DCIT, New Delhi V. M/s Fibcom India Ltd., New Delhi

ITA 4712/DEL/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 52606 (ITAT-DELHI)
• Duration Of Justice: 9 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 18-08-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 28-10-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ROHIT GARG SENIOR
• Assessee Lawyers: RAJESH ARORA
• Keywords: Depreciation; Opportunity of being heard; Cost of acquisition; Corroborative evidences
• Section: 143(3); 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH B : NEW DELHI) BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NO.4712/DEL./2010 (ASSESSMENT YEAR : 2004-05) ITA NO.4894/DEL./2010 (ASSESSMENT YEAR : 2005-06) DCIT, CIRCLE 11 (1), VS. M/S. FIBCOM INDIA LIMITE D, NEW DELHI. LGF 84, WORLD LANE CENTRE, BARAKHAMBA LANE, NEW DELHI. (PAN : AAACF2237P) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RAJESH ARORA, CA REVENUE BY : SHRI ROHIT GARG, SENIOR DR ORDER PER B.C. MEENA, ACCOUNTANT MEMBER : BOTH THE APPEALS FILED BY THE REVENUE FOR THE ASSE SSMENT YEARS 2004- 05 AND 2005-06 ARISE OUT OF THE ORDERS OF THE CIT (APPEALS)-XIII, NEW DELHI BOTH DATED 03.09.2010. 2. THE GROUNDS OF APPEAL IN ITA NO. 4712/DEL/2010 ARE AS UNDER:- 1. THE ORDER OF LD. CIT (A) IS WRONG, PERVERSE, IL LEGAL AND AGAINST THE PROVISIONS OF LAW, LIABLE TO BE SET ASI DE. ITA NO.4712 & 4894/DEL./2010 2 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE CIT (A) HAS ERRED IN DELETING THE DISALLOWANCE OF RS.20,79,721/- MADE BY THE AO ON ACCOUNT OF ROYALTY . 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE CIT (A) HAS ERRED IN DELETING THE DISALLOWANCE OF RS.3,65,130/- MADE BY THE AO ON ACCOUNT OF DEPRECIA TION ON COMPUTER PERIPHERALS. 4. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEN D ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF HEARIN G. THE GROUNDS OF APPEAL IN ITA NO. 4894/DEL/2010 RE AD AS UNDER:- 1. THE ORDER OF LD. CIT (A) IS WRONG, PERVERSE, IL LEGAL AND AGAINST THE PROVISIONS OF LAW, LIABLE TO BE SET ASI DE. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE CIT (A) HAS ERRED IN DELETING THE ADDITION OF R S.11,25,000/- MADE BY THE AO ON ACCOUNT OF FOREIGN EXCHANGE LOSS. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE CIT (A) HAS ERRED IN DELETING THE ADDITION OF R S.14,82,375/- MADE BY THE AO ON ACCOUNT OF ROYALTY. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE CIT (A) HAS ERRED IN DELETING THE ADDITION OF RS.1,11,09,070/- MADE BY THE AO ON ACCOUNT OF R&D EXPENDITURE. 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE CIT (A) HAS ERRED IN DELETING THE ADDITION OF R S.14,196/- MADE BY THE AO ON ACCOUNT OF DEPRECIATION ON COMPUT ER ACCESSORIES. 4. THE APPELLANT CRAVES LEAVE TO ADD, ALTER OR AMEN D ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF HEARIN G. ITA NO.4712 & 4894/DEL./2010 3 3. FIRST, WE TAKE UP ITA NO. 4712/DEL/2010 FOR THE ASSESSMENT YEAR 2004-05. GROUND NOS. 1 AND 4 ARE GENERAL IN NA TURE AND DO NOT REQUIRE ANY ADJUDICATION. 