DCIT 9(2), MUMBAI V. INDIA INFOLINE INSUR5ANCE SERVICE P.LTD, MUMBAI

ITA 5758/MUM/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 6603 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 11 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-07-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 21-07-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 12-08-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Reopening of assessment; Audit objection; Tangible material; Difference of opinion; Assessment record; Reason to believe; Change of opinion; Revenue expenditure; Capital expenditure
• Section: 143(3); 142(1); 147; 148

Judgement Text

, ,, , INCOME TAX APPELLATE TRIBUNALMUMBAI BENCHES I MUM BAI , . . ! ! ! ! ' # , ' . . BEFORE SHRI VIJAY PAL RAO, JM AND SHRI RAJENDRA, AM . / ITA NO. 5758/MUM/2011 $% $% $% $% & & & & / ASSESSMENT YEAR 2005-06 ( '( /APPELLANT) ( )*'( / RESPONDENT) + , - '/ REVENUE BY : : : : SHRI SUNIL AGRAWAL $% 01 $% 01 $% 01 $% 01 - - - - ' '' ' / / / / ASSESSEE BY : : : : SHRI PRITESH MEHTA % % % % , ,, , 1 1 1 1 / DATE OF HEARING : 21/07/2014 23& , 1 / DATE OF PRONOUNCEMENT : 21/07/2014 PER RAJENDRA,AM ' ' ' ' 4+ 4+ 4+ 4+ ' # ' # ' # ' # ' '' ' % % % % : :: : CHALLENGING THE ORDER OF THE CIT(A)-20, MUMBAI, DAT ED 10/06/2011, ASSESSING OFFICER HAS RAISED FOLLOWING GROUNDS OF APPEAL. I. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD. CIT(A) WAS CORRECT IN HOLDING THAT REOPENING OF THE ASSESSMENT BY THE ASSESSING OFFICER IS BAD IN LAW EVEN THOUGH THERE WAS NO ASSESSMENT U/S 143(3) AND THE RETURN WAS MERELY PROCESSED U/S 143(1)? II. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A)S DECISIONS IS BAD IN LAW WITHOUT CONSIDERING THE DECISION OF T HE SUPREME COURT IN THE CASE OF ACIT VS RAJESH JHAVERI STOCK BROKERS [291 ITR 500 (SC)]. III. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD. CIT(A) WAS CORRECT IN TREATING THE SOFTWARE EXPENSES OF RS.96, 00,000/- AS REVENUE IN NATURE EVEN THOUGH THE ASSESSEE WAS DERIVING ENDURING BENEFIT F ROM THE SAID EXPENDITURE. IV. THE APPELLANT PRAYS THAT THE ORDER OF CIT(A) ON THE GROUNDS BE SET ASIDE AND THAT OF AO BE RESTORED. V. THAT APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY G ROUNDS OR ADD A NEW GROUND WHICH MAY BE NECESSARY. THOUGH THERE ARE FIVE GROUNDS OF APPEAL BUT THE EFF ECTIVE GROUND OF APPEAL IS ABOUT THE REOPENING OF ASSESSMENT. 2. ASSESSEE-COMPANY,ENGAGED IN THE BUSINESS OF LIFE IN SURANCE,FILED ITS RETURN OF INCOME ON 29/10/2005 DECLARING TOTAL INCOME AT RS.31.19 LAKHS . THE RETURN WAS PROCESSED U/S.143(1) OF THE ACT ON 30/03/2007.LATER ON A NOTICE U/S 147 OF THE ACT WAS ISSUED BY THE AO.FROM THE DCIT-9(2), AAYAKAR BHAVAN, R.NO.218, 2 ND FLOOR, M.K.ROAD, MUMBAI-400020 VS M/S INDIA INFOLINE INSURANCE SERVICES PVT. LTD. IIFL CENTRE, KAMALA CITY, OFF SENAPATI BAPAT MARG, LOWER PAREL