ACIT, New Delhi V. M/s Tekriti Software Pvt. Ltd., New Delhi

ITA 521/DEL/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77674 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 09-04-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 31-01-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: JITENDER CHANANA
• Assessee Lawyers: SAMEER SHARMA
• Keywords: Capital asset; Opportunity of being heard; Revenue expenditure

Judgement Text

ITA N O.521/DEL/11 IN C.O NO.57/DEL/11 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: H NEW DELHI BEFORE SMT DIVA SINGH, JUDICIAL MEMBER AND SHRI B.C.MEENA, ACCOUNTANT MEMBER I.T.A .NO.-521/DEL/2011 IN C.O.-57/DEL/2011 (ASSESSMENT YEAR-2007-08) DCIT, CIRCLE-16(1), NEW DELHI. (APPELLANT) VS M/S TEKRITI SOFTWARE PVT. LTD., 205, PRABHAVI APARTMENTS, PLOT NO-29B, SECTOR-10, DWARKA, NEW DELHI-110075. PAN-AACCT3650J (RESPONDENT) APPELLANT BY: SH.JITENDER CHANANA, FCA RESPONDENT BY: SH. SAMEER SHARMA, SR. DR ORDER PER DIVA SINGH, JM THE PRESENT APPEAL HAS BEEN FILED BY THE REVENUE A GAINST THE ORDER DATED 10.11.2010 OF CIT(A)-XIX, NED DELHI PERTAININ G TO 200708 ASSESSMENT YEAR ON THE FOLLOWING GROUNDS:- THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW BY DE LETING DISALLOWANCE OF RS.53,11,973/- IGNORING: (I) THE FINDING OF THE AO IN THE ASSESSMENT ORDER THAT THE ASSESSEE FAILED TO PROVE THE GENUINENESS OF EXPENSES OF RS.53,11,973/- CLAIMED IN RESPECT OF THE CONCERNED UNIT. (II) THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE, TH E BUSINESS OF THE CONCERNED UNIT CAN ONLY BE CONSIDERED TO HAVE COMME NCED ON 31.03.20007 AND THE EXPENSES OF RS.53,11,973/- CLAIMED TO HAVE BEEN INCURRED BEFORE THAT DATE ARE IN THE NATURE OF PREOPERATIVE EXPENSES WHI CH CANNOT BE CLAIMED AS REVENUE EXPENDITURE BUT HAVE TO BE CAPITALIZED. 2. THE ASSESSEE HAS COME IN C.O. IN SUPPORT OF THE IMPUGNED ORDER. THE RELEVANT FACTS OF THE CASE ARE THAT THE ASSESSEE DE CLARED AN INCOME OF RS.6,56,060/- ITA N O.521/DEL/11 IN C.O NO.57/DEL/11 2 WHICH WAS SELECTED FOR SCRUTINY AFTER ISSUANCE OF N OTICE U/S 143(2). THE NATURE OF THE ASSESSEES BUSINESS AS NOTED BY THE AO IN PARA- 2 IS THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT IN THE FIELD OF INFORMATION TECHNOLOGY. THE AO CONSIDERING THE REPLY OF THE A SSESSEE IN RESPONSE TO QUERY RAISED FOR FURNISHING THE DETAILS FOR BOTH THE UNI TS I.E STPI UNIT-1 &2 DISALLOWED PRE-OPERATIVE EXPENSES OF UNIT-2 CLAIMED BY THE ASS ESSEE VIDE PARA 4 AT PAGES 2 TO 5. THE AO OBSERVED THAT WHEREAS FOR UNIT-1 INCOME R IGHT FROM APRIL 2006 TO MARCH 2007 WAS SHOWN FOR