DCIT, CHENNAI V. M/s. Managed Information Services P. Ltd., CHENNAI

ITA 566/CHNY/2011

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8738 (ITAT-CHENNAI)
• Duration Of Justice: 5 year(s) 4 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-08-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 14-06-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 29-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M MURUGABOOPATHY
• Assessee Lawyers: S SRIDHAR
• Keywords: Capital asset
• Section: 37(1)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI . . . , . !'# ! , % !& BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ ITA NO. 566/MDS/2011 ( )( / ASSESSMENT YEAR : 2006-07 THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE IV(1), CHENNAI - 600 034. V. M/S MANAGED INFORMATION SERVICES PVT. LTD., POTTIPATI PLAZA, 5 TH FLOOR, NO.77, NUNGAMBAKKAM HIGH ROAD, CHENNAI - 600 034. PAN : AACCM 7680 H (+,/ APPELLANT) (-.+,/ RESPONDENT) +, / 0 / APPELLANT BY : SHRI M. MURUGABOOPATHY, ADDL. CIT -.+, / 0 / RESPONDENT BY : SHRI S. SRIDHAR, ADVOCATE 1 / 2% / DATE OF HEARING : 14.06.2016 3') / 2% / DATE OF PRONOUNCEMENT : 11.08.2016 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: THIS APPEAL OF THE REVENUE IS DIRECTED AGAINST T HE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) V, CHENN AI, DATED 23.12.2010 AND PERTAINS TO ASSESSMENT YEAR 2006-07. 2 I.T.A. NO.566/MDS/11 2. SHRI M. MURUGABOOPATHY, THE LD. DEPARTMENTAL REPRESENTATIVE, SUBMITTED THAT THE FIRST ISSUE ARIS ES FOR CONSIDERATION IS WITH REGARD TO DISALLOWANCE OF ` 1,93,90,502/- BEING THE FEE PAID TO LEGAL FIRM AT LONDON. ACCORDING TO THE LD. D.R., THE ASSESSEE ENGAGED IN THE BUSINESS OF PROVIDING OUTSO URCING ACCOUNTANCY SERVICES. DURING THE YEAR UNDER CONSID ERATION, THE ASSESSEE CLAIMED THAT A SUIT WAS FILED AGAINST CHAR TER HOUSE IN UNITED KINGDOM. ULTIMATELY, THE DISPUTE WAS MUTUAL LY SETTLED IN SEPTEMBER, 2005. THE LEGAL PROCEEDING INITIATED BY ASSESSEE- COMPANY WAS ASSISTED BY M/S HAMMONDS UK FOR WHICH T HE ASSESSEE HAS PAID A SUM OF ` 1,93,90,502/-. REFERRING TO THE ASSESSMENT ORDER, THE LD. D.R. SUBMITTED THAT THE A SSESSEE CLAIMED THAT IT ENGAGED THE SERVICES OF M/S HAMMOND S, UK FOR 643 HOURS. HOWEVER, THE ASSESSEE COULD NOT FURNISH THE DETAILS OF ENGAGEMENT AND DISCUSSION MADE FOR 643 HOURS. THE LEGAL FEE TO M/S HAMMONDS, UK WAS PAID BY SHRI BRIJNATH. IN FAC T, THE PAYMENT WAS MADE FROM PERSONAL ACCOUNT OF SHRI BRIJNATH. N O PAYMENT WAS MADE FROM THE ASSESSEE-COMPANYS BANK ACCOUNT. SIN CE THE PAYMENT WAS NOT MADE FROM THE COMPANYS ACCOUNT, TH E ASSESSING OFFICER FOUND THAT THE PAYMENT CLAIMED BY THE ASSES SEE-COMPANY WAS NOT GENUINE. MOREOVER, THE ASSESSEE HAS RECEIV ED ONLY A SUM 3 I.T.A. NO.566/MDS/11 OF ` 80,16,570/- FROM THE CHARTER HOUSE. THEREFORE, THE EXPENDITURE OF ` 1,93,90,502/- IS EXCESSIVE AND NO PRUDENT BUSINESSM AN WOULD INCUR SUCH EXPENDITURE FOR RECEIVING A COMPENSATION OF ` 80,16,570/- THEREFORE, THE ASSESSING OFFICER HAS RIGHTLY DISALL OWED THE CLAIM OF ` 1,93,90,502/-. THE LD. D.R. PLACED HIS RELIANCE ON THE JUDGMENT OF MADRAS HIGH COURT IN CHELPARK COMPANY LIMITED V. CI T (1991) 191 ITR 249. 