Dy.CIT, Circle-1(2), Hyderabad V. M/s Cybermate Infotech Ltd., Secunderabad

ITA 631/HYD/2014

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 0353 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-04-2015
• Appeal Filed By: Department
• Bench Allotted: A
• Next Hearing Date: 09-04-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 04-04-2014
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: P MURALI MOHAN RAO
• Keywords: Depreciation; Wholly owned subsidiary; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER I.T.A. NO. 474/HYD/2014 ASSESSMENT YEAR: 2009-10 M/S. CYBERMATE INFOTEK LTD., HYDERABAD [PAN: AABCC4776F] VS ASST. COMMISSIONER OF INCOME TAX, CIRCLE-1(2), HYDERABAD (APPELLANT) (RESPONDENT) I.T.A. NO. 631/HYD/2014 ASSESSMENT YEAR: 2009-10 DY. COMMISSIONER OF INCOME TAX, CIRCLE-1(2), HYDERABAD VS M/S. CYBERMATE INFOTE K LTD., HYDERABAD [PAN: AABCC4776F] (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI P. MURALI MOHAN RAO, AR FOR REVENUE : SHRI D. SUDHAKAR RAO, CIT DATE OF HEARING : 09 - 0 4 - 201 5 DATE OF PRONOUNCEMENT : 17 - 04 - 2015 O R D E R PER B. RAMAKOTAIAH, A.M. : THESE ARE CROSS-APPEALS BY REVENUE AND ASSESSEE AG AINST THE ORDERS OF THE COMMISSIONER OF INCOME TAX(APPEALS)-I I, HYDERABAD DATED I.T.A. NOS. 474 & 631 /HYD/2014 :- 2 -: 03-01-2014. THERE ARE VARIOUS ISSUES ON WHICH ASSE SSING OFFICER (AO) MADE DISALLOWANCES/ADDITIONS WHICH CIT HAS PARTLY A LLOWED. HENCE, CROSS APPEALS. BOTH ASSESSEE AND REVENUE HAVE RAIS ED CORRESPONDING GROUNDS ON VARIOUS ISSUES WHICH ARE DEALT, WITH AFT ER HEARING THE LD. COUNSEL FOR ASSESSEE AND LD. DR FOR THE REVENUE. 2. BRIEFLY STATED, ASSESSEE FILED RETURN OF INCOME BELATEDLY ON 30-03- 2011 FOR AY.2009-10. AO SELECTED THE CASE FOR SCRU TINY AND ON THE REASON THAT ASSESSEE HAS NOT SUBSTANTIATED MANY OF THE CLAIMS AND HAS NOT FURNISHED COMPLETE DETAILS, MADE VARIOUS DISALL OWANCES AS UNDER: RS. A. DISALLOW ANCE OF DEDUCTION UNDER SECTION 10A 6,75,96,165 B. DISALLOWANCE OF INVESTMENTS WRITTEN OFF 4,09,46,675 C. DISALLOWANCE OF OVERSEAS EMPLOYEES 3,32,00,000 D. DISALLOWANCE OF SOFTWARE PURCHASE 59,03,400 E. DISALLOWANCE OF BUSINESS PROMOTION EXPENSES 73, 05,795 F. DISALLOWANCE OF CONSULTANCY CHARGES 37,51,921 G. DISALLOWANCE OF AUDITOR'S FEE 1,00,000 3. ASSESSEE CONTESTED THE ISSUES BEFORE THE CIT(A) AND CIT(A) CONFIRMED THE DISALLOWANCES OF DEDUCTION U/S.10A, I NVESTMENTS