MUMBAI-400013 PAN -AAACF8058H 2 ITA NO.5758/MUM/11 ASSESSMENT RECORDS,THE AO FOUND THAT ASSESSEE HAD E NTERED INTO AN AGREEMENT WITH M/S INDIA INFOLINE LTD. TO PAY SOFTWARE SERVICES AMOUNTING TO RS.90 LAKHS FOR INFORMATION TECHNOLOGY TO BE PROVIDED BY IT.AS PER THE AO,SAME WERE OF END URING IN NATURE AND THEREFORE THE EXPENDITURE INCURRED BY IT HAD TO BE TREATED AS CAP ITAL EXPENDITURE, THAT THE SOFTWARE EXPENDITURE HAD TO BE ADDED TO TOTAL INCOME, THAT N ON INCLUSION OF THAT AMOUNT RESULTED IN UNDER ASSESSMENT. AS STATED EARLIER A NOTICE U/S 14 8 WAS ISSUED ON 30/03/2010. LATER ON A NOTICE U/S 142(1) ALSO ISSUED. 3. WHILE GOING THROUGH THE PROFIT & LOSS ACCOUNT, AO F OUND THAT THE ASSESSEE HAVE SHOWN SUM OF RS.90 LAKHS INCURRED UNDER THE HEAD SOFTWARE DEVELOPMENT. HE DIRECTED THE ASSESSEE TO EXPLAIN AS TO WHY THE EXPENDITURE INCURRED BY IT SHOULD NOT BE TREATED AS CAPITAL EXPENDITURE.VIDE ITS LETTER DATED 14/09/2010, ASSES SEE STATED THAT DURING THE YEAR ENDED 31 ST MARCH 2005,IT HAD ENTERED INTO AN AGREEMENT TO PAY SOFTWARE SERVICES FOR INFORMATION TECHNOLOGY SERVICES,PROVIDED BY THE HOLDING COMPANY FOR A PERIOD OF THREE YEARS,AT THE RATE OF RS.90 LAKHS PER YEAR, THAT THE ASSESSEE DID NOT HAVE RIGHT, TITLE OR INTEREST IN THE COMPUTER SOFTWARE OR HARDWARE, THAT PARENT COMPANY WAS RENDE RING INFORMATION TECHNOLOGY SERVICES TO IT,THAT IT WAS NOT GETTING ANY ENDURING BENEFIT FOR THE SAID AGREEMENT, THAT IT HAD TO RETURN ALL HARDWARE/SOFTWARE TO PARENT COMPANY ON TERMINATION OF THE SAID AGREEMENT, THAT THE PARENT COMPANY WAS RENDERING SERVICES TO THE ASSESSEE IN C ONNECTION WITH OPERATING AND MAINTAINING OF COMPUTER SOFTWARE AND COMPUTERISED D ATA PROCESSING AND SYSTEM NETWORK. AFTER EXPLANATION OF THE ASSESSEE,AO HELD THAT THE COMPUTER SOFTWARE WAS AN INTANGIBLE ASSET AND ANY EXPENDITURE INCURRED FOR SOFTWARE ISWAS A C APITAL EXPENDITURE,THAT IT INCLUDED COMPUTE PROGRAMME RECORDED ON ANY DISC/TAPE/PERFORA TED MEDIA OR OTHER INFORMATION STORAGE DEVICE. HE HELD THAT EXPENDITURE INCURRED ON SOFTWA RE DEVELOPMENT OF RS.90,00,000/- WAS TO 3 ITA NO.5758/MUM/11 BE TREATED AS CAPITAL EXPENDITURE.THE AO ALLOWED D EPRECIATION OF @ 60% I.E 54,00,000/-. FINALLY,HE MADE AN ADDITION OF RS.36,00,000/- (90,0 0,000-54,00,000) TO THE INCOME OF THE ASSESSEE. HE ALSO MADE THE ADDITION UNDER THE HEAD OF BUSINESS PROMOTION EXPENSES .VIDE ITS ORDER DATED 29/10/2010, HE DETERMINED THE INCOME OF THE ASSESSEE U/S.143(2) R.W.S. 147 OF THE ACT AT RS.69.77 LAKHS. 