4. IN GROUND NO. 2, THE ISSUE INVOLVED IS AGAINST THE DELETION OF DISALLOWANCE OF RS.20,79,721/- MADE BY THE AO ON AC COUNT OF PAYMENT OF ROYALTY. THE CASE WAS PROCESSED U/S 143(1). LATER ON, THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S 143(2) W AS ISSUED. SUBSEQUENTLY, THE CASE WAS REOPENED AND EXPENDITURE ON ROYALTY P AYMENTS WERE HELD TO BE CAPITAL IN NATURE, IN VIEW OF THE DECISION IN T HE CASE OF SOUTHERN SWITCHGEARS LTD. VS. CIT, 232 ITR 359, AND ON TH AT BASIS 25% OF THE EXPENSES WERE DISALLOWED. DURING THE YEAR UN DER CONSIDERATION, THE ASSESSEE HAD PAID ROYALTY ON ITS SALES AMOUNTI NG TO RS.83,18,885/- AND THE SAME WAS DEBITED IN THE PROFIT AND LOSS ACCOUNT . 5. THE LD. DR RELIED ON THE ORDER OF THE AO AND THE LD. AR RELIED ON THE ORDER OF THE CIT(APPEALS). 6. WE HAVE HEARD BOTH THE SIDES. THE ROYALTY EXPE NSES INCURRED BY THE ASSESSEE WERE AS PER THE TERMS OF AGREEMENT DATED 9.8.2002. AS PER THIS AGREEMENT, ONE TIME PAYMENT FOR ACQUIRING KNOW-H OW HAS BEEN SEPARATELY PAID WHICH HAS BEEN CAPITALIZED AND IT HAS NOT BE EN CHARGED TO REVENUE ACCOUNT. IN TERMS OF CLAUSE 9.1 OF THE SAID A GREEMENT A SEPARATE FEE HAS BEEN PRESCRIBED IN CONSIDERATION OF THE TRANSFER OF TECHNICAL KNOW-HOW, ITA NO.4712 & 4894/DEL./2010 4 TECHNICAL DOCUMENTATION LICENSING RIGHTS GRANTED U NDER THIS AGREEMENT AND FOR THE SAME, A NON-REFUNDABLE AMOUNT HAS BEEN PAID BY THE ASSESSEE. AS PER CLAUSE 9.6.1 OF THE AGREEMENT, THE ASSESSEE HAS TO PAY ROYALTY @ 5% FOR DOMESTIC SALES AND 8% FOR THE EXPORT SALES . SINCE THERE WAS NO EXPORT DURING THE YEAR, THE ASSESSEE HAD PAID ROYALTY @ 5% OF THE DOMESTIC SALES AND THE CALCULATION HAS BEEN MADE AS PER THE AGR EEMENT WHICH IS NOT IN DISPUTE. THE PAYMENT HAD BEEN MADE DURING THE R UNNING OF THE BUSINESS. THESE EXPENSES WERE RECURRING AND BASED ON THE PERC ENTAGE OF SALES. THE NON-REFUNDABLE ONE TIME WAS SEPARATELY MADE AND THE SAME WAS CAPITALIZED. BY INCURRING THIS EXPENSE, THE ASSESSEE HAD NOT ACQ UIRED ANY ASSET OF ENDURING BENEFIT. IN THE CASE OF SOUTHERN SWITCHGEAR LIMITE D, THE EXPENDITURE WAS COMPOSITE OF RECURRING AND NON-RECURRING EXPENDITUR E. IN THE ABSENCE OF SEGREGATION, 25% WAS TREATED AS CAPITAL BUT IN ASSE SSEES CASE, SUCH SEGREGATION WAS ALREADY MADE. KEEPING ALL THESE FACTS IN VIEW, WE FIND NO FAULT IN THE ORDER OF CIT(APPEALS) AND WE SUSTAIN THE SAME ON THIS ISSUE. ACCORDINGLY, GROUND NO. 2 OF THE REVENUES APPEA L IS DISMISSED. 7. IN GROUND NO. 3, THE ISSUE INVOLVED IS DELE TION OF ADDITION OF RS.3,65,130/- ON ACCOUNT OF DEPRECIATION ON COMPU TER PERIPHERALS. THE ASSESSEE HAS CLAIMED 60% DEPRECIATION ON THE COM PUTER PERIPHERALS WHEREAS THE AO ALLOWED ONLY 25%. CIT(APPEALS) HAS ALLOWED THIS GROUND BY RELYING ON THE DECISIONS OF ITAT IN THE CA SE OF ITO VS. SIMRAM ITA NO.4712 & 4894/DEL./2010 5 MAJUMDAR, 101 TTJ (KOL) 501, EXPEDITORS INTERNAT IONAL (INDIA) (P) LTD. VS. ADDITIONAL CIT, 118 TTJ 2008 AND CONTAINER C ORPORATION OF INDIA LTD. VS. ACIT, 30 SOT 284 (DEL). 