DCIT 9(3)(2), MUMBAI V. FUTURE AXIOM TELECOM LTD, MUMBAI

ITA 4722/MUM/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0132 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-07-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 05-07-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 20-08-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T A KHAN
• Keywords: Depreciation; Non-deduction of tax; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'F' BENCH, MUMBAI BEFORE SHRI P K BANSAL, VICE PRESIDENT AND SHRI D.T. GARASIA, JUDICIAL MEMBER ITA NOS. 4720, 4721 & 4722 /MUM/2015 (ASSESSMENT YEARS: 2008-09, 2010-11 & 2011-02) D C I T - 9(3)(2) VS. M/S. FUTURE AXIOM TELECOM LTD. 2ND FLOOR, AAYAKAR BHAVAN M.K. MARG, MUMBAI 400020 KNOWLEDGE HOUSE, OFF JOGESHWAR I VIKHROLI LINK ROAD, SHYAM NAGAR JOGESHWARI (E), MUMBAI 400060 PAN AACCC7717P APPELLANT RESPONDENT APPELLANT BY: SHRI T.A. KHAN RESPONDENT BY: NONE DATE OF HEARING: 05.07.2017 DATE OF PRONOUNCEMENT: 05.07.2017 O R D E R PER BENCH THESE APPEALS HAVE BEEN FILED BY THE REVENUE AGAINS T THE RESPECTIVE ORDERS OF THE CIT(A)-16, MUMBAI DATED 20.05.2015. 2. THE COMMON GROUNDS RAISED BY THE ASSESSEE IN ALL TH E APPEALS READS AS UNDER: - I) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE LD. CIT-(A) IS RIGHT IN LAW IN IGNORING THE LEGAL POSIT ION THAT SECTION 40 OF THE INCOME TAX PROVIDES FOR DEDUCTION OF TDS ON ALL AMOUNTS ALLOWABLE U/S 30 TO 38 (INCLUSIVE OF SECTION 32) AN D SINCE NO TDS HAD BEEN DEDUCTED ON THE PAYMENT MADE FOR THE ACQUI SITION OF INTANGIBLE ASSET WHICH FALLS UNDER THE DEFINITION ' ROYALTY' AS PER SECTION 9 OF THE ACT, THUS, THE SAME WAS LIABLE FOR DISALLOWANCE.' II) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT-(A) IS RIGHT IN DELETING THE ADDITION MADE BY T HE ASSESSING OFFICER FOR NON-DEDUCTION OF TDS ON ACQUISITION OF INTANGIB LE ASSET WHICH FALL UNDER THE DEFINITION OF ROYALTY. TDS DEDUCTION HAS TO BE DEDUCTED AT THE RATES PRESCRIBED UNDER CHAPTER XVIIB OF THE AC T AND AS THE ASSESSEE DID NOT DEDUCT THE TAX AT THE PRESCRIBED R ATE, THE SAME WAS LIABLE FOR DISALLOWANCE AS RIGHTLY DONE BY THE ASSE SSING OFFICER' ITA NOS. 4720 TO 4722/MUM/2015 M/S. FUTURE AXIOM TELECOM LTD. 2 3. THE SHORT FACTS OF THE CASE ARE THAT DURING THE ASS ESSMENT PROCEEDINGS FOR A.Y. 1010-11 IT WAS FOUND THAT THE ASSESSEE CLAIMED DEPRECIATION OF ` 2,81,25,000/- UNDER THE HEAD TRADE MARK, COPY RIGHT AND PATENT. THE ASSESSEE WAS ASKED TO FURNISH DETAI LED NOTE ON TRADE MARK AND RIGHTS AS APPEARING IN THE BOOKS OF ACCOUN T WITH EMPHASIS TO TAX DEDUCTED AT SOURCE ON THIS PAYMENT TO PANTALOON RET AIL INDIA LTD. THE AO FOUND THAT IN THIS CASE THE ASSESSEE HAS NOT DEDUCT ED TAX AT SOURCE UNDER SECTION 194J. THE ASSESSEE CONTENDED THAT SECTION 1 94J IS NOT APPLICABLE IN THE PRESENT CASE BUT AO WAS OF THE VIEW THAT SEC TION 194J IS APPLICABLE TO TRADE MARK AND COPY RIGHTS BECAUSE IT IS EXPLICI TLY FIND PLACE IN THE DEFINITION OF ROYALTY AS MENTIONED IN SECTION 9 OF THE INCOME TAX ACT, 1961. THEREFORE, DISALLOWANCE UNDER SECTION 40(A)(I A) WAS MADE ON ACCOUNT OF NON-COMPLIANCE OF PROVISIONS OF SECTION 194J. 4. WHEN THE MATTER WAS BROUGHT TO THE CIT(A), THE CIT( A) ALLOWED THE CLAIM OF THE ASSESSEE BY OBSERVING AS UNDER: - 3.3 . 