4 .AGGRIEVED BY THE ORDER OF THE AO ASSESSEE FILED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA).AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AND ASSESSMENT ORDER THE FAA HELD THAT THERE MUST BE TANGIBLE MATERIAL FOR R EOPENING THE ASSESSMENT EVEN WITH THE PERIOD OF FOUR YEARS. REFERRING TO THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF KELVINATOR OF INDIA LTD (320 ITR 561) ,HE HELD THAT AUDITED ANNUAL ACCOUNT OF THE ASSESSE E FOR THE FINANCIAL YEAR 2004-05 CLEARLY DISCLOSED TH E FACT ABOUT THE PAYMENT OF SOFTWARE CHARGES OF RS.90,00,000/-,THAT SERVICE-AGREEMENT UN DER SOFTWARE CHARGES WERE PAID BY THE ASSESSEE WAS ALSO FILED BEFORE THE AO,THAT NO NEW F ACTS/EVIDENCES CAME BEFORE HER SUBSEQUENTLY, THAT THERE WAS ABSENCE OF TANGIBLE MA TERIAL,THAT THE AO REOPENED THE CASE ON THE BASIS OF CHANGE OF HIS OPINION.HE FURTHER HELD THAT THE ASSESSEE HAD TO RETURN ALL THE SOFTWARE/HARDWARE SERVICES TO THE PARENT COMPANY ON TERMINATION OF THE AGREEMENT, THAT IT HAD NOT HAVE ANY RIGHT, TITLE INTEREST IN THE COMPU TER SOFTWARE/HARDWARE,THAT THE ASSESSEE WAS NOT GETTING ANY ENDURING OR PERMANENT BENEFIT ,THAT EXPENDITURE INCURRED WAS REVENUE IN NATURE,THAT THE ASSESSEE DID NOT OWN ANY FIXED ASSE TS, THAT AGREEMENT WITH THE PARENT COMPANY WAS LIKE OBTAINING THE REQUISITE COMPUTER SYSTEMS ON LEASE. FINALLY,HE ALLOWED THE APPEAL FILED BY THE ASSESSEE. 5. BEFORE US,AUTHORISED REPRESENTATIVE (AR) RELIED UPO N THE CASE OF RAJESH JHAVERI STOCK BROKERS(291ITR500) DELIVERED BY THE HONBLE SUPREME COURT. THE AR STAT ED THAT THE MATTER 4 ITA NO.5758/MUM/11 WAS REOPENED BECAUSE OF THE AUDIT OBJECTION,THAT IN THE SUBSEQUENT YEARS SIMILAR DISALLOWANCE WAS NOT MADE BY THE AO,THAT IN THE REASONS RECORDED BY THE AO,THERE IS NO MENTION OF EXISTENCE OF A TANGIBLE MATERIAL. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT IN THE CASE UNDER CONSIDERATION THE AO HAD REO PENED THE ASSESSMENT AS SHE WAS OF THE OPINION THAT THE EXPENDITURE INCURRED BY THE ASSESS EE UNDER THE HEAD OF THE SOFTWARE CHARGES WAS OF ENDURING IN NATURE.IN OUR OPINION ON THIS BA SIS ISSUING A NOTICE U/S 148 OF THE ACT WAS NOT JUSTIFIED.EXPENDITURE INCURRED ON SOFTWARE CANN OT BE HELD TANGIBLE MATERIAL ESPECIALLY WHEN IT WAS AN ANNUAL EXPENDITURE AND SAID FACT WA S DISCLOSED BY THE ASSESSEE. IN THE CASE OF KELVINATOR OF INDIA LTD. HONBE SUPREME COURT HELD AS UNDER:- WE MUST ALSO KEEP IN MIND THE CONCEPTUAL DIFFERENC E BETWEEN POWER TO REVIEW AND POWER TO REASSESS. THE ASSESSING OFFICER HAS NO POWER TO REV IEW ;HE HAS THE POWER TO REASSESS. BUT REASSESSMENT HAS TO BE BASED ON FULFILMENT OF CERTA IN PRE-CONDITIONS AND IF THE CONCEPT OF 'CHANGE OF OPINION' IS REMOVED, AS CON-TENDED ON BE HALF OF THE DEPARTMENT, THEN, IN THE GARB OF REOPENING THE ASSESSMENT, REVIEW WOULD TAKE PLAC E. ONE MUST TREAT THE CONCEPT OF 'CHANGE OF OPINION' AS AN IN-BUILT TEST TO CHECK ABUSE OF P OWER BY THE ASSESSING OFFICER. HENCE, AFTER 1ST APRIL, 1989, THE ASSESSING OFFICER HAS POWER TO REOPEN, PROVIDED THERE IS 'TANGIBLE MATERIAL' TO COME TO THE CON-CLUSION THAT THERE IS ESCAPEMENT OF INCOME FROM ASSESSMENT. REASONS MUST HAVE A LIVE LINK WITH THE FORMATION OF THE BELIEF. OUR VIEW GETS SUPPORT FROM THE CHANGES MADE TO SECTION 