8. WE HAVE HEARD BOTH THE SIDES ON THE ISSUE AND HOLD THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY VARIOUS DEC ISIONS OF ITAT AND ALSO BY THE DECISION OF HONBLE JURISDICTIONAL HIGH CO URT. KEEPING THESE FACTS IN VIEW, WE DO NOT FIND ANY FAULT IN THE ORDER OF THE CIT(APPEALS) AND DISMISS GROUND NO.3 OF REVENUES APPEAL. 9. IN THE RESULT, THE APPEAL IN ITA NO. 4712(DEL) /2010 STANDS DISMISSED. 10. NOW WE TAKE UP ITA NO.4894/DEL/2010 FOR ASS ESSMENT YEAR 2005- 06. 11. GROUND NOS. 1 AND 6 ARE GENERAL IN NATURE AN D DO NOT REQUIRE ANY ADJUDICATION. 12. IN GROUND NO. 3 THE REVENUE HAS CHALLENGED THE DELETION OF DISALLOWANCE ON ACCOUNT OF ROYALTY PAYMENT. WE HAV E ALREADY DECIDED THIS ISSUE IN ITA NO. 4712/DEL//2010 FOR THE ASSESS MENT YEAR 2004-05, WHEREIN THE APPEAL OF THE REVENUE HAS BEEN DISMI SSED ON THE ISSUE OF PAYMENT OF ROYALTY. THEREFORE, FOR SAME REASONS, THIS GROUND OF APPEAL OF THE REVENUE IS ALSO DISMISSED. ITA NO.4712 & 4894/DEL./2010 6 13. GROUND NO. 5, WHICH IS AGAINST THE DELETI ON OF ADDITION OF RS.14,196/- ON ACCOUNT OF DEPRECIATION ON COMPUTER ACCESSORIES, HAS ALSO BEEN DECIDED BY US AFORESAID IN FAVOUR OF THE ASSE SSEE IN REVENUES APPEAL FOR ASSESSMENT YEAR 2004-05 AND ACCORDINGLY, WE DIS MISS THE REVENUES APPEAL ON THIS ISSUE. THEREFORE, THIS GROUND AL SO STANDS DISMISSED. 14. IN GROUND NO. 2, THE ISSUE INVOLVED IS AGAINS T THE DELETION OF ADDITION OF RS. 11,25,000/- MADE BY THE AO ON ACCOUNT OF FO REIGN EXCHANGE LOSS. WE HAVE HEARD BOTH SIDES ON THIS ISSUE, AFTER HEARI NG WE HOLD THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA P. L TD. REPORTED IN 312 ITR 254 (SC) HAS HELD AS UNDER :- LOSS SUFFERED BY THE ASSESSEE ON ACCOUNT OF FLU CTUATION IN THE RATE OF FOREIGN EXCHANGE AS ON THE DATE OF T HE BALANCE- SHEET IS AN ITEM OF EXPENDITURE UNDER SECTION 37(1) OF THE INCOME-TAX ACT, 1961. DECISION OF THE DELHI HIGH COURT IN CIT V. WOODWAR D GOVERNOR INDIA P. LT. [2007] 294 ITR 451 AFFIRMED. FOR VALUING THE CLOSING STOCK AT THE END OF A PARTI CULAR YEAR, THE VALUE PREVAILING ON THE LAST DATE IS RELE VANT. THIS IS BECAUSE PROFIT/LOSS IS EMBEDDED IN THE CLOSING STOC K. WHILE ANTICIPATED LOSS IS TAKEN INTO ACCOUNT, ANTICIPATED PROFIT IN THE SHAPE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO ACCOUNT, AS NO PRUDENT TRADER WOULD CARE TO SH OW INCREASE IN PROFITS BEFORE ACTUAL REALIZATION. THIS IS THE T HEORY UNDERLYING THE RULE THAT CLOSING STOCK IS TO BE VAL UED AT COST OR MARKET PRICE WHICHEVER IS LOWER. DECISION OF THE DELHI HIGH COURT AFFIRMED. ITA NO.4712 & 4894/DEL./2010 7 THE EXPRESSION 'ANY EXPENDITURE' HAS BEEN USED IN SECTION 37 OF THE ACT, 1961, TO COVER BOTH 'EXPENS ES INCURRED' AS WELL AS AN AMOUNT WHICH IS REALLY A 'LOSS' EVEN THOUGH SUCH AMOUNT HAS NOT GONE OUT FROM THE POCKET OF THE ASSE SSEE. PROFITS AND GAINS OF THE PREVIOUS YEAR ARE REQUIRED TO BE COMPUTED IN ACCORDANCE WITH THE RELEVANT ACCOUNTING STANDARD. ON GENERAL PRINCIPLES OF COMMERCIAL ACCOUNTING, THE VALUE OF THE STOCK-IN-TRADE AT THE BEGINNING AND AT THE END OF THE ACCOUNTING YEAR SHOULD BE ENTERED IN THE PROFIT AND LOSS ACCOUNT AT COST OR MARKET PRICE, WHICHEVER IS LOWER -THE MARKET VALUE BEING ASCERTAINED ON THE LAST DATE OF THE ACC OUNTING YEAR, NOT AT ANY INTERMEDIATE DATE. NO GAIN OR PROFIT CA N ARISE UNTIL A BALANCE IS STRUCK BETWEEN THE COST OF ACQUISITION A ND THE PROCEEDS OF SALE. THE WORD 'PROFITS' IMPLIES A COMP ARISON BETWEEN THE STATE OF BUSINESS AT TWO SPECIFIC DATES , USUALLY SEPARATED BY AN INTERVAL OF TWELVE MONTHS. STOCK-IN -TRADE IS AN ASSET: IT IS A TRADING ASSET. THEREFORE, THE CONCE PT OF PROFITS AND GAINS MADE BY A BUSINESS DURING THE YEAR CAN ONLY M ATERIALIZE WHERE A COMPARISON OF THE ASSETS OF THE BUSINESS AT TWO DIFFERENT DATES ARE TAKEN INTO ACCOUNT. UNDER THE MERCANTILE SYSTEM OF ACCOUNTING, WHAT IS DUE IS BROUGHT INTO CREDIT BEFORE IT IS ACTUALLY RECEIV ED : IT BRINGS INTO DEBIT AN EXPENDITURE FOR WHICH A LEGAL LIABILI TY HAS BEEN INCURRED BEFORE IT IS ACTUALLY DISBURSED. UNITED COMMERCIAL BANK V. CIT [1999] 240 ITR 355 (SC) FOLLOWED. . THE ACCOUNTING METHOD FOLLOWED BY AN ASSESSEE CONTI NUOUSLY FOR A GIVEN PERIOD OF TIME HAS TO BE PRESUMED TO BE CORRECT TILL THE ASSESSING OFFICER COMES TO THE CONCLUSION FOR R EASONS TO BE GIVEN THAT THE SYSTEM DOES NOT REFLECT TRUE AND CORRECT PROFITS. AS DECIDED BY HON'BLE APEX COURT, WE FIND NO FAUL T IN THE ORDER OF THE CIT(APPEALS). GROUND NO. 2 OF REVENUES APPEAL IS DISMISSED. ITA NO.4712 & 4894/DEL./2010 8 15. THE ISSUE INVOLVED IN GROUND NO. 4 IS AGAINST THE DELETION OF ADDITION OF RS.1,11,09,070/- MADE BY THE AO ON ACCOUNT OF RESEARCH & DEVELOPMENT EXPENDITURE. DURING THE YEAR, THE ASSESSEE COMPANY HAS CLAIMED EXPENSES OF RS. 2,22,18,140/- FOR CARRY ING OUT SCIENTIFIC RESEARCH ON IN HOUSE RESEARCH AND DEVELOPMENT FACILITIES. THE DEDUCTION U/S 35(2AB) WAS MADE. THE ASSESSEE CLAIMED THE DEDUCTION @ 150% OF THE EXPENSES AMOUNTING TO RS. 3,33,27,210/- AS PROVIDED IN SECT ION 35(2AB). AO DISALLOWED THE CLAIM BY HOLDING THAT NOTHING SUBMIT TED TO SUBSTANTIATE THE EXTEND OF CLAIM AND HELD THAT R&D EXPENDITURE WERE ONLY OF RS.21,91,211/-. CIT (A) GRANTED RELIEF BY HOLDING AS UNDER : THERE HAS BEEN DEDUCTION ALLOWED FOR R&D EXPENSE E VER SINCE THE BEGINNING AND UPTO ASSESSMENT YEAR 2004-05. TH E DISALLOWANCE OF R&D WAS DONE FOR THE FIRST TIME IN ASSESSMENT YEAR IN QUESTION. ON THE BASIS OF THE SAME, THE R& D EXPENSE HAVE BEEN DISALLOWED FOR ASSESSMENT YEAR 2006-07 AN D 2007- 08 ALSO WHICH ARE IN APPEAL. THE ASSESSMENT YEAR 2004-05 IS ALSO IN APPEAL BEFOR E YOUR GOODSELF WHICH WAS ASSESSED UNDER SECTION 143(3) R. W.S. 148. IT CAN BE NOTICED THAT THERE WAS NO DISALLOWANCE OF R& D EXPENSE. THUS ON A PERUSAL AND CONSIDERATION OF THE ALL THE ABOVE SUBMISSION AND SUPPORTING EVIDENCES FILED ON RECORD I FIND THAT THE ASSESSEE THE ASSESSEE COMPANY SATISFIES THE CON DITIONS LAID DOWN UNDER THE PROVISIONS OF SECTION 35(2AB) OF INC OME TAX ACT, 1961 AND I FIND NO JUSTIFICATION IN DISALLOWIN G THE CLAIM OF THE APPELLANT FOR 150% WEIGHTED DEDUCTION ON R&D EX PENSES. ACCORDINGLY, THE ADDITION OF RS.1,11,09,070/- HEREB Y DELETED. 