY MA KE EITHER ALONE OR WITH CASHTECH PURSUANT TO OR IN RELATION TO THIS AGREEMENT, SHALL AUTOMATICALLY BELONG TO CASHTECH. THE CONTRACTOR SH ALL HAVE NO CLAIMS AND SHALL NOT MAKE ANY CLAIMS IN RESPECT THERETO. FOR T HIS PURPOSE THE CONTRACTOR SHALL PROMPTLY DISCLOSE AND DELIVER TO CASH TECH ALL THE INFORMATION AND DATA IN ITS POSSESSION NECESSARY TO I MPART A FULL UNDERSTANDING OF THE SAID IMPROVEMENT, INVENTION, PRO CESSES, SYSTEMS OR DESIGNS AND SHALL ASSIST CASHTECH OR ITS NOMINEES IN EVERY PROPER WAY, WITHOUT ANY PERSON-MONTH CHARGES, IN OBTAINING PROT ECTION OF SAID IMPROVEMENTS, INVENTIONS, PROCESSES, SYSTEMS OR DESI GNS IN ANY AND ALL COUNTRIES. ITA NO. 4508 & 4466/MUM/2014 6 THE CONTRACTOR HEREBY AGREE THAT THE CASHTECH IS A N SHALL BE THE SOLE AND EXCLUSIVE OWNER OF ALL PRESENT AND FUTURE INTELLE CTUAL PROPERTY RIGHTS IN AND TO ALL MATERIAL WRITTEN OR DEVISED BY THE CONT RACTOR PERTAINING TO THE PRODUCT, THE OPERATION OR BUSINESS OF CASHTECH O R RESULTING FROM ANY WORK WHICH THE CONTRACTOR SHALL HAVE CARRIED OUT PU RSUANT TO THIS AGREEMENT AND ALL RIGHTS OF ACTION FOR DAMAGES FOR INFRINGEMENT OF SUCH INTELLECTUAL PROPERTY RIGHTS FOR THE ENTIRE PERIOD O F THE SUBSISTENCE OF THE INTELLECTUAL PROPERTY RIGHTS AND ANY RENEWALS AND EXT ENSIONS THEREOF AND IRREVOCABLY UNDERTAKE AND CONFIRM TO EXECUTE, UPON RE CEIPT OF A REQUEST FROM CASHTECH. ALL NECESSARY AND ADEQUATE DOCUMENTS TO CONFIRM THE SAME. 2.7 SIMILAR IS THE AGREEMENT BETWEEN THE ASSESSEE A ND THE OTHER ENTITIES. THE ASSESSEE HAS ENGAGED THEM TO PERFORM SOFTWARE SERVICES, FOR PRODUCT DEVELOPMENT AND CUSTOMIZED SOFTWARE DEV ELOPMENT. 2.8 A SIMILAR ISSUE AROSE BEFORE ITAT, PUNE BENCH I N THE CASE OF OPUS SOFTWARE SOLUTIONS (P) LTD. VS. ACIT (2012) 139 ITD 427. IN THIS CASE THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF DE VELOPMENT OF SOFTWARE PRODUCTS. THE CLAIM OF THE ASSESSEE WAS TH AT IT WAS ENGAGED IN THE DEVELOPMENT OF VARIOUS SOFTWARE PACKAGES, LI KE TRADE NOW, ELECTRA ATM, ELECTRA CARD AND ELECTRA PAYMENT GATEW AY (EPG), ETC. THE ASSESSEE EXPLAINED TO THE AO THAT THE EXPENDITU RE INCURRED ON DEVELOPMENT OF SUCH PRODUCTS WAS TO THE TUNE OF RS. 2,77,07,736/- AND THE SAME WAS CLAIMED AS REVENUE EXPENDITURE. TH E AO AND THEREAFTER THE LEARNED CIT(A) HELD THAT SUCH DEVELO PMENT EXPENDITURE WAS CAPITAL IN NATURE. IN FURTHER APPEA L, THE TRIBUNAL HELD THAT: IN OUR CONSIDERED OPINION, THE AFORESAID PROPOSITI ON OF THE REVENUE IS QUITE ALIEN TO THE BUSINESS REALITIES UNDER WHICH THE ASSE SSEE IS OPERATING. QUITE CLEARLY, THE ASSESSEE IS IN THE BUSINESS OF SOFTWAR E DEVELOPMENT WHICH ENTAILS