3. ON THE CONTRARY, SHRI S. SRIDHAR, THE LD.COUNSEL FOR THE ASSESSEE, SUBMITTED THAT THE ASSESSEE-COMPANY FORME D A JOINT VENTURE WITH SHRI VINOO PATEL. AS PER THE ARRANGEM ENT, SHRI VINOO PATEL HAD 36% OF STAKE IN THE ASSESSEE-COMPANY. SH RI VINOO PATEL WAS ALSO A JOINT VENTURE PARTNER ON BEHALF OF M/S C HARTER HOUSE ACCOUNTANTS LLP. THE SOFTWARE DEVELOPED BY THE ASS ESSEE- COMPANY WAS UNLAWFULLY USED BY SOME OF THE COMPETIN G BUSINESS HOUSES IN UK, MORE PARTICULARLY, M/S HANOVER OUTSOU RCING BASED AT PAKISTAN. M/S HANOVER OUTSOURCING WAS SET UP BY PA RTNERS OF CHARTER HOUSE AFTER SELLING THEIR INTEREST IN THE A SSESSEE-COMPANY IN OCTOBER, 2004. SINCE THE MISUSE OF SOFTWARE BY COMPETING BUSINESS HOUSES IN LONDON AFFECTED THE BUSINESS OF THE ASSESSEE, THE ASSESSEE WAS FORCED TO INITIATE LEGAL PROCEEDIN G AGAINST M/S 4 I.T.A. NO.566/MDS/11 CHARTER HOUSE ACCOUNTANTS LLP. THE LITIGATION WAS MUTUALLY SETTLED IN SEPTEMBER, 2005 AND THE ASSESSEE PAID A SUM OF ` 1,93,90,502/- BEING THE LEGAL FEE TO M/S HAMMONDS UK. ACCORDING TO THE LD. COUNSEL, THE ASSESSEE PRODUCED ALL THE INVOICES RAI SED BY M/S HAMMONDS UK AND PAYMENT DETAILS TO SUBSTANTIATE THE CLAIM OF DEDUCTION UNDER SECTION 37(1) OF THE INCOME-TAX ACT , 1961 (IN SHORT 'THE ACT'). THE LD.COUNSEL PLACED HIS RELIANCE ON THE JUDGMENTS OF MADRAS HIGH COURT IN CIT V. O.P.N. ARUNACHALA NADAR (1983) 141 ITR 620, CIT V. RAMAN & RAMAN LTD. (1951) 19 ITR 55 8, STATE OF TAMIL NADU V. C.H. SIMPSON (1992) 197 ITR 237 AND G . VEERAPPA PILLAI V. CIT (1955) 28 ITR 636. 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. FROM THE MATERIAL AVAILABLE ON RECORD IT APPEARS THAT THE RE GISTERED SOFTWARE OF THE ASSESSEE-COMPANY WAS USED BY OTHER COMPETING BUSINESS CONCERNS IN UNITED KINGDOM. THEREFORE, THE ASSESSE E WAS FORCED TO INITIATE LEGAL PROCEEDING. THE ASSESSEE INCURRE D EXPENDITURE FOR INITIATING AND PROSECUTING THE LEGAL PROCEEDING. U LTIMATELY, THE LITIGATION WAS SETTLED MUTUALLY IN SEPTEMBER, 2005. THE QUESTION ARISES FOR CONSIDERATION IS WHETHER THE PAYMENT MAD E BY THE 5 I.T.A. NO.566/MDS/11 ASSESSEE FOR LEGAL OPINION IS ALLOWABLE UNDER SECTI ON 37(1) OF THE ACT? THE ASSESSEE, BEING A BUSINESS CONCERN, HAS T O PROTECT ITS CAPITAL BASE FROM MISUSE BY OTHER COMPETING BUSINES S HOUSES. THE EXPENDITURE INCURRED BY THE ASSESSEE IS NOT FOR CRE ATING ANY ENDURING ASSET IN THE COURSE OF BUSINESS ACTIVITY. IT IS AN EXPENDITURE INCURRED FOR PROTECTING THE REGISTERED SOFTWARE DEVELOPED BY THE ASSESSEE. THE BUSINESS OF THE ASS ESSEE APPEARS TO BE PROVIDING OUTSOURCING ACCOUNTANCY SERVICES. THEREFORE, WHEN THE PAKISTAN BASED COMPANY ATTEMPTED TO MISUSE THE SOFTWARE IN THE UNITED KINGDOM, THE ASSESSEE HAD TO ACTUALLY IN ITIATE LEGAL PROCEEDING FOR