WRITTEN- OFF, DISALLOWANCE OF SOFTWARE PURCHASE AND DISALLOW ANCE OF AUDIT FEE. ASSESSEE IS CONTESTING THE SAME. LD. CIT(A) GAVE A RELIEF ON DISALLOWANCE OF OVERSEAS EMPLOYEES, BUSINESS PROMOTION EXPENSES AND CONSULTANCY CHARGES. REVENUE IS AGGRIEVED ONLY ON THE DISALLOW ANCE OF RS.3.3 CRORES TOWARDS OVERSEAS EMPLOYEES. LD CIT(A) ALSO ENHANCED THE INCOME ON WHICH ASSESSEE OBJECTED NOT ONLY ON MERITS BUT ALSO ON NOT GIVING AN OPPORTUNITY BEFORE ENHANCING. THESE ARE CONSIDERED ISSUE-WISE. I. CLAIM OF DEDUCTION U/S.10A OF THE ACT: 4. ASSESSEE HAD AN EXPORT TURNOVER OF RS.1.53 C RORES AND HAD ARRIVED AT THE DEDUCTION U/S.10B OF AN AMOUNT OF RS.1,96,28 ,459/-. HOWEVER, I.T.A. NOS. 474 & 631 /HYD/2014 :- 3 -: WHILE FILING THE RETURN OF INCOME, BY MISTAKE THE A MOUNT PERTAINING TO SECTION 10A WAS SHOWN UNDER THE HEAD CAPITAL WORK I N PROGRESS AND AMOUNT PERTAINING TO CAPITAL WORK IN PROGRESS OF RS .6,75,96,165/- WAS SHOWN AGAINST 10A CLAIM. SINCE THE TYPOGRAPHICAL M ISTAKE WAS NOTED DURING THE ASSESSMENT PROCEEDINGS, ASSESSEE CLAIMS THAT IT HAS FILED REVISED COMPUTATION BEFORE THE AO WHICH WAS IGNORED . BE THAT AS IT MAY, AO NOTED THAT THERE CANNOT BE ANY CLAIM OF DED UCTION U/S.10A AT RS.6,75,96,165/- AS AGAINST EXPORT TURNOVER OF RS.1 .53 CRORES. AO ALSO GAVE A FINDING THAT ALL THE PRE-REQUISITES FOR CLAI MING DEDUCTION U/S.10A HAS NOT BEEN FULFILLED AND FIRCS FILED IN SUPPORT O F THE EXPORT TURNOVER IS NOT COMPLETE. SINCE, ASSESSEE CLAIM IS NOT SUBSTAN TIATED, THE ENTIRE AMOUNT OF RS.6,75,96,165/- WAS DISALLOWED AND ADDED TO THE TOTAL INCOME RETURNED. 4.1 BEFORE THE CIT(A), ASSESSEE SUBMITTED THAT THIS CLAIM WAS WRONGLY SHOWN IN THE COMPUTATION WHEREAS THE ACTUAL CLAIM W AS ONLY RS.1,96,28,459/-. IN SUPPORT IT FILED THE RELEVANT CERTIFICATES OF FIRCS AND PERMISSION FROM STPI AND STATED TO HAVE FILED F ORM 56F IN SUPPORT OF THE CLAIM. HOWEVER, LD. CIT(A) NOTICED THAT THE RE IS NO RENEWAL OF STPI CERTIFICATE NOR ASSESSEE HAS FILED THE RELEVAN T FORM 56F WHICH QUANTIFIES SECTION 10A DEDUCTION WHICH IS PRE-REQUI SITE FOR ALLOWING 10A DEDUCTION. HOWEVER, CIT(A) ACKNOWLEDGED THAT THE M ISTAKE IN CLAIM WAS A TYPOGRAPHICAL ERROR AND THEREFORE RESTRICTED THE DISALLOWANCE TO THE AMOUNT OF RS.1,53,00,444/-. 