FAST TECHNOLOGICAL CHANGES AND IN THAT VIEW, THERE I S NO PERMANENCE ATTACHED TO ANY PRODUCT DEVELOPED. IN FACT, IT IS QUITE UNDERST ANDABLE THAT THE BUSINESS OF THE ASSESSEE IS EXPOSED TO VOLATILITY OF NEW AND U PCOMING TECHNOLOGICAL ADVANCES AND THE PRODUCTS DEVELOPED BY IT MAY NOT BE SUS TAINABLE OVER A PERIOD OF TIME TO COMPETE IN THE MARKET PLACE. THERE FORE, IN THIS BACKGROUND ONE HAS TO EXAMINE AS TO WHETHER THE EXPENDITURE IN CURRED ON DEVELOPMENT AND LAUNCHING OF NEW PRODUCTS IN THE SAME LINE OF BUS INESS RESULTS IN AN ITA NO. 4508 & 4466/MUM/2014 7 ADVANTAGE IN THE REVENUE FIELD OR IN THE CAPITAL FIEL D. THE HONBLE SUPREME COURT IN THE CASE OF EMPIRE JUTE CO LTD (SUPRA) HAS HELD THAT THE TRUE TEST TO ASCERTAIN THE NATURE AND IMPORT OF THE EXPENDITURE I S TO EXAMINE THE SAME FROM A COMMERCIAL PERSPECTIVE. EVEN IF, IT HAS TO B E ACCEPTED THAT THE EXPENDITURE RESULTS IN AN ENDURING BENEFIT TO THE ASS ESSEE, YET FOLLOWING DISCUSSION BY THE HONBLE SUPREME COURT WOULD SHOW T HAT EACH AND EVERY INCIDENCE OF ENDURING BENEFIT WOULD NOT RESULT IN CLAS SIFICATION OF EXPENDITURE AS A CAPITAL EXPENDITURE: THERE MAY BE CASES WHERE EXPENDITURE EVEN IF INCURR ED FOR OBTAINING AN ADVANTAGE OF ENDURING BENEFIT, MAY, NONETHELESS, BE O N REVENUE ACCOUNT AND THE TEST OF ENDURING BENEFIT MAY BREAKDOWN. IT IS NO T EVERY ADVANTAGE OF ENDURING NATURE ACQUIRED BY AN ASSESSEE THAT BRINGS T HE CASE WITHIN THE PRINCIPLE LAID DOWN IN THIS TEST. WHAT IS MATERIAL TO CONSIDER IS NATURE OF THE PRINCIPLE LAID DOWN IN THIS TEST. WHAT IS MATERIAL TO CONSIDER IS NATURE OF THE ADVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHERE THE ADVANTAGE IS IN THE CAPITAL FIELD THAT THE EXPENDITURE WOULD BE DISALLOWAB LE ON AN APPLICATION OF THIS TEST. IF THE ADVANTAGE CONSISTS MERELY IN FACIL ITATING THE ASSESSEES TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEES BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE P ROFITABLY WHILE LEAVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE OF RE VENUE ACCOUNT, EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR AN INDEFINITE FUT URE. IN THE PRESENT CASE, IN OUR VIEW, THE EXPENDITURE ON DEVELOPMENT OF NEW PRODUCT IN THE LINE OF BUSINESS BEING CARRIED OUT BY THE ASSESSEE IS AN EXPENDITURE RELATED TO SUCH BUSINESS AND BENEFIT TO TH E ASSESSEE IS IN THE REVENUE FIELD, INASMUCH AS IT SEEKS TO IMPROVE THE P ROFITABILITY OF THE ASSESSEE AND THE ENDURING BENEFIT CANNOT BE REGARDED TO BE IN TH E CAPITAL FIELD. THE PARITY OF REASONING LAID DOWN BY THE HONBLE APEX CO URT IN THE CASE OF EMPIRE JUTE CO LTD (SUPRA), AS EXTRACTED