16. WE HAVE HEARD BOTH THE SIDES ON THE ISSUE AND HAD GONE THROUGH THE ORDER OF THE CIT(APPEALS). THE RELIEF HAS BEEN GRANTED BY CIT (A) IN ITA NO.4712 & 4894/DEL./2010 9 THE ABSENCE OF ANY RELIABLE SUPPORTING EVIDENCE IN RESPECT OF THE ALLOCATION OF EXPENSES. THE EXTENT OF EXPENSES PERTAINING TO THE HEAD RESEARCH & DEVELOPMENT HAD NOT BEEN ESTABLISHED. THE CIT(APP EALS)S MAIN RELIANCE ON THE RECOGNITION OF MINISTRY OF SCIENCE & TECHNOL OGY FOR R&D FACILITIES, CANNOT BE A SOLE BASIS FOR JUSTIFICATION OF E XTENT OF THE QUANTUM OF EXPENSES INCURRED. ASSESSEE HAD TO SATISFY WITH RE LIABLE DOCUMENTS THAT THESE EXPENSES WERE FOR R&D. ONUS IS ON THE ASSESSEE T O ESTABLISH BEYOND ANY DOUBT THAT ALL THE EXPENSES CLAIMED UNDER THIS HEAD WERE INCURRED FOR R&D ONLY. THE ASSESSEE HAS ALLOCATED SALARY OF RS .1,44,73,616/- TOWARDS R&D. BUT THE DETAILS FILED IN THE PAPER BOOK W HICH WERE ALSO MADE AVAILABLE TO THE AUTHORITIES BELOW ONLY SHOW THE PA YMENT BUT WHETHER THESE PERSONS WERE DOING ONLY R&D WORK IS NOT ESTABLISHED . HOW THESE PERSONS WERE RELATED WITH R&D WORK? WHAT FUNCTIONS ARE P ERFORMED BY THESE PERSONS? WHAT WERE THEIR QUALIFICATIONS AND HOW THEY ARE RECRUITED? WHAT WAS THE ADVERTISEMENT FOR THESE RECRUITMENTS? ASS ESSEE HAD TO ESTABLISH BEYOND ANY DOUBT THAT THESE PERSONS WERE DOING ONLY R&D WORK DURING THE RELEVANT PERIOD. SIMILARLY, THE ALLOCATION OF THE RENT OF THE PREMISES TOWARDS THE R&D IS ON AD-HOC BASIS. WHAT WORK OF R&D WAS CARRIED OUT FROM THESE PREMISES IS NOT ESTABLISHED. THE SAME IS IN THE CASE IN RESPECT OF ELECTRICITY CHARGES PERTAINING TO THESE PREMISES. ASSESSEE HAS TO ESTABLISH THAT PERSONS TO WHOM SALARY PAID WERE RECRUITED FOR R&D AND THEY ARE ITA NO.4712 & 4894/DEL./2010 10 FUNCTIONING ONLY FOR R&D DURING THE RELEVANT PERIOD . SIMILARLY, ASSESSEE HAS TO ESTABLISH THAT PREMISES HAVE BEEN EXCLUSIVELY US ED FOR R&D FOR WHICH RENT IS PAID OR ALLOCATED. KEEPING ALL THESE FACTS IN VIEW AND IN THE INTEREST OF JUSTICE AND EQUITY, WE SET ASIDE THIS ISSUE TO THE FILE OF THE AO FOR DECIDING DE-NOVO AFTER PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE ASSESSEE SHALL BE AT LIBERTY TO SUBMIT AL L THE RELEVANT DETAILS IN RESPECT OF ITS CLAIM. 17. IN THE RESULT, THE APPEAL IN ITA NO. 4894/DEL/ /2010 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 18. TO SUM UP: THE APPEAL IN ITA NO. 4712(DEL)/ 2010 IS DISMISSED AND THE APPEAL IN ITA NO. 4894(DEL)/2010 IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 26 TH DAY OF AUGUST, 2011. SD/- SD/- (RAJPAL YADAV) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 26 TH DAY OF AUGUST, 2011 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A)-XIII, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.