UNIT-2 INCOME OF RS41,16,0 00/- WAS SHOWN ONLY IN THE MONTH OF MARCH 2007. THESE FACTS ARE TABULATED AT PAGES 2 & 3 OF THE ASSESSMENT ORDER. THE AO FURTHER TOOK NOTE OF THE FACT THAT T HE EXPENSES FOR UNIT-2 ON THE OTHER HAND HAVE BEEN INCURRED FROM 01.04.2006 TO 31 .03.2007 AMOUNTING TO RS53,11,973.70/-. IN THE CIRCUMSTANCES THE AO REQU IRED THE ASSESSEE TO EXPLAIN THE SAME. CONSIDERING THE REPLY DISALLOWANCE WAS MADE IN THE FOLLOWING MANNER:- FROM THE DETAILS OF MONTH WISE INCOME OF BOTH THE UNITS, IT WAS FOUND THAT THE UNIT-II OF THE ASSESSEE HAS SHOWN INCOME ON ONLY ON E MONTH I.E. MARCH, 2007, HOWEVER THE EXPENSES OF ENTIRE YEAR HAVE BEEN BIFURCATED AN D TOTAL EXPENSE OF RS.53,11,973/- HAVE BEEN ALLOCATED FOR UNIT0II AND A LOSS OF RS.11,95,9 73/- HAS BEEN SHOWN IN UNIT-II. THE ASSESSEE WAS ASKED TO FURNISH THE SALE BILLS OF UNI T-II. THESE WERE FURNISHED BY THE AR AND FROM THE SAME IT WAS ASCERTAINED THAT THE SECON D UNIT HAS BOOKED BOTH THE SALES AS ON 31.03.2007 THE DATE ON WHICH THE ASSESSEE HAS MA DE FIRST AND SECOND SALE OF RS.36,00,000/- AND RS.5,16,000/-. THE AR ALSO TRIE D TO EXPLAIN THAT THE CONSTRUCTION AND ESTABLISHMENT WORK WAS CONTINUING IN THE UNIT-II TH OUGH THE FIRST SALE ON THE SAME COULD FINALLY TAKE PLACE ON 31 ST MARCH, 2007, THEREFORE, IT WAS CLAIMED THAT THE AB OVE MENTIONED EXPENSES SHOWN TO HAVE BEEN RELATED WITH UNIT-II WERE GENUINE AND THE SAME SHOULD BE ALLOWED TO BE CLAIMED. BUT THIS CONTENTI ON OF THE AR CANNOT BE ACCEPTED BECAUSE THE EXPENSES RELATED TO PRE OPERATIVE PERIO D CAN ONLY BE CAPITALIZED AND CAN NOT BE CLAIMED AGAINST THE PROFIT. FROM THE DETAILS FU RNISHED BY THE ASSESSEE IT HAS BEEN ASCERTAINED THAT THE ASSESSEE COULD MAKE SALE FROM UNIT-II ONLY ON 31.03.2007 OF TWO BILLS OF RS.36,00,000/- AND RS.5,16,000/- IN WHICH THE SALE HAS BEEN MADE TO TEK TRAVEL PVT. LTD. AND UNSOURCE INFORMATION TECHNOLOGIES PVT . LTD. RESPECTIVELY. THEREFORE, THE COMMENCEMENTS OF BUSINESS OF THE ASSESSEE OF SECOND UNIT CAN ONLY BE CONSIDERED TO HAVE TAKEN PLACE ON 31.03.2007. THUS, IT IS FINALL Y CONCLUDED THAT THE ASSESSEE FAILED TO PROVE THE GENUINENESS OF CLAIM OF EXPENSES OF UNIT- II TILL THE BUSINESS ON THAT UNIT STARTED AND HENCE, THE SAME ARE CONCLUDED TO BE PRE-OPERATI VE EXPENSES IN NATURE AND HENCE, THESE ARE ALLOWED TO BE CAPITALIZED. THEREFORE, TH E DISALLOWANCE OF RS.53,11,973/- IS MADE AND IS ADDED TO THE TOTAL INCOME OF THE ASSESS EE. PENALTY PROCEEDINGS U/S 271(1)(C) ITA N O.521/DEL/11 IN C.O NO.57/DEL/11 3 OF THE I.T. ACT, 1961, ARE INITIATED FOR CONCEALIN G AND FILLING INACCURATE PARTICULARS OF INCOME. (DISALLOWANCE :RS.53,11,973) 3. AGGRIEVED BY THIS THE ASSESSEE WENT IN APPEAL BE FORE THE FIRST APPELLATE AUTHORITY WHO CONSIDERING THE SUBMISSIONS ADVANCED BY THE ASSESSEE DECIDED THE ISSUE IS ASSESSEES FAVOUR IN THE FOLLOWING MANNER: - 11. I HAVE GONE THROUGH THE ASSESSMENT OR DER AND THE DETAILED WRITTEN SUBMISSIONS FILED BY THE AR IN TH IS REGARD. 