4.2 ON CONSIDERING THE RIVAL SUBMISSIONS AND PERUSI NG THE PAPER BOOK ON RECORD, WE ARE OF THE OPINION THAT THIS MATTER R EQUIRES RE-EXAMINATION BY THE AO. IT IS STATED THAT ASSESSEE WAS CLAIMING 10A DEDUCTION IN EARLIER YEARS AND AS PER THE PROVISIONS, ASSESSEE I S ELIGIBLE FOR CONTINUATION OF CLAIM FOR A PERIOD OF TEN YEARS. T HEREFORE, IT IS NECESSARY I.T.A. NOS. 474 & 631 /HYD/2014 :- 4 -: THAT THE ELIGIBILITY OF ASSESSEE SHOULD BE EXAMINED . AS SEEN FROM THE ASSESSMENT ORDER, THE AO SEEMS TO HAVE BEEN CARRIED AWAY BY THE AMOUNT OF CLAIM MADE AGAINST EXPORT TURNOVER AND N O OTHER CONDITIONS/DETAILS SEEMS TO HAVE BEEN EXAMINED. BE FORE US, LD. COUNSEL FILED A COPY OF FORM 56F WHICH IS STATED TO HAVE BE EN FILED BEFORE THE AUTHORITIES BUT NOT ACKNOWLEDGED. THEREFORE, IN TH E INTEREST OF JUSTICE AND NOTING THAT ASSESSEES CLAIM WAS MADE IN EARLIE R YEARS, WE ARE OF THE OPINION THAT MATTER REQUIRES RE-EXAMINATION BY THE AO. AO ALSO SHOULD EXAMINE THE ELIGIBILITY OF THE CLAIM AND THE AMOUNT CLAIMED TOWARDS DEDUCTION, KEEPING IN VIEW THE ELIGIBLE UNIT AND IT S PROFITS AS PER THE PROVISIONS OF THE ACT. 4.3 INCIDENTAL TO THE ABOVE CLAIM IS THE DIRECTION OF CIT(A) TO ENHANCE THE INCOME BY AN AMOUNT OF RS.6,75,96,165/- IN THE LAST PARA OF THE ORDER, ON THE REMAND REPORT SENT BY THE AO. WE ARE UNABLE TO UNDERSTAND THE DIRECTION. FIRST OF ALL, THE ENTIRE AMOUNT OF RS.6,75,96,165/- WAS DISALLOWED BY THE AO, THEREFOR E QUESTION OF ENHANCING THE AMOUNT DOES NOT ARISE. THE ISSUE WHE THER CAPITAL WORK IN PROGRESS CAN BE REDUCED OR NOT WAS NOT AN ISSUE BEF ORE THE AO AND THIS ASPECT WAS NOT EXAMINED AT ALL. SINCE THE AO PUT I T TO CIT(A), WITH REFERENCE TO CLAIM OF RS.1,96,28,459/- AND CAPITAL WORK IN PROGRESS REDUCED IN THE COMPUTATION, WHICH THE LD. CIT(A) DI RECTED TO BE ENHANCED BY AN AMOUNT OF RS.6,75,96,165/- , THAT TO O WITHOUT GIVING OPPORTUNITY TO ASSESSEE AS CONTENDED, WE ARE OF THE OPINION THAT THIS CAPITAL WORK IN PROGRESS ISSUE ALSO REQUIRES RE-EXA MINATION. AO IS DIRECTED TO TAKE THE REVISED COMPUTATION FILED BY T HE ASSESSEE AND DETERMINE THE EXACT AMOUNT CLAIMED BY ASSESSEE AND WHY THIS CLAIM WAS MADE AND WHETHER THE CLAIM CAN BE ALLOWED AS PER TH E PROVISIONS OF THE ACT. FOR THIS PURPOSE, THIS ISSUE OF CLAIM OF CAPI TAL WORK IN PROGRESS IS I.T.A. NOS. 474 & 631 /HYD/2014 :- 5 -: ALSO RESTORED TO THE FILE OF AO. ACCORDINGLY, GROU ND NO. 2, 3, 8 AND 9 OF ASSESSEES APPEAL ARE CONSIDERED ALLOWED FOR STATIS TICAL PURPOSES. II. INVESTMENT WRITTEN-OFF RS.4,09,46,675/-: 5. IN THE P&L A/C ASSESSEE HAS CLAIMED THE ABOV E AMOUNT AS A WRITE- OFF. AO NOTED THAT INVESTMENT WRITTEN-OFF CANNOT B E TREATED AS AN ALLOWABLE DEDUCTION AS IT IS NOT A REVENUE EXPENDIT URE. BEFORE THE CIT(A), ASSESSEE SUBMITTED THAT THIS AMOUNT WAS ORI GINALLY SHOWN AS INCOME IN THE BOOKS OF ACCOUNTS AND IS RECEIVABLE F ROM WHOLLY OWNED SUBSIDIARY IN USA. SINCE THE AMOUNT WAS NOT RECEIV ED FROM THE THIRD PARTY TO THE SUBSIDIARY, UNDER THE FEMA REGULATIONS PERMISSION OF THE RBI WAS OBTAINED TO CONVERT THE OUTSTANDING AMOUNT INTO EQUITY. LATER ON IN VIEW OF THE RBIS CIRCULAR NO.69 DT. 25-07-2 011, 22.5% OF THE AMOUNT INVESTED WAS WRITTEN-OFF DURING THE YEAR. S INCE THE AMOUNT WAS ORIGINALLY OFFERED AS INCOME, NON-RECEIPT OF THE SA ME WAS ELIGIBLE AS DEDUCTION U/S.37(1). AFTER OBTAINING THE REMAND RE PORT FROM THE AO AND ALSO NOTED DOWN THE AMOUNTS REMITTED AND CAPITA LIZATION OF RECEIVABLES, LD. CIT(A) CONCLUDED THAT THE WRITE-OF F DOES NOT SATISFY THE CONDITIONS PRESCRIBED. BEFORE US, LD. AR FILED VAR IOUS ANNUAL REPORTS IN SUPPORT THAT THE AMOUNT WAS ORIGINALLY OFFERED AS I NCOME AND RECEIVABLE FROM SUBSIDIARY WAS CONVERTED TO EQUITY, IN VIEW OF THE FEMA PROVISIONS, AND THEN BY VIRTUE OF RBI CIRCULAR WRITTEN-OFF THE AMOUNT. SINCE THE AMOUNT WAS ORIGINALLY OFFERED AS INCOME, SUBSEQUENT WRITE-OFF IS ALLOWABLE AS REVENUE EXPENDITURE, IT WAS CONTENDED. 5.1. WITHOUT GOING INTO THE MERITS OF THE CLAI M, WE ARE OF THE OPINION THAT THIS CLAIM ALSO REQUIRES RE-EXAMINATION. ASSE SSEES CLAIM THAT AMOUNTS ARE ORIGINALLY OFFERED AS INCOME, SUBSEQUEN TLY CONVERTED TO EQUITY OF THE SUBSIDIARY AND WRITTEN-OFF ON THE BAS IS OF THE CIRCULARS OF I.T.A. NOS. 474 & 631 /HYD/2014 :- 6 -: RBI REQUIRES EXAMINATION BY AO, AS NONE OF THE FIGU RES ARE COMPARABLE ON THE BASIS OF THE ANNUAL REPORTS FILED BEFORE US. IN ORDER TO EXAMINE THE ISSUE AND TO GIVE ONE MORE OPPORTUNITY TO ASSES SEE TO SUBSTANTIATE THE CLAIM, MATTER IS RESTORED TO THE FILE OF AO WIT H A DIRECTION TO EXAMINE THE FACTUAL ASPECT OF THE CONTENTIONS OF ASSESSEE A ND THEN DECIDE WHETHER THE AMOUNT CAN BE ALLOWED AS REVENUE EXPEND ITURE OR NOT AS PER THE PROVISIONS OF ACT. FOR THIS PURPOSE, THIS ISSU E IS ALSO RESTORED TO THE FILE OF AO AND GROUND NO.4 IS ACCORDINGLY CONSIDERE D ALLOWED FOR STATISTICAL PURPOSES. III. SOFTWARE PURCHASES: 6. ASSESSEE IS IN THE BUSINESS OF SOFTWARE DEVE LOPMENT AND STATED TO HAVE PURCHASED SOFTWARE TO AN EXTENT OF RS.59,97,74 4/-. OUT OF WHICH AO ACCEPTED AN AMOUNT OF RS.95,160/- AND DISALLOWED THE BALANCE AMOUNT AS NOT SUBSTANTIATED. BEFORE THE LD. CIT(A) , ASSESSEE FURNISHED ALL THE VOUCHERS WHICH ARE LISTED IN PARA 8.3. HOW EVER, THE LD. CIT(A) TREATED THE EXPENDITURE AS CAPITAL EXPENDITURE AND DIRECTED THE AO TO ALLOW DEPRECIATION AS PER THE SCHEDULES. BEFORE US IT WAS THE CONTENTION THAT SOFTWARE PURCHASED ARE NOT ON CAPITAL ACCOUNT, BUT ON REVENUE ACCOUNT IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND SINCE VOUCHERS ARE FURNISHED BEFORE THE CIT(A), WHICH WAS ALSO REMANDE D TO AO, THE AMOUNT HAS TO BE ALLOWED AS REVENUE EXPENDITURE. 6.1 WE HAVE EXAMINED THE ISSUE. AS SEEN FRO M THE ASSESSMENT ORDER, THE ISSUE RAISED BY AO IS ONLY WITH REFERENC E TO NON-FURNISHING OF VOUCHERS WITH RESPECT OF PURCHASES CLAIMED IN THE P &L A/C. THERE IS NO DISPUTE BEFORE THE AO AS THE SOFTWARE PURCHASES ARE ON REVENUE ACCOUNT. ONLY FOR LACK OF PROOF OF SOFTWARE PURCHA SE, AO DISALLOWED THE AMOUNT. THE SAID PROOF WAS FURNISHED BEFORE THE LD . CIT(A) WHICH WAS I.T.A. NOS. 474 & 631 /HYD/2014 :- 7 -: ALSO SENT ON REMAND REPORT TO THE AO. WE ARE SURPR ISED TO SEE THAT LD. CIT(A) DIRECTING THE AO TO TREAT AS CAPITAL PURCHA SE WHICH ISSUE NOT ALL RAISED BY AO NOR BY ASSESSEE. IN VIEW OF THIS, WE MODIFY THE ORDER OF CIT(A) AND DIRECT THE AO TO ALLOW THE AMOUNT AS REV ENUE EXPENDITURE. GROUND NO. 5 & 6 ARE ALLOWED. IV. ISSUE OF AUDIT FEE RS.1 LAKH: 7. AO NOTICED THAT ASSESSEE PAID AN AMOUNT O F RS.1 LAKH ON WHICH TDS WAS NOT DONE. INVOKING THE PROVISIONS OF SECTI ON 40(A)(IA) ENTIRE AMOUNT OF RS.1 LAKH WAS DISALLOWED. BEFORE THE LD. CIT(A), ASSESSEE SUBMITTED THAT AMOUNT OF TDS PAID OF RS.87,857/- ON 27-08-2008 INVOLVES TDS ON AUDIT OF FEE OF RS.1 LAKH. LD. CIT (A) DIRECTED THE AO TO VERIFY AND ALLOW THE AMOUNT. SINCE THE CIT(A)S DI RECTION IS ONLY WITH REFERENCE TO DIRECTION GIVEN TO THE AO, WE REITERAT E THE SAME DIRECTION. GROUND IS CONSIDERED ALLOWED ACCORDINGLY. V. SALARY PAID TO OVERSEAS EMPLOYEES: 8. WHILE COMPLETING THE ASSESSMENT, AO NOTED THAT AN AMOUNT OF RS.4.97 CRORES WAS CLAIMED UNDER THE HEAD SALARIES . OUT OF WHICH AN AMOUNT OF RS.3,32,00,000/- WAS TOWARDS SALARIES TO OVERSEAS EMPLOYEES. ON THE REASON THAT ASSESSEE DO NOT HAVE ANY BRANCHES IN USA OR UAE AND FURTHER ASSESSEE FAILED TO PRODUCE T HE DETAILS OF THE ALLEGED SALARIES PAID TO THE FOREIGN EMPLOYEES, AN AMOUNT OF RS.3,32,00,000/- WAS DISALLOWED BY THE AO. BEFORE THE LD. CIT(A), ASSESSEE MADE DETAILED SUBMISSIONS AND FURNISHED VA RIOUS DETAILS INCLUDING VARIOUS CONTRACTS AND MAN POWER EMPLOYED ORGANIZATION-WISE. LD. CIT(A) EXTRACTED THE INFORMATION IN PARA 7.1, 7 .2 AND 7.3 OF THE ORDER. THIS INFORMATION WAS ALSO SENT TO AO IN THE REMAND REPORT. IN VIEW OF THIS, CIT(A) WAS OF THE OPINION THAT THE DI SALLOWANCE MADE BY I.T.A. NOS. 474 & 631 /HYD/2014 :- 8 -: THE AO IS NOT WARRANTED AND ACCORDINGLY DELETED. W E HAVE ALSO EXAMINED THE CLAIMS AND SOUGHT CLARIFICATION FROM A SSESSEE ABOUT THE CLAIM OF SALARIES. THE NOTE SUBMITTED BY ASSESSEE WITH REFERENCE TO THIS IS AS UNDER: NOTE ON EXPENDITURE INCURRED TOWARDS SALARIES (RS.3.32 CRORES) : 'THE COMPANY BIDS FOR VARIOUS SOFTWARE SERVICES/BUI LDING OF THE PRODUCTS/VERSIONS. NORMALLY THESE BILLINGS WILL B E DONE BASIN ON THE MILESTONES SPECIFIED IN THE TENDERS. WHENEVER THE COMPANY COMPLETED THE PROJECTS IT WILL GO TO REVENUE OTHER WISE IT WILL BE KEPT IN INVENTORY (CLOSING WIP I.E., UNBILLED AMOUNT). DURING THE YEAR AS MOST OF THE WORKS WERE NOT COMPLETED AS PER THE SP ECIFICATION WE ARE NOT IN A POSITION TO BILL EVENTHOUGH WE INCURR ED THE EXPENDITURE ON SALARIES AND OTHER THINGS THAT IS THE REASON TH IS YEAR INCREASE IN THE INVENTORY IS AROUND 19 CRORES. THE EXPENDITUR E WE INCURRED I.E., RS.3.32 CRORES FOR THE SALARIES OF THE PERSONS OUT SIDE INDIA, THE AMOUNT WE INCURRED FOR THE SALARIES IS INCLUDED IN INCREASE IN THE INVENTORY IN THE PROFIT & LOSS ACCOUNT'. IN VIEW OF THE CLARIFICATION GIVEN AND INFORMATION FURNISHED ON RECORD, WE DID NOT SEE ANY REASON TO INTERFERE WITH THE FINDIN GS OF LD. CIT(A). REVENUES GROUNDS ON THIS, ARE THEREFORE DISMISSED. 9. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES AND REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 17 TH APRIL, 2015 SD/- SD/- (ASHA VIJAYARAGHAVAN) (B. RAMA KOTAIAH) JUDICIAL MEMBER ACC OUNTANT MEMBER HYDERABAD, DATED 17 TH APRIL, 2015 TNMM I.T.A. NOS. 474 & 631 /HYD/2014 :- 9 -: COPY TO : 1. M/S. CYBERMATE IN F OTEK LTD., C/O. P. MURALI & CO., CHARTERED ACCOUNTANTS, 6-3-655/2/3, 1 ST FLOOR, SOMAJIGUDA, HYDERABAD. 2. DY. COMMISSIONER OF INCOME TAX, CIRCLE-1(2), 4 TH FLOOR, AAYAKAR BHAVAN, HYDERABAD. 3. ASST. COMMISSIONER OF INCOME TAX, CIRCLE-1(2), H YDERABAD 4. CIT(APPEALS)-II, HYDERABAD 5. CIT-I, HYDERABAD 6. D.R. ITAT, HYDERABAD