147 OF THE ACT, AS QUOTED H EREINABOVE. UNDER THE DIRECT TAX LAWS (AMENDMENT) ACT, 1987, PARLIAMENT NOT ONLY DELETED THE WORDS 'REASON TO BELIEVE' BUT ALSO INSERTED THE WORD 'OPINION' IN SECTION 147 OF THE A CT. HOWEVER, ON RECEIPT OF REPRESENTATIONS FROM THE COMPANIES AGAINST OMISSION OF THE WORDS 'R EASON TO BELIEVE', PARLIAMENT THE SAID EXPRESSION AND DELETED THE WORD 'OPINION' ON THE GR OUND THAT IT WOULD VEST ARBITRARY POWERS IN THE ASSESSING OFFICER. WE QUOTE HEREINBELOW THE RELEVANT PORTION OF CIRCULAR NO. 549 DATED OCTOBER 31, 1989 ([1990] 182 ITR (ST.) 1, 29) , WHICH READS AS FOLLOWS : '7.2 AMENDMENT MADE BY THE AMENDING ACT, 1989, TO REINTR ODUCE THE EXPRESSION `REASON TO BELIEVE' IN SECTION 147.-A NUMBER OF REPRESENTATION S WERE RECEIVED AGAINST THE OMISSION OF THE WORDS `REASON TO BELIEVE' FROM SECTION 147 AND THEIR SUBSTITUTION BY THE `OPINION' OF THE ASSESSING OFFICER. IT WAS POINTED OUT THAT THE MEAN -ING OF THE EXPRESSION, `REASON TO BELIEVE' HAD BEEN EXPLAINED IN A NUMBER OF COURT RULINGS IN THE PAST AND WAS WELL SETTLED AND ITS OMIS- SION FROM SECTION 147 WOULD GIVE ARBITRARY POWERS T O THE ASSESSING OFFICER TO REOPEN PAST ASSESSMENTS ON MERE CHANGE OF OPINION. TO ALLAY THE SE FEARS, THE AMENDING ACT, 1989, HAS AGAIN AMENDED SECTION 147 TO REINTRODUCE THE EXPRES SION `HAS REASON TO BELIEVE' IN PLACE OF THE WORDS `FOR REASONS TO BE RECORDED BY HIM IN WRI TING, IS OF THE OPINION'. OTHER PROVISIONS OF THE NEW SECTION 147, HOWEVER, REMAIN THE SAME.' WE FIND THAT THE ASSESSEE HAD MADE PAYMENT UNDER TH E HEAD OF SOFTWARE CHARGES IN 5 ITA NO.5758/MUM/11 SUBSEQUENT YEARS ALSO AND THE AO DO NOT INVOKE THE PROVISIONS OF SECTION 147/148.IF IT WAS A REVENUE EXPENDITURE FOR THE YEAR UNDER APPEAL,SAME WAS FOR THE SUBSEQUENT YEARS ALSO.IN OUR OPINION THERE WAS NO TANGIBLE MATERIAL TO REOPEN TH E ASSESSMENT.RESPECTFULLY FOLLOWING THE DECISION OF KELVINATOR OF INDIA LTD.(SUPRA)OF THE H ONBLE SUPREME COURT, WE DECIDE THE EFFECTIVE GROUNDS OF APPEAL AGAINST THE AO.IN OUR O PINION ORDER OF THE FAA DOES NOT SUFFER FROM ANY LEGAL INFIRMITY,SO, UPHOLDING IT WE DISMIS S THE GROUNDS OF APPEAL FILED BY THE AO. AS A RESULT, APPEAL FILED BY TH E AO STAND DISMISSED. 516 $% 01 7 48 , 9 + : 1 , 1 ;<. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST ,JULY, 2014. 4'> , 23& ' ? @4% 21 ,2014 3 , 9 E SD/- SD/- ( / VIJAY PAL RAO ) ( ' # / RAJENDRA ) $ 4+ /JUDICIAL MEMBER ' 4+ /ACCOUNTANT MEMBER /MUMBAI, @4% /DATE: 21 ST JULY, 2014 SHASHI SHEKHAR KUMAR 4'> 4'> 4'> 4'> , ,, , )$1F )$1F )$1F )$1F G'&1 G'&1 G'&1 G'&1 / COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / '( 2. RESPONDENT / )*'( 3. THE CONCERNED CIT(A)/ H I , 4. THE CONCERNED CIT / H I 5. DR I BENCH, ITAT, MUMBAI / J9 )$1$% , . . . 6. GUARD FILE/ 9 5 *1 *1 *1 *1 )$1 )$1)$1 )$1 //TRUE COPY// 4'>% / BY ORDER, K / ; DY./ASST. REGISTRAR , /ITAT, MUMBAI