PROTECTING ITS INTEREST SO THAT THE ASSESSEE CAN CARRY ON THE BUSINESS EFFECTIVELY AND PROFITABLY. THIS T RIBUNAL IS OF THE CONSIDERED OPINION THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IS NOT ON THE CAPITAL FIELD SINCE IT WAS NOT TO CREATE ANY CAPITAL ASSET. IT WAS INCURRED BY THE ASSESSEE FOR PROTECTING THE REG ISTERED SOFTWARE IN THE COURSE OF ITS BUSINESS ACTIVITY. THEREFORE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE JUDGMENT OF MADRAS HIGH COURT IN CHELPARK COMPANY LIMITED (SUPRA) MAY NOT BE APPLICA BLE TO FACTS OF THE CASE. 6 I.T.A. NO.566/MDS/11 5. THE NEXT CONTENTION OF THE LD. D.R. IS THAT THE ASSESSEE HAS PAID TO M/S HAMMONDS UK FOR 643 HOURS AND THE PAYME NT WAS MADE ON HOURLY BASIS. IT IS NOT IN DISPUTE THAT EV EN IN THIS COUNTRY, SOME OF THE LEGAL PRACTITIONERS CHARGING FROM THE R ESPECTIVE CLIENTS ON HOURLY BASIS. SOME OF THEM ARE CHARGING ON DAY BASIS. THEREFORE, IT DEPENDS UPON THE PROFESSIONALS WHO AR E BEING ENGAGED BY THE ASSESSEE. SO LONG AS CHARGING OF FE E ON HOURLY BASIS IS PREVALENT IN THE LEGAL PROFESSION, THIS TR IBUNAL IS OF THE CONSIDERED OPINION THAT MERELY BECAUSE THE ASSESSEE HAS PAID ON HOURLY BASIS TO ENGAGE THE SERVICE OF M/S HAMMONDS UK FOR 643 HOURS THAT CANNOT BE A REASON TO DISALLOW THE CLAIM OF THE ASSESSEE. IT IS FOR THE ASSESSEE TO DETERMINE HOW LONG HOURS IT HAS TO RETAIN OR ENGAGE THE SERVICE OF M/S HAMMONDS UK. WHEN THE AS SESSEE HAS ESTABLISHED FACT OF INITIATION OF LEGAL PROCEEDING AND PAYMENT OF FEE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE RE IS NO REASON TO DISALLOW THE CLAIM OF THE ASSESSEE. 6. NOW COMING TO THE PAYMENT MADE BY SHRI BRIJNATH FROM HIS HSBC BANK ACCOUNT, THE FACT REMAINS THAT SHRI BRIJN ATH IS ONE OF THE DIRECTORS OF THE ASSESSEE-COMPANY. THE COMPENSATIO N SAID TO BE RECEIVED FROM M/S CHARTER HOUSE ACCOUNTANTS LLP WAS CREDITED IN 7 I.T.A. NO.566/MDS/11 THE ACCOUNTS OF THE ASSESSEE-COMPANY AND IT WAS ALS O REFLECTED IN THE PROFIT & LOSS ACCOUNT FOR YEAR ENDING 31.03.200 6. IN THOSE CIRCUMSTANCES, MERELY BECAUSE THE FUNDS TO THE LEGA L FIRM WAS PAID FROM THE INDIVIDUAL ACCOUNT OF ONE OF THE DIRECTORS SHRI BRIJNATH, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THERE CA NNOT BE ANY REASON TO DISALLOW THE CLAIM OF THE ASSESSEE. IN V IEW OF THE ABOVE, THIS TRIBUNAL DO NOT FIND ANY REASON TO INTERFERE W ITH THE ORDER OF THE LOWER AUTHORITY AND ACCORDINGLY THE SAME IS CONFIRM ED. 7. THE NEXT GROUND OF APPEAL IS WITH REGARD TO DISA LLOWANCE OF ` 1,87,327/- BEING THE PREMIUM PAID FOR PROFESSIONAL INDEMNITY INSURANCE. 8. SHRI M. MURUGABOOPATHY, THE LD. DEPARTMENTAL REPRESENTATIVE, SUBMITTED THAT THE ASSESSEE CLAIMED PAYMENT OF PREMIUM TO M/S WINDSOR PL UK TOWARDS PROFESSIONAL I NDEMNITY INSURANCE PAYABLE EVERY YEAR AS PER UK LAWS. THE A SSESSEE HAS NOT PRODUCED COPIES OF BILL FOR PAYMENT OF INSURANC E PREMIUM. MOREOVER, IT IS FOR THE LEGAL FIRM TO PAY THE PROFE SSIONAL INDEMNITY INSURANCE PREMIUM AND NOT FOR THE ASSESSEE. IN THE ABSENCE OF ANY DOCUMENTARY EVIDENCE TO SUBSTANTIATE THE CLAIM OF E XPENSES, THE ASSESSING OFFICER HAS RIGHTLY DISALLOWED THE CLAIM OF THE ASSESSEE. 