1 1 HAVE CONSIDERED THE SUBMISSIONS AND CAREFULLY P ERUSED THE RELEVANT MATERIAL ON RECORD. THE ASSESSING OFFICER HAS DISALLOWED THE CLAIM OF DEPRECIATION ON THE GROUND THAT THE ASSESS EE HAS NOT DEDUCTED THE TAX AT SOURCE WHILE MAKING PAYMENT FOR PURCHASE OF 'TRADE MARK AND COPY RIGHTS' BY ATTRACTING SECTION 40(A)(IA) OF THE INCOME-TAX ACT, 1961. THE AO CONCLUDED THAT 'TRADE MARK AND COPY RIGHTS' COVERED IN THE DEFINITION OF ROYALTY AS MEN TIONED IN THE SECTION 9 OF THE INCOME TAX ACT, 1961; HENCE LIABLE TO DEDUCT TDS U/S 194J OF THE INCOME TAX ACT, 1961. THE APPELLANT CON TENDED THAT IT HAS ACQUIRED AN ENTIRE BUSINESS ALONG WITH THAT CER TAIN VALUABLE INFORMATION IN THE NATURE OF KNOWHOW. THE APPELLANT SUBMITTED THAT PURCHASE OF 'TRADE MARK AND COPY RIGHTS' UNDER THE BUSINESS PURCHASE AGREEMENT CANNOT BE CONSIDERED AS PAYMENT TOWARDS ROYALTY. THE AR OF THE APPELLANT CONTENDED THAT SIN CE THE APPELLANT HAS NOT CLAIMED THE ENTIRE AMOUNT AS REVENUE EXPEND ITURE; BUT HAS CAPITALIZED THE SAME AND CLAIMED ONLY DEPRECIATION U/S 32(1)(II); THER EFORE, PROVISIONS OF SEC. 40(A) (IA) SHALL NOT APPLY. SECTION 40(A)(IA) CONTEMPLATES THAT ANY INTEREST, ROYALTY, FEE FOR TECHNICAL SERVICES OR OTHER SUM CHARGEABLE UNDER THIS ACT, ON WHICH TAX IS DEDUCTIBLE AT SOURCE AND SUCH TAX HAS NOT BEEN DEDU CTED OR, AFTER DEDUCTION, HAS NOT BEEN PAID, THE AMOUNT OF INTERES T, ROYALTY, FEE FOR TECHNICAL SERVICES AND OTHER SUM SHALL NOT BE DEDUC TED IN COMPUTING ITA NOS. 4720 TO 4722/MUM/2015 M/S. FUTURE AXIOM TELECOM LTD. 3 THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS & GAI NS OF BUSINESS OR PROFESSION'. THIS CONDITION OF DEDUCTIBILITY HAS BE EN STIPULATED U/S 40 NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SECTION 30 TO 38 OF THE ACT. SEC. 40 BEGINS WITH NON-OBSTANTE CLAUSE; THERE FORE, IT IS AN OVERRIDING EFFECT TO THE PROVISIONS OF SEC. 30 TO 3 8 OF THE I T ACT. THE QUESTION ARISES IS WHETHER ANY AMOUNT WITHOUT DEDUC TION OF TAX AT SOURCE AND THE ASSESSEE HAS CAPITALIZED THE SAME IN THE INTANGIBLE ASSETS AND CLAIMED ONLY DEPRECIATION IS SUBJECTED T O THE PROVISIONS OF SEC. 40(A)(IA) OR NOT?. 3.3.2 IT IS MANIFEST FROM THE PLAIN READING OF PROV ISIONS OF SEC. 40(A)(IA) THAT AN AMOUNT PAYABLE TOWARDS INTEREST, ROYALTY, FEE FOR TECHNICAL SERVICES OR OTHER SUMS CHARGEABLE UNDER T HIS ACT SHALL NOT BE DEDUCTED WHILE COMPUTING THE INCOME UNDER THE HE AD PROFIT AND GAIN OF BUSINESS OR PROFESSION ON WHICH TAX IS DEDU CTIBLE AT SOURCE; BUT SUCH TAX HAS NOT BEEN DEDUCTED. THE EXPRESSION A MOUNT PAYABLE' WHICH IS OTHERWISE AN ALLOWABLE DEDUCTION REFERS TO THE EXP ENDITURE INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSE E AND THEREFORE, TH E SAID EXPENDITURE