12.1 AS ALREADY STATED THE ASSESSEE IS IN THE BUSINESS O F SOFTWARE DEVELOPMENT IN THE FIELD OF INFORMATION TECHNOLOGY DURING THE ASST . YEAR 2007-08. THE APPELLANT COMPANY HAD BEEN OPERATING UNDER TWO DIFF ERENT UNITS, NAMELY STPI UNIT AND THE OTHER UNIT-II, WHICH CATERS TO THE DOM ESTIC CLIENTS. 12.2 IN THE UNIT-II, THE ASSESSEE HAD SHOWN SALES OF RS. 41,16,000/- AND INCURRED EXPENSES OF RS.53,11,973/-. THE ASSESSEE HAD ENTER ED INTO SOFTWARE DEVELOPMENT CONTRACTS WITH TWO PARTIES VIZ. M/S TEK TRAVEL PVT. LTD. & M/S USOURCE INFORMATION TECHNOLOGIES PVT. LTD. AND RAIS ED SALE BILLS ON 31/3/2007 FOR RS.36,00,000/- AND 5,16,000/- (TOTALING TO RS.4 1,16,000/-) RESPECTIVELY. THE ASSESSEE HAS BEEN INCURRING EXPENSES ON THESE D EVELOPMENT PROJECTS FROM 1/4/2006. THE AO TREATED THE ENTIRE EXPENSES OF RS .53,11,973/- AS PRE OPERATIVE EXPENSES ON THE GROUND THAT THE UNIT-II H AS COMMENCED ITS BUSINESS ACTIVITY ONLY ON 31/3/2007. 12.3 THE MAIN CONTENTION OF THE AR IS THAT THE BUSINESS WAS COMMENCED IN UNIT-II FROM APRIL, 2006 AND STARTED WORKING ON THE PROJECT IN HAND AND THE ENTIRE EPXENSES ARE ALLOWABLE SINCE THE BUSINESS WAS COMME NCED AND SALES WERE MADE. 13. THE AR RELIED ON THE VARIOUS CASE LAWS AS MENTIONED IN THE WRITTEN SUBMISSIONS. 14. THE EXPENDITURE IS INCURRED FOR THE DEVELOPMENT OF SOFTWARE FOR THE TWO SAID COMPANIES AS PER THEIR REQUIREMENT. THE EXPEN DITURE INCURRED WAS OFFSET WITH THE INCOME OF RS.41,16,000/- WHICH IS N OT DISPUTED BY THE AO. IT CANNOT BE SAID THAT THE BUSINESS IS NOT COMMENCED B EFORE 31/3/2007. THE ASSESSEE HAS BEEN INCURRING EXPENDITURE SINCE APRIL , 2006. THE AO HAS MADE SOME GENERAL REMARKS THAT THE EXPENDITURE IS P RE-OPERATIVE IN NATURE. THE EXPENDITURE CANNOT BE CONSIDERED A PRE-OPERATIV E EXPENDITURE. EVEN IF THE SALE IS NOT MADE, THE EXPENDITURE IS TO BE TREA TED AS WORK IN PROGRESS FOR THE TWO PROJECTS UNDERTAKEN BY THE ASSESSEE. T HESE EXPENSES ARE NOT RELATED TO THE ACQUISITION OF CAPITAL ASSETS TO THE CAPITALIZED EITHER IN THIS YEAR OR IN THE SUBSEQUENT YEAR. THE EXPENSES ARE O N REVENUE ACCOUNT AND ARE TO BE ALLOWED IN THE ASSESSMENT YEAR SINCE THE SALES ARE EFFECTED AND CREDITED TO THE P & L ACCOUNT WHICH ARE NOT DISPUTE D BY THE