ABOVE, CLEARLY SUPP ORTS THE STAND OF THE ASSESSEE, INASMUCH AS THE EXPENDITURE IN QUESTION ME RELY RESULTS IN DEVELOPMENT OF NEW PRODUCTS BY THE ASSESSEE IN ITS EX ISTING LINE OF BUSINESS. EVEN OTHERWISE, IT IS NOTEWORTHY THAT NONE OF THE E XPENDITURES IN QUESTION ARE OF CAPITAL NATURE AND IN FACT, THE EXPENDITURE WHICH HAS BEEN REFERRED TO BY US IN THE EARLIER PARAGRAPH CLEARLY ARE SUCH EXPENDITU RE, WHICH ARE INCURRED IN THE COURSE OF CARRYING ON OF BUSINESS. 2.9 IN VIEW OF THE FOREGOING REASONS, THE 1 ST GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 3. AS WE HAVE ALLOWED THE 1 ST GROUND OF APPEAL FILED BY THE ASSESSEE, THERE IS NO NECESSITY OF ADJUDICATING THE ADDITIONAL GROUND FILED BY THE ASSESSEE THAT WITHOUT PREJUDICE TO GROUND NO 1 TO 5, THE AO ERRED IN ALLOWING DEPRECIATION @25% INSTEAD OF 6 0% ON CONSULTANCY CHARGES WHICH HAVE BEEN CAPITALIZED AS SOFTWARE ITA NO. 4508 & 4466/MUM/2014 8 DEVELOPMENT EXPENSES. THEREFORE, THE ADDITIONAL G ROUND FILED BY THE ASSESSEE IS DISMISSED. 4. THE 2 ND GROUND RAISED BY THE ASSESSEE IN THIS APPEAL IS TH AT THE LEARNED CIT(A) HAS ERRED IN UPHOLDING THE DISALLOWA NCE OF ONE-THIRD OF DIRECTORS FOREIGN TRAVEL AND CONVEYANCE EXPENSE S AMOUNTING TO RS. 11,72,587/- ON AN ADHOC BASIS EVEN THOUGH IT WAS WH OLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS OF THE APPELLANT. 4.1 THE DETAILS OF THE FOREIGN TRAVEL BY THE DIRECT ORS ARE MENTIONED BY THE AO AT PAGE 6 OF THE ASSESSMENT ORDER. THE AS SESSEE-COMPANY SUBMITTED BEFORE THE AO THAT THE ENTIRE AMOUNT INCU RRED ON HIRE CHARGES LOCAL, HOTEL STAY OVERSEAS WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PURPOSE AND THEREFORE ALLOWABLE. THE ASSESSEE-COMPANY FILED A WRITTEN SUBMISSION BEF ORE THE AO WHICH IS AVAILABLE AT PAGE 7 9 OF THE ASSESSMENT ORDER. THE AO WAS NOT CONVINCED WITH THE SAID EXPLANATION OF THE ASSE SSEE-COMPANY BECAUSE OF THE REASONS THAT IN NOW-A-DAYS, BUSINE SS SCENARIO NOBODY REQUIRES TO GO DOOR TO DOOR FOR EFFECTING SA LES PARTICULARLY IN SOFTWARE TRADE. THE SALES MADE TO VARIOUS FOREIGN C LIENTS ARE NOT THE NEW ONE. IN VIEW OF THE ABOVE, THE AO DISALLOWED RS.1,50,00,000/- (OUT OF TRAVEL EXPENSES OF RS. 4,49,96,230/-) AS NO T RELATED TO BUSINESS EXPENDITURE AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE- COMPANY. 