IS A DEDUCTIBLE CLAIM. THUS, SEC TION 40 REFERS TO THE OUTGOING AMOUNT CHARGEABLE UNDER THIS ACT AND SUBJECT TO TDS UNDER CHAPTER XVII-B. THERE IS A DIFFERENCE BETWEEN THE EXPENDITURE AND OTHER KIND OF DEDUCTION. THE OTHER KIND OF DEDU CTION WHICH INCLUDES ANY LOSS INCIDENTAL TO CARRYING ON THE BUS INESS, BAD DEBTS ETC., WHICH ARE DEDUCTIBLE ITEMS ITSELF NOT BECAUSE AN EXPENDITURE WAS LAID OUT AND CONSEQUENTIALLY ANY SUM HAS GONE OUT; ON THE CONTRARY THE EXPENDITURE RESULTS A CERTAIN SUMS PAYABLE AND GOES OUT OF THE BUSINESS OF THE ASSESSEE. THE SUM, AS CONTEMPLATED UNDER SEC. 40(A)(IA) IS THE OUTGOING AMOUNT AND THEREFORE, NEC ESSARILY REFERS TO THE OUTGOING EXPENDITURE. DEPRECIATION IS A STATUTO RY DEDUCTION AND AFTER THE INSERTION OF EXPLANATION 5 TO SEC. 32, IT IS OBLIGATORY ON THE PART OF THE ASSESSING OFFICER TO ALLOW THE DEDUCTIO N OF DEPRECIATION ON THE ELIGIBLE ASSET IRRESPECTIVE OF ANY CLAIM MADE B Y THE ASSESSEE. THEREFORE, DEPRECIATION IS A MANDATORY DEDUCTION ON THE ASSET WHICH IS WHOLLY OR PARTLY OWNED BY THE ASSESSEE AND USED FOR THE PURPOSE OF BUSINESS OR PROFESSION WHICH MEANS THE DEPRECIAT ION IS A DEDUCTION FOR AN ASSET OWNED BY THE ASSESSEE AND USED FOR THE PURPOSE OF BUSINESS AND NOT FOR INCURRING OF ANY EXPENDITURE. THE DEDUCTION U/S 32 IS NOT IN RESPECT OF THE AMOUNT PAID OR PAYABLE WHICH IS SUBJECTED TO TDS; BUT IS A STATUTORY DEDUCTION ON AN ASSET WH ICH IS OTHERWISE ELIGIBLE FOR DEDUCTION OF DEPRECATION. DEPRECIATION IS NOT AN OUTGOING EXPENDITURE AND THEREFORE, THE PROVISIONS OF SEC. 4 0(A)(IA) OF THE ACT ARE NOT ATTRACTED ON SUCH DEDUCTION. THIS VIEW HAS BEEN FORTIFIED BY THE FOLLOWING DECISIONS: THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF 'MARK AUTO INDUSTRIES LTD. VS. CIT (2013) 358 ITR 43 (P&H)' HE LD THAT THE PROVISIONS FOR DISALLOWANCE FOR FAILURE TO DEDUCT T AX AT SOURCE ARE NOT APPLICABLE TO EXPENDITURE WHICH ARE CAPITALIZED AND NOT CLAIMED AS REVENUE EXPENDITURE. ITA NOS. 4720 TO 4722/MUM/2015 M/S. FUTURE AXIOM TELECOM LTD. 4 IN THE CASE OF 'CRESCENT CHEMSOL PVT. LTD. VS. ACIT (ITA NO. 1497/MUM/ 2010) WHEREIN ITAT MUMBAI HELD THAT 'PROV ISION OF SECTION 40(A)(IA) OF THE INCOME TAX ACT 1961 READS AS FOLLOWS: '40. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SE CTION 30 TO 38, THE FOLLOWING AMOUNTS SHALL NOT BE DEDUCTED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFIT AND GAINS OF BUSINESS OR PROFESSION', (IA) ANY INTEREST, COMMISSION OF BR OKERAGE, RENT, ROYALTY, FEES FOR PROFESSIONAL SERVICES OR FEES FOR TECHNICAL SERVICES PAYABLE TO A RESIDENT, OR AMOUNT PAYABLE T O A CONTRACTOR OR SUB-CONTRACTOR, BEING RESIDENT, FOR CARRYING OUT ANY WORK (INCLUDING SUPPLY OF LABOUR FOR CARRYING OUT ANY WO RK), ON WHICH TAX IS DEDUCTIBLE AT SOURCE UNDER CHAPTER XV11-8 AN D SUCH TAX HAS BEEN DEDUCTED OR, AFTER DEDUCTION, HAS NOT BEEN PAID ON OR BEFORE THE DUE DATE SPECIFIED IN SUB-SECTION (1) OF SECTION 139' AS PERUSAL OF THE ABOVE PROVISIONS SHOWS THAT IT I S ONLY WHEN DEDUCTION IS CLAIMED IN COMPUTING THE INCOME CHARGE ABLE UNDER THE HEAD PROFIT AND GAINS OF BUSINESS OR PROFESSIO N THAT THE ABOVE PROVISIONS ARE ATTRACTED. THE DEDUCTION CLAIM ED SHOULD BE OF INTEREST, COMMISSION OR BROKERAGE, RENT, ROYALTY , FEES FOR PROFESSIONAL SERVICES OR FESS FOR TECHNICAL SERVICE S. THE CLAIM FOR DEPRECIATION MADE BY THE ASSESSEE DOES NOT FALL WIT HIN ANY OF THE CATEGORIES MENTIONED IN THE AFORESAID PROVISION . THEREFORE, IT IS NOT POSSIBLE TO MAKE THE IMPUGNED DISALLOWANCE B Y RESORTING TO PROVISION OF SECTION 40(A)(IA) OF THE ACT. THE L EARNED D.R. HOWEVER SUBMITTED THAT PROVISIONS OF SECTION 40(A) (IN) OF THE ACT WERE HELD TO APPLY EVEN TO CAPITAL EXPENDITURE BY T HE ITAT MUMBAI IN SPACO CARBURETORS (I) LTD. VS. ACIT 2005 (SOT) 798 (MUM). WE FIND THAT THE SAID DECISION WAS RENDERED IN THE CONTEXT OF DEDUCTION OF CAPITAL EXPENDITURE WHILE C OMPUTING INCOME, CLAIMED BY AN ASSESSEE U/S 35AB OF THE ACT. WE THEREFORE DO NOT FIND ANY RELEVANCE TO THE SAID DEC ISION TO THE PRESENT CASE. IN THAT VIEW OF THE MATTER WE DIRECT THAT THE DISALLOWANCE MADE BE DELETED.' 3.3.3 IN VIEW OF THE ABOVE DISCUSSION AS WELL AS FO LLOWING THE ABOVE JUDICIAL PRONOUNCEMENT, THIS GROUND OF APPEAL IS ALLOWED. 5. NONE APPEARED ON BEHALF OF THE ASSESSEE. HAVING HEA RD THE LEARNED D.R. WE HAVE GONE THROUGH THE ORDER OF THE CIT(A) A ND WE FIND THAT THE CIT(A) HAS RELIED UPON THE DECISION OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF MARK AUTO INDUSTRIES LTD. VS. CIT (2013) 358 ITR 43 (P&H) WHEREIN IT IS HELD THAT THE PROVISIONS FOR DI SALLOWANCE FOR FAILURE TO DEDUCT TAX AT SOURCE ARE NOT APPLICABLE TO THE EXPE NDITURE WHICH ARE CAPITALISED AND NOT CLAIMED AS REVENUE. DURING THE COURSE OF HEARING WE ITA NOS. 4720 TO 4722/MUM/2015 M/S. FUTURE AXIOM TELECOM LTD. 5 HAVE ALSO ASKED THE LEARNED D.R. WHETHER THE ASSESS EE HAS CAPITALISED THIS EXPENDITURE OR WHETHER THE ASSESSEE HAS CLAIMED THI S EXPENDITURE AS REVENUE EXPENDITURE. THE LEARNED D.R. FAIRLY CONCED ED THAT THE ASSESSEE HAS CAPITALISED THIS EXPENDITURE. THEREFORE, IN OUR OPINION THE CIT(A) IS JUSTIFIED IN HOLDING THAT SECTION 40(A)(IA) IS THE OUTGOING AMOUNT AND THEREFORE, NECESSARILY REFERS TO THE OUTGOING EXPEN DITURE. DEPRECIATION IS A STATUTORY DEDUCTION AND AFTER THE INSERTION OF EXPL ANATION 5 TO SEC. 32, IT IS OBLIGATORY ON THE PART OF THE ASSESSING OFFICER TO ALLOW THE DEDUCTION OF DEPRECIATION ON THE ELIGIBLE ASSET IRRESPECTIVE OF ANY CLAIM MADE BY THE ASSESSEE. DEPRECIATION IS AN OUTGOING EXPENDITURE, THEREFORE, PROVISIONS OF SECTION 40(A)(IA) ARE NOT ATTRACTED ON SUCH DEDUCTI ON. 6. IN THE RESULT, APPEALS FILED BY THE REVENUE ARE DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 5 TH JULY, 2017. SD/ - SD/ - (P.K. BANSAL) (D.T. GARASIA) VICE PRESIDENT JUDICIAL MEMBER MUMBAI, DATED: 5 TH JULY, 2017 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) -16, MUMBAI 4. THE CIT - 9, MUMBAI 5. THE DR, F BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.