AO. I AM IN AGREEMENT WITH THE CONTENTIONS OF THE AR. THE ACTI ON OF THE AO IS NOT UPHELD. ITA N O.521/DEL/11 IN C.O NO.57/DEL/11 4 4. AGGRIEVED BY THIS THE REVENUE IS IN APPEAL BEFOR E THE TRIBUNAL. THE LD. SR. DR, MR. SAMEER SHARMA PLACED HEAVY RELIANCE UPON THE ASSESS MENT ORDER SO AS TO CONTEND THAT THE PRE-OPERATIVE EXPENDITURE IN THE FACTS AND CIRCUMSTANCES OF THE CASE OUGHT NOT TO HAVE BEEN ALLOWED AND THE DISALLOWANCE MADE BY THE AO ON FACTS WAS JUSTIFIED. 5. LD. AR ON THE OTHER HAND CONTENDED THAT THE UNIT -2 WAS READY TO COMMENCE FROM APRIL 2006 AS SUCH THE EXPENSES CLAIM ED HAD WRONGLY BEEN CONSIDERED TO BE PRE-OPERATIVE EXPENSES. IT WAS HI S SUBMISSION THAT INFACT THE ASSESSEE HAD ENTERED INTO SOFTWARE DEVELOPMENT CONT ACTS WITH THE TEK TRAVEL PVT. LTD. AND UNSOURCE INFORMATION TECHNOLOGIES PVT. LTD . AND RAISED BILLS AS PER THE AGREEMENT ONLY IN THE MONTH OF MARCH 2007 HOWEVER E XPENSES HAD BEEN INCURRED ON THESE DEVELOPMENT PROJECTS RIGHT FROM 1/4/2006. RELIANCE WAS PLACED ON THE SUBMISSION ADVANCED BEFORE THE AUTHORITIES AND HEAV Y RELIANCE WAS PLACED UPON THE JUDGEMENT OF THE JURISDICTIONAL HIGH COURT IN THE C ASE OF CIT VS ESPN SOFTWARE INDIA PVT. LTD. (2009) 184 TAXMANN 452(DEL.) AND CI T VS ELECTRON INDIA (2001) 118 TAXMANN 190 (MAD.). 5.1. IN REPLY LD. SR. DR STATED THAT THE COPIES OF THE AGREEMENT ARE NOT AVAILABLE WITH THE DEPARTMENT AND THERE IS NO REFER ENCE THERETO BEFORE THE AO. FURTHER IT WAS SUBMITTED THAT NO SUCH CLAIM WAS MAD E BEFORE THE AO HEAVY RELIANCE WAS PLACED THEREON. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN THE PECULIAR FACTS AND CIRCUMSTANCES IT IS SEEN FROM THE REPRODUCTION OF THE ASSESSMENT ORDER IT IS SEEN THAT THERE IS NO REFERENCE TO ANY AGREEMENT ENTERED INTO BY THE ASSESSEE IT IS FURTHER SEEN THA T THE CIT(A) THOUGH HAS MADE REFERENCE TO TWO AGREEMENTS HOWEVER HAS NOT GIVEN A NY CONCLUSIVE FINDING OR HAS CARED TO EXAMINE THEM SO AS TO COME A FINDING AS TO WHEN THEY WERE ENTERED INTO AND ON THE BASIS OF THE AGREEMENTS ON WHICH SPECIFI C DATE HE HAS CAME TO THE ITA N O.521/DEL/11 IN C.O NO.57/DEL/11 5 CONCLUSION THAT BUSINESS HAS COMMENCED IN APRIL 200 6. THE LD. CIT(A) ON FACTS SHOULD HAVE COME TO A SPECIFIC FINDING DISCUSSING T HE FACTS AS TO ON WHAT SPECIFIC DATE IN APRIL 2006 HE HAS COME TO THE CONCLUSION TH AT BUSINESS HAS COMMENCED. IT IS WELL-SETTLED THAT BUSINESS IS A CONTINUOUS COURS E OF ACTIVITIES AND IT HAS BEEN VARIOUSLY HELD THAT FOR COMMENCEMENT OF BUSINESS AL L THE ACTIVITIES WHICH GO TO MAKE UP THE BUSINESS NEED NOT BE STARTED SIMULTANEO USLY. WHAT IS RELEVANT IS THAT AS SOON AS AN ACTIVITY WHICH IS THE ESSENTIAL ACTI VITY IN THE COURSE OF CARRYING ON THE BUSINESS IS STARTED THE BUSINESS MUST BE SAID TO HAVE COMMENCED. FOR A MANUFACTURER WHO HAS NECESSARILY TO UNDERTAKE SEVER AL ACTIVITIES IN ORDER TO BRING THE BUSINESS TO THE STATE WHERE IT CAN PRODUCE THE GOODS A BUSINESS CAN BE SAID TO HAVE COMMENCED AS SOON AS HE UNDERTAKES FIRST OF SU CH ACTIVITIES. SIMILARLY A BUSINESS FOR A TRADE CAN BE SAID TO HAVE COMMENCED WITH PURCHASE OF STOCK IN TRADE AND PLACE FOR STORAGE AND SELLING THE SAME. IN THE FACTS OF THE CASE RELIED UPON BEFORE THE CIT(A) THE FACT OF ACQUIRING A LICENSE O N A SPECIFIC DATE FOR DISTRIBUTION BY COMPANY VIA SATELLITE HAS BEEN HELD TO BE THE D ATE ON WHICH THE BUSINESS HAD COMMENCED. THE FINDINGS ON THIS SPECIFIC FACT WAS AVAILABLE ON RECORD. IN THE FACTS OF THE PRESENT CASE THE ASSESSEE WHO IS STATE D TO BE ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT IN THE FIELD OF INFORMATION TE CHNOLOGY, THERE IS NO SUCH FINDING. NO SPECIFIC DATE HAS BEEN CONSIDERED TO B E THE DATE ON WHICH CONSIDERING THE MATERIAL ON RECORD THE BUSINESS CAN BE SAID TO HAVE COMMENCED. NEEDLESS TO SAY THAT IT IS NECESSARY FOR THE ASSESSEE TO LEAD T HIS SPECIFIC EVIDENCE IN SUPPORT OF THE ARGUMENTS THAT THE ESSENTIAL ACTIVITY HAS START ED EVIDENCED BY SOME DOCUMENT ON A SPECIFIC DATE. THE ISSUE HAS NOT BEEN CONSIDE RED IN THE PROPER PERSPECTIVE AND ONLY GENERAL ARGUMENT HAS BEEN ADVANCED WHICH HAS B EEN ACCEPTED THAT BUSINESS COMMENDED IN APRIL 2006. NO EFFORT HAS BEEN MADE T O POINT OUT THAT ON WHICH SPECIFIC DATE THE BUSINESS HAS COMMENCED. IN THE P ECULIAR FACT AND CIRCUMSTANCES OF THE CASE, IN THE ABSENCE OF ANY RELEVANT DISCUSS ION IN THE ORDERS OF THE TAX ITA N O.521/DEL/11 IN C.O NO.57/DEL/11 6 AUTHORITIES BOTH THE ORDERS ARE SET ASIDE AND WE DE EM IT APPROPRIATE TO RESTORE THE ISSUE BACK TO THE AO TO DECIDE THE ISSUE DENOVO AFT ER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY OF BEING HEARD AND ALLOWING THE ASSESSEE TO PLACE NECESSARY EVIDENCE IN SUPPORT OF ITS CLAIM IF NEED BEFORE HIM . THE SAID ORDER WAS PRONOUNCED IN THE PRESENCE OF THE PARTIES IN THE OP EN COURT AT THE TIME OF HEARING. 7. IN THE RESULT THE APPEAL OF THE REVENUE IS ALLOW ED FOR STATISTICAL PURPOSES AND CO FILED BY THE ASSESSEE IN SUPPORT THEREOF IS DISMISSED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 29 TH OF APRIL 2014. SD/- SD/- (B.C.MEENA) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEM BER DATED: 29 /04/2014 *AMIT KUMAR/R. NAHEED* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI