S.P.P.S.Systems Private Limited, Hyderabad V. Dy.CIT, Circle-3(2), Hyderabad

ITA 552/HYD/2013

• Counselvise Citation: 55222514 RSA 2013
• Duration Of Justice: 1 year(s) 8 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-01-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 06-01-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 19-04-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAJAT MITRA
• Assessee Lawyers: S RAMA RAO
• Keywords: Business income; Business expenditure; Capital expenditure
• Section: 147; 148; 37; 143(3); 234B; 37(1)

Judgement Text

ITA NOS. 551 & 552 OF 2013 SPPS SYSTEMS PRIVATE LTD HYDERABAD. PAGE 1 OF 8 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SMT.ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NOS.551 & 552/HYD/2013 (ASSESSMENT YEARS: 2004-05 & 2005-06) M/ S. S.P.P.S SYSTEMS (P) LT D HYDERABAD PAN: AAFCS 3280 E VS. DY. CIT, CIRCLE - 3(2) HYDERABAD (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI S. RAMA RAO, ADVOCATE DEPARTMENT BY: SHRI RAJAT MITRA, (DR) DATE OF HEARING: 06/01/2015 DATE OF PRONOUNCEMENT: 09/01/2015 O R D E R PER ASHA VIJAYARAGHAVAN, J.M. BOTH THESE APPEALS ARE DIRECTED AGAINST THE ORDERS OF THE CIT(A)-9, MUMBAI (CAMP AT HYDERABAD) DATED 12.02.20 13 RELATING TO A.YS 2004-05 & 2005-06. ITA NO.551/HYD/2013- A.Y 2004-05 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY IS ENGAGED IN THE BUSINESS OF DEVELOPMENT AND SALE OF SOFTWARE. IT FURNISHED ITS RETURN OF INCOME ON 31.10.2004 FOR A. Y 2004-05 DISCLOSING LOSS OF RS.6,64,940/-. THE SAID RETURN O F INCOME WAS PROCESSED U/S 143(1) OF THE ACT. THEREAFTER THE AO ISSUED A NOTICE U/S 148 OF THE ACT RECORDING THE REASONS THA T THE ASSESSEE HAD DEBITED EXPENDITURE OF RS.24,82,147/- WITHOUT E ARNING ANY ITA NOS. 551 & 552 OF 2013 SPPS SYSTEMS PRIVATE LTD HYDERABAD. PAGE 2 OF 8 BUSINESS INCOME. THE ASSESSEE HAD EARNED INTEREST I NCOME WHICH WAS ASSESSABLE UNDER THE HEAD INCOME FROM OT HER SOURCES. 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS U/S 147 OF THE ACT, THE ASSESSEE ARGUED THAT THE ASSESSEE COMP ANY EMPLOYED SOFTWARE PROFESSIONAL AND PAID SALARIES AN D INCURRED OTHER EXPENSES. IT WAS SUBMITTED THAT THE ASSESSEE COULD NOT GET ANY WORK AND HENCE NO BUSINESS RECEIPTS WERE DISCLO SED BY THE ASSESSEE DURING THE ACCOUNTING YEAR RELEVANT TO A.Y 2004-05. THE AO HELD THAT THERE WAS NO BUSINESS ACTIVITY AT ALL CARRIED ON BY THE ASSESSEE. THE AO FURTHER HELD THAT THE ASSES SEE HIMSELF HAS OFFERED INTEREST INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES AND THEREFORE, NO EXPENSES CAN BE ALLOWED U/S 37 OF THE ACT. HOWEVER, THE AO ALLOWED A SUM OF RS.3.00 LAKHS U/S 57(III) OF THE ACT AGAINST THE INTEREST INCOME OF RS.14,85, 280/- ASSESSED U/S 56 OF THE ACT UNDER THE HEAD INCOME FROM OTHER SOURCES. AGGRIEVED, THE ASSESSEE FILED APPEAL BEFORE THE CIT (A). IT WAS ARGUED BY THE AUTHORISED REPRESENTATIVE FOR THE ASS ESSEE THAT THE AO SHOULD HAVE ALLOWED THE ENTIRE EXPENDITURE D EBITED TO THE P&L A/C, BECAUSE THE ASSESSEE COMPANY WAS NOT CLOSE D. IT WAS ALSO SUBMITED THAT THE ASSESSEE COMPANY HAD DEBITED THE SALARY AND OTHER EXPENDITURE AT RS.24,82,147/- AND WAS WAI TING FOR WORK ORDERS, BUT AS THERE WAS NO BUSINESS INCOME AN D NO BUSINESS RECEIPTS, NO INCOME WAS OFFERED TO TAX. TH E CIT (A) AFTER GOING THROUGH THE ORDERS OF THE AO UPHELD THAT REOP ENING U/S 147 OF THE ACT WAS VALID AND HELD THAT THE AO HAD A SSUMED VALID JURISDICTION TO FRAME REASSESSMENT, THUS CONFIRMING THE ACTION OF THE AO. ITA NOS. 551 & 552 OF 2013 SPPS SYSTEMS PRIVATE LTD HYDERABAD. PAGE 3 OF 8 4. THE CIT (A) FURTHER HELD AT PARA 5.3.1 OF HIS OR DER, AS FOLLOWS: 5.3.1 I HAVE CAREFULLY AND DISPASSIONATELY CONSID ERED THE FACTS AND CIRCUMSTANCES OF THE CASE. FOR ALLOWI NG EXPENDITURE U/S 37 OF THE ACT SUCH EXPENDITURE MUST BE PAID WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE APPELLANTS BUSINESS AND PROFESSION AND FURTHER MUST NOT BE CAPITAL EXPENDITURE, PERSONAL EXPENDITURE OR AN ALLOWANCE OF THE CHARACTER DESCRIBED IN SECTIONS 30 TO 36 OF THE ACT. IN THIS CASE THE APPELLANT HAS NOT DISCLOSED ANY BUSINESS RECEIPTS AND NO INCOME HAS BEEN DISCLOSED UNDER THE HEAD INCOME FROM BUSINESS OR PROFESSION. AN EXPENDITURE CAN BE ALLOWED AS BUSINESS EXPENDITURE U/S 37(1) OF THE ACT ONLY IF T HE ASSESSEE HAS CARRIED ON THE BUSINESS IN THE YEAR IN WHICH THE EXPENDITURE IS TO BE ALLOWED AND IT IS NO T ENOUGH THAT THE ASSESSEE HAS CARRIED ON SOME OTHER BUSINESS DURING THE SAID YEAR. STRONG RELIANCE IS P LACED ON THE FOLLOWING DECISIONS: (I) CIT VS. GEMINI CASHEW SALES CORPORATION (1967) 65 ITR 643, 650 (SC) (II) GRAIN CHAMBER LTD VS. CIT (1962) 46 ITR 217 (ALL) (III) RAM CHANDRA MUNNA LAL VS. CIT (1949) 17 ITR 394 (EAST PUNJ) UNDER THE CIRCUMSTANCES, THE EXPENDITURE HAS CORREC TLY NOT BEEN ALLOWED BY THE AO. IT IS FURTHER OBSERVED THAT THE AO HAS ALLOWED ESTIMATED DEDUCTION OF RS.3 LACS U/S 57(III) OF THE ACT. HAVING CONSIDERED THE RIVAL SUBMISSIONS, IT IS DECIDED THAT THE ENDS OF JUSTICE WOULD BE MET IF THE DEDUCTION U/S 57(III) OF THE ACT IS A LLOWED AT 25% OF THE EXPENDITURE OF RS.24,82,147/- DEBITED IN THE APPELLANTS P&L A/C. IN OTHER WORDS, THE APPELLA NT SHALL GET DEDUCTION OF EXPENDITURE OF RS.6,20,536/- INSTEAD OF RS.3 LACS ALLOWED BY THE AO. THEREFORE, THE APPELLANT WILL GET A FURTHER RELIEF OF RS.3,20,536/ -. INTEREST U/S 234A AND 234B TO BE LEVIED AS PER LAW. GROUNDS OF APPEAL NO.3,4,5 & 6 ARE PARTLY ALLOWED. ITA NOS. 551 & 552 OF 2013 SPPS SYSTEMS PRIVATE LTD HYDERABAD. PAGE 4 OF 8 5. THUS, THE CIT (A) PARTLY ALLOWED THE ASSESSEES APPEAL. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US. 6. THE LD COUNSEL FOR THE ASSESSEE SHRI S. RAMA RAO PLACED BEFORE US THE BACKGROUND OF THE ASSESSEE AND SUBMIT TED THAT THE ASSESSEE IS IN THE BUSINESS OF DEVELOPMENT OF SOFTW ARE. THE ASSESSEE IN THE PROCESS DEVELOPED VARIOUS TECHNOLOG IES IN THE FIELD OF INTERNET AND SOFTWARE ENGINEERING I.E. THE TECHNOLOGY WOULD INCREASE THE SOFTWARE PRODUCTIVITY THREE FOLD AND ALSO CAN BUILD UP MORE COMPLEX GRAPHICAL INTERFACES THAN EXI STS TODAY ONLINE. IT ALSO PARTICIPATED IN VARIOUS TECHNOLOGY REVIEWS CONDUCTED BY THE AUTHORITIES. THE DEPARTMENT OF NAV Y OF USA INVITED TECHNOLOGY PROJECTS. THE ASSESSEE PARTICIPA TED IN THE SAID WEAPONS PMAS AND SUCCEEDED IN PASSING THE TEST. HOW EVER, IT COULD NOT GET THE ORDERS FOR THE TECHNOLOGY DEVELOP ED BY IT. THE ASSESSEE COMPANY DEVELOPED THE TECHNOLOGY AND INTER ACTED WITH VARIOUS OTHER CONCERNS IN THE WORLD FOR OBTAINING T HE ORDERS. IT COULD NOT GET ANY ORDER FOR SUPPLY. HOWEVER, IT IS CARRYING ON THE ACTIVITY OF RESEARCH CONTINUOUSLY AND IS WAITING FO R THE ORDERS FOR SUPPLY OF ITS TECHNOLOGY. 7. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE WAS I N THE PROCESS OF RESEARCH AND WAITING FOR ORDERS WHICH WO ULD ABSORB ITS TECHNOLOGY AND HAD INCURRED EXPENDITURE OF RS.2 4,82,147/- DURING THE FINANCIAL YEAR 2003-04 AND RS.14,52,712/ - FOR THE FINANCIAL YEAR 2004-05. IT ALSO RECEIVED INTEREST O F RS.14,85,280/- FOR THE YEAR ENDED ON 31.3.2004 AND RS.16,09,512/- FOR THE FINANCIAL YEAR ENDED ON 31.3 .2005. BASED ITA NOS. 551 & 552 OF 2013 SPPS SYSTEMS PRIVATE LTD HYDERABAD. PAGE 5 OF 8 ON THE FINAL ACCOUNTS, IT FILED THE RETURNS OF INCO ME ON 31.10.2004 AND 30.11.2005 RESPECTIVELY FOR THE A.YS 2004-05 AND 2005-06. 8. THE LD COUNSEL POINTED OUT THAT THE AO COMPLETED THE ASSESSMENT U/S 143(3) FOR THE A.Y 2005-06 AND U/S 1 47 FOR THE A.Y 2004-05 AND ACCORDING TO THE AO THERE WAS NO BU SINESS ACTIVITY AND THE EXPENDITURE DEBITED IS NOT ALLOWAB LE. THE AO ESTIMATED THE PROBABLE EXPENDITURE TO BE ALLOWED AT RS.3.00 LAKHS FOR BOTH THE YEARS AND DEDUCTED THE SAME FROM THE INCOME FROM OTHER SOURCES. 9. THE LD COUNSEL STATED THAT HE WAS NOT PRESSING T HE GROUNDS AGAINST PRESUMPTION OF JURISDICTION U/S 148 FOR REO PENING THE ASSESSMENT WHICH WAS CONFIRMED AS VALID BY THE CIT (A). IT WAS SUBMITTED THAT THE AO WAS UNDER THE MISCONCEPTION I N COMING TO THE CONCLUSION THAT, SINCE THERE WAS NO BUSINESS RE CEIPTS, THE EXPENDITURE INCURRED ON BUSINESS IS NOT ALLOWABLE A S A DEDUCTION IGNORING THE FACT THAT THE ASSESSEE HAD ALREADY COM MENCED THE BUSINESS ACTIVITY. IT WAS FURTHER POINTED OUT THAT THE SOFTWARE IS DEVELOPED AND THE ASSESSEE MADE ARRANGEMENTS FOR SE LLING THE SAME IN THE MARKET. THE ENTIRE EXPENDITURE INCURRED IS FOR THE PURPOSE OF CREATING THE STOCK-IN-TRADE TO BE MARKET ED OR FOR ADVERTISING FOR MARKETING THE SAME AND IS BUSINESS EXPENDITURE. IN THIS REGARD THE ASSESSEE SUBMITTED THAT THERE AR E VARIOUS DECISIONS ON THE ISSUE WHICH CLEARLY HOLD THAT FOR ALLOWING EXPENDITURE THERE NEED NOT BE ANY RECEIPT FROM BUSI NESS. THE LD COUNSEL FURTHER RELIED ON THE DECISIONS OF THE HON' BLE RAJASTHAN ITA NOS. 551 & 552 OF 2013 SPPS SYSTEMS PRIVATE LTD HYDERABAD. PAGE 6 OF 8 HIGH COURT IN THE CASE OF CIT VS. STONES AND MINERA L ASSOCIATED LTD REPORTED IN 257 ITR 479 WHEREIN IT HAS BEEN HEL D THAT THE BUSINESS IS SAID TO HAVE BEEN STARTED EVEN WHEN THE ASSESSEE DID NOT EFFECT THE PURCHASES DURING THE PREVIOUS YEAR N OR HAD HE EFFECTED THE EXPORTS. THE HON'BLE HIGH COURT HELD T HAT EXPENDITURE INCURRED FOR PROCURING MATERIAL IS ALLO WABLE AS BUSINESS EXPENDITURE AS THERE IS A COMMENCEMENT OF BUSINESS ACTIVITY. 10. THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF C IT VS. SAURASTRA CEMENT AND CHEMICAL INDUSTRIES REPORTED I N 91 ITR 170 HAD HELD THAT IN THE CASE OF A MANUFACTURING AC TIVITY, PURCHASE OF STOCKS IN TRADE WOULD BE SETTING UP OF BUSINESS. 11. THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS . SARABAI MANAGEMENT CORPORATION LTD REPORTED IN 192 ITR 151 HAD HELD THAT THE BUSINESS IS SAID TO HAVE BEEN COMMENCED WH EN IT HAS SET UP AND IT IS NOT NECESSARY THAT IT COMMENCED AC TIVITY OF PURCHASE OR SALE. IN THE SAID CASE, THE APEX COURT OBSERVED THAT WHEN THE ASSESSEE ACQUIRED IMMOVABLE PROPERTIES FOR LET OUT ON LEASE, SUCH BUSINESS IS SAID TO HAVE BEEN COMMENCED WHEN THE PROPERTY IS MADE READY FOR USE AND ACTUAL RECEIPT O F RENT IS NOT ESSENTIAL. THE ASSESSEE HEREIN IS READY WITH ITS PR ODUCE AND CAN MARKET ANY TIME AND THEREFORE, THE ASSESSEE COMMENC ED BUSINESS ACTIVITY AND THE EXPENDITURE INCURRED IS A LLOWABLE AS A DEDUCTION. ITA NOS. 551 & 552 OF 2013 SPPS SYSTEMS PRIVATE LTD HYDERABAD. PAGE 7 OF 8 12. THE LD COUNSEL FURTHER HIGHLIGHTED THAT PERUSAL OF THE P&L A/C FOR BOTH THE YEARS WOULD CLEARLY INDICATE THAT THE EXPENDITURE IS RELATABLE TO BUSINESS ACTIVITY AND THEREFORE, TH E SAME IS ALLOWABLE AS A DEDUCTION. ON THE OTHER HAND, THE LD DR SUPPORTED THE ORDERS OF THE AO AND THE LD CIT (A). 13. WE HEARD BOTH THE PARTIES. RELIANCE IS PLACED O N THE DECISION OF THE MUMBAI BENCH OF ITAT IN THE CASE OF ACCOR RADHAKRISHNA CORPORATE SERVICES (P) LTD VS. JCIT RE PORTED IN 13 SOT 652. IN THE CASE OF ACIT VS. LAFARGE INDIA HOL DING PVT. LTD REPORTED IN 19 SOT 121 IT HAS BEEN HELD AS FOLLOWS: 8. WE FIND THAT THE HON'BLE SUPREME COURT IN THE RECENT JUDGMENT IN THE CASE OF S.A. BUILDERS LTD V. CIT (2007) 288 ITR 1 HAS HELD THAT EXPRESSION FOR THE PURPOSE OF BUSINESS OCCURRING IN VARIOUS PROVISION S IS WIDER IN SCOPE THAN THE EXPRESSION FOR THE PURPOSE OF EARNING INCOME. IN VIEW OF THIS JUDGMENT, THE OPIN ION OF THE AO THAT THE ASSESSEE WAS NOT CARRYING ON ANY BUSINESS SINCE THERE WAS NO ACTIVITY LEADING TO THE EARNING OF INCOME, BECOMES ERRONEOUS AND UNSUSTAINABLE. WHEN THE ASSESSEE COMPANY HAS BEEN SET UP WITH AN OBJECT OF MAKING STRATEGIC INVESTMEN T IN THE SHARES OF COMPANIES INVOLVED IN THE CEMENT BUSINESS, WE FIND THAT IT CANNOT BE HELD THAT THE ASSESSEE IS NOT CARRYING ON ANY BUSINESS. WE THEREFORE, APPROVE THE FINDING OF THE LD CIT (A) TO THIS EXTENT. FOLLOWING THE RATIO OF ABOVE SAID DECISION, WE ARE OF THE OPINION THAT THE AO HAS ERRED IN REJECTING THE BUSINESS LOS S OF ASSESSEE ADMITTED IN THE RETURN OF INCOME. THE AO SHOULD HAV E APPRECIATED THAT THERE WAS BUSINESS ACTIVITY, THOUG H THERE WAS NO REVENUE DURING THE PREVIOUS YEAR UNDER CONSIDERA TION. HENCE, ITA NOS. 551 & 552 OF 2013 SPPS SYSTEMS PRIVATE LTD HYDERABAD. PAGE 8 OF 8 IN OUR OPINION THE EXPENDITURE IS RELATABLE TO THE BUSINESS ACTIVITY AND THE SAME IS ALLOWABLE AS A DEDUCTION. 14. IN THE RESULT APPEAL IN ITA NO.551/HYD/2013 IS ALLOWED. ITA NO.552/HYD/2013 15. THE FACTS FOR THE A.Y 2005-06 IN ITA NO.552/HYD /2013 ARE IDENTICAL TO THOSE OF ITA NO.551/HYD/2013 FOR THE A .Y 2004-05 HENCE THE SAME CONCLUSIONS IN PARA 13 IS TO BE FOLL OWED IN THIS APPEAL BEFORE US. 16. IN THE RESULT, BOTH THE APPEALS ARE PARTLY ALLO WED. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH JANUARY, 2015. S D/ - S D/ - (P.M. JAGTAP) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 9 TH JANUARY, 2015. VNODAN/SPS COPY TO: 1. SHRI S. RAMA RAO, ADVOCATE, FLAT NO.102, SHRIYAS EL EGANCE, H.NO.3-6-643, ST. NO.9, HIMAYATNAGAR, HYDERABAD 500 029 2. DY. COMMISSIONER OF INCOME TAX, CIRCLE-3(2) HYDERAB AD 3. THE CIT(A) IV HYDERABAD 4. THE CIT HYDERABAD 5. THE DR, ITAT, HYDERABAD 6. GUARD FILE BY ORDER