8 I.T.A. NO.566/MDS/11 9. ON THE CONTRARY, SHRI S. SRIDHAR, THE LD.COUNSEL FOR THE ASSESSEE, SUBMITTED THAT THE ASSESSEE-COMPANY PAID A SUM OF ` 1,87,327/- TOWARDS PROFESSIONAL INDEMNITY INSURANCE TO M/S WINDSOR PL UK. AS PER THE UK LAW, EVERY LEGAL FIRM HAS TO PAY PREMIUM TOWARDS PROFESSIONAL INDEMNITY INSURANCE. ON THE BASIS OF MAIL RECEIVED FROM SHRI SHARAN REQUESTING FOR PAYME NT OF PROFESSIONAL INDEMNITY INSURANCE PREMIUM, THE ASSES SEE HAS PAID THE PREMIUM. THE PAYMENT OF PREMIUM IS NOT IN DISP UTE. THE ONLY OBJECTION OF THE LD. D.R. IS THAT THE ASSESSEE IS N OT EXPECTED TO PAY PREMIUM AND IT IS FOR THE LEGAL FIRM TO PAY THE PRE MIUM FOR PROFESSIONAL INDEMNITY INSURANCE. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. ADMITTEDLY, THE ASSESSEE CLAIMS ` 1,87,327/- BEING THE PROFESSIONAL INDEMNITY INSURANCE PREMIUM PAID TO M/S WINDSOR PL UK. THE A SSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE PAYMENT WAS NOT SUBSTANTIATED AND THE ASSESSEE HAS NOT PROVED THAT THE EXPENDITURE WAS FOR BUSINESS PURPOSE. THE FACT REMAINS THAT THE ASSESSEE HAS RECEIVED A MAIL FROM SHRI SHA RAN REQUESTING FOR PAYMENT OF PROFESSIONAL INDEMNITY PREMIUM. THE PAYMENT 9 I.T.A. NO.566/MDS/11 MADE BY THE ASSESSEE IS NOT IN DISPUTE. THE LD. D. R. NOW CONTENDS BEFORE THIS TRIBUNAL THAT IT IS THE OBLIGATION OF T HE UK LEGAL FIRM TO PAY THE INSURANCE PREMIUM AND NOT THAT OF THE ASSES SEE. WHEN THE ASSESSEE-COMPANY AGREED TO PAY THE PREMIUM FOR PROF ESSIONAL INDEMNITY INSURANCE AS PART OF THE FEE PAID TO THE LEGAL FIRM, EVEN THOUGH THERE WAS AN OBLIGATION UNDER THE UK LAW THA T ONLY THE LEGAL FIRM HAS TO PAY THE PROFESSIONAL INDEMNITY PREMIUM, IN VIEW OF THE ASSURANCE GIVEN BY THE ASSESSEE TO MEET THE EXPENDI TURE FOR INSURANCE PREMIUM, THIS TRIBUNAL IS OF THE CONSIDER ED OPINION THAT SUCH PREMIUM WOULD FORM PART OF THE PAYMENT MADE BY THE ASSESSEE TOWARDS FEES. THEREFORE, IT HAS TO BE NAT URALLY TREATED AS EXPENDITURE FOR MEETING THE LEGAL LITIGATION INITIA TED IN THE UK FOR PREVENTING THE MISUSE OF REGISTERED SOFTWARE. IN T HOSE CIRCUMSTANCES, THIS TRIBUNAL IS OF THE CONSIDERED O PINION THAT THE CIT(APPEALS) HAS RIGHTLY ALLOWED THE CLAIM OF THE A SSESSEE. THIS TRIBUNAL DO NOT FIND ANY REASON TO INTERFERE WITH T HE ORDER OF THE LOWER AUTHORITY AND ACCORDINGLY THE SAME IS CONFIRM ED. 11. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. 10 I.T.A. NO.566/MDS/11 ORDER PRONOUNCED ON 11 TH AUGUST, 2016 AT CHENNAI. SD/- SD/- (. !'# ! ) ( . . . ) (A. MOHAN ALANKAMONY) (N.R.S. GANESAN) % / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 5 /DATED, THE 11 TH AUGUST, 2016. KRI. / -267 87)2 /COPY TO: 1. +, /APPELLANT 2. -.+, /RESPONDENT 3. 1 92 () /CIT(A)-V, CHENNAI-34 4. 1 92 /CIT, CHENNAI-III, CHENNAI 5. 7: -2 /DR 6. ;( < /GF.