4.2 IN RESPECT OF DISALLOWANCE OF RS.1,50,00,000/- MADE BY THE AO OUT OF FOREIGN TRAVELLING AND OVERHEAD HOTEL CHARGE S INCURRED FOR THE DIRECTORS, THE LEARNED CIT(A) HAVING GONE THROUGH T HE ASSESSMENT ORDER, REMAND REPORT OF THE AO, THE CONTENTIONS OF THE ASSESSEE AND MATERIALS ON RECORD OBSERVED THAT THERE HAD BEEN NO REBUTTAL OF THE AOS OBSERVATIONS THAT THE SALES WERE NOT MADE TO N EW FOREIGN ITA NO. 4508 & 4466/MUM/2014 9 CLIENTS, CONSEQUENTLY THERE WAS NO REQUIREMENT FOR PROLONGED VISITS OF A WEEK OR SO. FURTHER THERE WAS NO RECORD OF PRO CEEDINGS OF THE DISCUSSION, WHAT WAS DISCUSSED AND THE OUTCOME OF T HE SAME. THE LEARNED CIT(A) THUS CONFIRMED THE DISALLOWANCE OF R S.1,50,00,000/- MADE BY THE AO. 4.3 THE LEARNED COUNSELS SUBMITTED THAT ON PERUSAL OF T HE DETAILS FILED BEFORE THE AO, IT WOULD BE APPARENT THAT THE ENTIRE EXPENDITURE TOWARDS TRAVEL AND CONVEYANCE BY THE DIRECTORS WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. COMMER CIAL EXPEDIENCY WAS EXPLAINED BY STATING THAT AS MOST OF THE CLIENT S ARE LOCATED OUTSIDE INDIA, THE ASSESSEE IS REQUIRED TO FREQUENT LY VISIT THE CLIENTS FOR RENDERING OF SERVICES AND MAINTAINING AND DEVEL OPING THE EXISTING BUSINESS RELATIONSHIP AND FOR NEW BUSINESS OPPORTUN ITIES. IT WAS SUBMITTED BY THEM THAT THE NAMES OF CLIENTS VISITED AND THE PURPOSE OF THE SAID MEETING WERE FURNISHED TO THE AO. THERE IS A DIRECT NEXUS BETWEEN THE EXPENDITURE INCURRED ON DIRECTORS TRAV EL AND EXPENSES CARRIED OUT BY THE ASSESSEE. THE LEARNED COUNSELS A LSO SUBMITTED THAT THE ASSESSMENT MADE ON THE BASIS OF AD-HOC DISALLOW ANCE IS LIABLE TO BE DELETED. 4.4 THE LEARNED DR SUPPORTED THE ORDER PASSED BY THE LE ARNED CIT(A). 4.5 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THE CONCLUSION ARR IVED AT BY THE AO THAT THE SALES WERE NOT MADE TO NEW FOREIGN CLIENTS , HENCE THERE IS NO REQUIREMENT OF PROLONGED VISIT OF A WEEK OR SO IS N OT BASED ON REASONS. WE FIND THAT THE AO HAS DISALLOWED AN AD-HOC AMOUNT OF RS. 1,50,00,000/- OUT OF TRAVEL EXPENSES OF RS. 4,49,96 ,230/-. THE ASSESSEE FILED A RECTIFICATION PETITION BEFORE THE AO ON 27.01.2011 AND ITA NO. 4508 & 4466/MUM/2014 10 THE RECTIFICATION ORDER DATED 17.02.2011 WAS PASSED BY THE AO RESTRICTING THE DISALLOWANCE TO RS. 11,72,587/- (OU T OF DIRECTORS EXPENSES OF RS. 35,23,293/-). WE FIND THAT THE DETAILS WERE FURNISHED BY THE ASSE SSEE COMPANY BEFORE THE AO. THE SAME HAS BEEN EXTRACTED AT PAGE 9 11 OF THE ASSESSMENT ORDER BY THE A.O. IN SESHASAYEE BROTHERS LTD. VS. CIT (1961) 42 ITR 568 (MAD) AND COOPER ENGINEERING LTD. VS. CIT (1982) 135 ITR 597 (BOM), IT HAS BEEN HELD THAT WHERE THE DETAILS ARE NOT FURNISHED BY THE ASSESSEE, THE CLAIM CAN BE DISALLO WED ON THE GROUND THAT THE ASSESSEE HAD NOT ESTABLISHED THAT THE AMOU NT IN QUESTION WAS EXPENDITURE LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS. IF THE OBJECT OF THE UNDERTAKEN TOUR IS COMMERCIAL IN NATURE, THE EXPENDITURE WOULD QUALIFY FOR DEDUCTION . WE FIND THAT THE DISALLOWANCE MADE BY THE AO OF THE DIRECTORS EXPEN SES IS BEREFT OF SOUND REASONING. THEREFORE, THE DISALLOWANCE MADE B Y THE AO OF RS. 11,72,587/- IS DELETED. THE 2 ND GROUND OF APPEAL FILED BY THE ASSESSEE IS THEREFORE, ALLOWED. 5. THE LEARNED COUNSELS OF THE ASSESSEE SUBMITTED D URING THE COURSE OF HEARING THAT THEY WOULD NOT LIKE TO PRESS 3 RD GROUND OF THE APPEAL. THEREFORE, THE SAME DISMISSED AS NOT PRESSE D. 6. AS REGARDS 4 TH GROUND OF APPEAL, THE LEVY OF PENALTY U/S 234B IS MANDATORY, THOUGH CONSEQUENTIAL. WE ORDER ACCORDING LY. 7. AS REGARDS 5 TH GROUND OF APPEAL, THE AO HAS ONLY INITIATED PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT. THE G ROUND OF APPEAL BEING PREMATURE, IS DISMISSED. 8. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE I S PARTLY ALLOWED. ITA NO. 4508 & 4466/MUM/2014 11 9. WE SHALL NOW TAKE UP NOW REVENUES APPEAL. THE S OLE GROUND RAISED BY THE REVENUE IN THIS APPEAL IS THAT THE LE ARNED CIT(A) HAS ERRED IN HOLDING THAT THE EXPENSES EVIDENCED BY FOL LOWING VOUCHERS WERE REVENUE IN NATURE WITHOUT ASSIGNING ANY REASON S: (A) INVOICES FOR SECURITY ASSESSMENT (AT SR. NO. 40 &45 ) ARE REVENUE IN NATURE AS THE SAME WERE INCURRED FOR PRO DUCT IMPLEMENTATION FOR SECURITY CHECKS OF THE SOFTWARE AFTER SALE OF THE PRODUCT. (B) INVOICES AT SR. NO. 41 TO 49 AND 51 WERE FOR MARKET ING SERVICES 9.1. THE LEARNED DR SUPPORTED THE ORDER PASSED BY T HE AO WHEREAS THE LEARNED COUNSELS OF THE ASSESSEE SUPPORTED THE ORDER OF THE LEARNED CIT(A). 9.2 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THE LEARNED CIT(A) HAS GIVEN SPECIFIC REASONS FOR INVOICES AT SERIAL NO. 40 & 45, 41 TO 4 9 AND 51 FOR ALLOWING THE SAME AS REVENUE EXPENDITURE. SERIAL NO. 40 & 45 OF THE INVOICE ARE FOR PRODUCT IMPLEMENTATION FOR SECURITY CHECKS OF T HE SOFTWARE AFTER SALE OF THE PRODUCT. SERIAL NO. 46 OF THE INVOICE I S FOR TAX CONSULTATION AND TAX RELATED ISSUES. INVOICES AT SERIAL NO. 41 T O 49 AND 51 ARE FOR MARKETING SERVICES. THEREFORE, THE LEARNED CIT(A) H AS RIGHTLY ARRIVED AT A FINDING THAT THE SAID EXPENDITURES ARE REVENUE IN NATURE. 9.3 IN VIEW OF THE ABOVE, THE ABOVE GROUND OF APPEA L FILED BY THE REVENUE IS DISMISSED. 10. TO SUM UP, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED WHEREAS THE APPEAL FILED BY THE REVENUE IS DISMISSE D. ITA NO. 4508 & 4466/MUM/2014 12 ORDER PRONOUNCED IN THE OPEN COURT ON 16/ 01/2017 SD/- SD/- (C.N. PRASAD) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBE R MUMBAI; DATED: 16/01/2017 BISWAJIT, SR. P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI