TECHNO SHARES & STOCK LTD, MUMBAI V. ACIT CIR 4(2), MUMBAI

ITA 7153/MUM/2008

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8855 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-01-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 02-12-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 18-12-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K SINGH
• Assessee Lawyers: F V IRANI
• Keywords: Depreciation; Revenue expenditure

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I, MUMBAI BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYRAGHAVAN, JUDICIAL MEMBER. I.T.A. NOS. 7153 & 7154/MUM/2008. ASSESSMENT YEAR : 2004-05 & 2005-06. M/S TECHNO SHARES & STOCKS LTD. ASSTT.COMMISSIONER OF INCOME-TAX, 1 ST FLOOR, 93 MUMBAI SAMACHAR MARG, VS. CIRCLE-4(2), MUMBAI. ENGINEER PREMISES, MUMBAI 400 023. PAN AAACT4464G APPELLANT. RESPON DENT. I.T.A. NOS. 7009 & 7010/MUM/2008. ASSESSMENT YEAR : 2004-05 & 2005-06. DY. COMMISSIONER OF INCOME-TAX, M/S TECHNO SHARES & STOCKS LTD., CIRCLE-4(2), MUMBAI. VS. MUMBAI. ASSESSEE BY : SHRI F.V. IRANI. DEPARTMENT BY : SHRI S.K. SINGH. O R D E R PER J. SUDHAKAR REDDY, A.M. : THESE ARE CROSS APPEALS FILED FOR THE ASSESSMENT Y EARS 2004-05 AND 2005-06 DIRECTED AGAINST THE SEPARATE ORDERS OF THE CIT(APP EALS)-IV, MUMBAI DATED 26-09- 2008. AS THE ISSUES ARISING IN ALL THESE APPEALS AR E COMMON, FOR THE SAKE OF CONVENIENCE, THEY ARE HEARD TOGETHER AND DISPOSED O F BY WAY OF THIS COMMON ORDER. 2 2. THE ASSESSEE IS A COMPANY AND IS IN THE BUSINESS OF A SHARE BROKER. IT FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2004-05 ON 01-11-2004 DECLARING A TOTAL INCOME OF RS.92,73,706/-. FOR THE ASSESSMENT YEAR 2 005-06, IT FILED ITS RETURN OF INCOME ON 29-10-2005 DECLARING TOTAL INCOME OF RS.2 ,15,55,177/-. AS THE ISSUES ARISING IN THESE APPEALS ARE COMMON, WE DISPOSE OF THE SAME BY WAY OF THIS COMMON ORDER AFTER HEARING RIVAL SUBMISSIONS. 3. WE HAVE HEARD SHRI F.V. IRANI, LEARNED COUNSEL F OR THE ASSESSEE AND SHRI S.K. SINGH, LEARNED SENIOR DR. 4. WE FIRST TAKE UP THE ASSESSEES APPEAL FOR ASSES SMENT YEAR 2004-05. 4.1 GROUND NO. 1 IS ON THE DISALLOWANCE OF CLAIM AS REVENUE EXPENDITURE OF SOFTWARE PURCHASED. THE AO AT PARA 4.1 OF HIS ORDER , BROUGHT OUT THE FACTS. HE OBSERVED THAT THE ASSESSEE PURCHASED NEW SOFTWARE F OR DEVELOPMENT, AMOUNTING TO RS.1,96,000/- AND HELD THAT THE ASSESSEE RECEIVED E NDURING BENEFIT. MR. FARUK IRANI SUBMITS THAT THE SOFTWARE WAS PURCHASED FOR UPDATIN G EXISTING SOFTWARE AND IT INCLUDES CUSTOMIZATION CHARGES. HE SUBMITTED THAT T HE PAYMENT WAS TOWARDS NEW SOFTWARE AND THE PRICE INCLUDES BASIC PRODUCT COST, CUSTOMIZATION CHARGES, INSTALLATION COST, MULTI USER FACILITY COST, TRAINI NG OF STAFF, SUPPORT COST, FREE UPGRADATION FOR ONE YEAR AND SUCH OTHER MATTERS. HE SUBMITTED THAT THE PRICE CANNOT BE BIFURCATED INTO PRODUCT COST AND SERVICE COST AN D THAT THE PRICE PAID IS ONLY FOR THE FIRST YEAR AND ANNUAL MAINTENANCE CHARGES HAVE TO BE PAID SUBSEQUENTLY. HE SUBMITTED THAT THE EXPENDITURE IS IN THE REVENUE FI ELD. 4.2 MR. S.K. SINGH, LEARNED DR, OPPOSED THE CONTENT IONS. 4.3 AFTER HEARING RIVAL CONTENTIONS, WE AGREE WITH THE FINDINGS OF THE AO AS CONFIRMED BY THE CIT(APPEALS) ON THIS ISSUE. ADMITT EDLY THE SOFTWARE IS A NEW SOFTWARE. THE ASSESSEE IS ALSO REQUIRED TO PAY ANNU AL MAINTENANCE CHARGES FOR THE 3 NEXT YEAR ONWARDS AND IS ALSO REQUIRED TO PAY ADDIT IONAL COST FOR MODIFICATION OR MAJOR UPGRADATION. ON THESE FACTS, IT CANNOT BE SAI D THAT THE EXPENDITURE IS IN REVENUE FIELD. 4.4 IN THE RESULT, GROUND NO.1 OF THE ASSESSEE IS D ISMISSED. 5. GROUND NO.2 IS ON THE ISSUE OF DISALLOWANCE OF B AD DEBT. THE AO DEALT WITH THIS ISSUE AT PARA 8 OF HIS ORDER. THE DISALLOWANCE WAS MADE ON THE GROUND THAT THE DEBT SHOULD HAVE TO BE SHOWN AS HAVING BECOMING BAD . THIS ISSUE NOW STANDS COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE R EVENUE BY A DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF SHREYA S MORAKHIA IN ITA NO. 3374/MUM/2008, ORDER DATED 16 TH JULY, 2010 AND THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF T.R.F. LTD. 323 ITR 3 97. THUS THIS GROUND IS ALLOWED. 6. IN THE RESULT THE RESULT, THE APPEAL OF THE ASSE SSEE IS ALLOWED IN PART. 7. ITA NO.7009/MUM/2008, ASSTT.YEAR:2004-05 (REVENU E APPEAL). THE FIRST ISSUE IN THE REVENUE APPEAL IS DEPRECIAT ION ON BSE CARD. THE ISSUE NOW STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HONBLE SUPREME COURT IN ASSESSEES OWN CASE WHICH IS REPORTED AT 3 27 ITR 323 (SC). 7.1 GROUND NO. 2 TO 6 IS ON THE DISALLOWANCE OF EX PENDITURE BY WAY OF PENALTY PAID TO STOCK EXCHANGE. THE ISSUE IS DISCUSSED AT P ARA 5 OF THE ASSESSMENT ORDER. THE PENALTIES WERE LEVIED ON ROUTINE SHORT COMINGS AND SMALL LAPSES IN THE DAY TO DAY WORKING AS A STOCK BROKER AND IN COMPLETION OF SETTLEMENT PROCEEDINGS. THESE PENALTIES CANNOT BE HELD AS THOSE WHICH ARE LEVIED FOR VIOLATION OF STATUTE OR FOR INFRINGEMENT OF LAW. THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE, IN THE ASSESSEES OWN CASE BY THE ORDER OF THE TRIBUNAL FO R THE ASSESSMENT YEAR 2003-04 AND FOR THE ASSESSMENT YEAR 2006-07, ORDERS DATED 1 3-3-2009 AND 8 TH OCT., 2010 4 RESPECTIVELY. RESPECTFULLY FOLLOWING THE SAME, WE D ISMISS THESE GROUNDS OF THE REVENUE. 8. GROUND NOS. 7 TO 11 ALLEGED VIOLATION OF RULE 46A. IN VIEW OF OUR DECISION ON THE MERITS OF THE CASE, WE DISMISS THESE GROUNDS. 9. IN THE RESULT, APPEAL FILED BY THE REVENUE IN IT A NO. 7009/MUM/2008 IS DISMISSED. 10. WE NOW CONSIDER ASSESSEES APPEAL FOR ASSESSMEN T YEAR 2005-06 IN ITA NO.7154/MUM/2008.. 10.1 GROUND NO. 1 IS ON THE DISALLOWANCE MADE U/S 4 0(A)(IA) ON THE GROUND THAT TDS HAS NOT BEEN MADE ON TRANSACTION CHARGES PAID T O BSE AND NSE. THIS BENCH OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2006-07 FOLLOWED THE DECISION OF THE TRIBUNAL IN THE CASE O F KOTAK SECURITIES LTD. VS. ADDL. CIT 318 ITR (AT) 268 AND ALLOWED THE CLAIM OF THE A SSESSEE. RESPECTFULLY FOLLOWING THE SAME, WE ALLOW THIS GROUND. 10.2 GROUND NO. 2 IS ON THE DISALLOWANCE OF BAD DEB TS. AS IN THE EARLIER YEAR, WE FOLLOW THE JUDGMENT OF THE SPECIAL BENCH OF THE TRI BUNAL IN THE CASE OF DCIT VS. SHREYAS MORAKHIA IN ITA NO. 3374/MUM/2008, ORDER DA TED 16 TH JULY, 2010 AND THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE O F T.R.F. LTD. VS. CIT 323 ITR 397 AND ALLOW THIS GROUND OF THE ASSESSEE. 10.3 GROUND NO. 3 IS ON THE DISALLOWANCE OF CONTRIB UTION OF EMPLOYEES PROVIDENT FUND U/S 36(1)(VA). THE UNDISPUTED FACT IS THAT THE ASSESSEE HAS PAID THE P.F. IN QUESTION BEFORE THE FILING OF THE RETURN. IN FACT, THE DELAY WAS JUST FOUR DAYS BEYOND THE GRACE PERIOD. THE ISSUE NOW STANDS COVERED IN F AVOUR OF THE ASSESSEE BY THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE C IT VS. ALOM EXTRUSIONS LTD. 5 319 ITR 306 (SC) AND THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. AIMIL LTD. 321 ITR 508 (DEL.). RESPECTFULLY FOLLOWING THE SAME, WE ALLOW THIS GROUND. 11. GROUND NO. 4 IS IN RESPECT OF PROPORTIONATE DIS ALLOWANCE IN RESPECT OF PREMIUM PAID ON KEYMEN INSURANCE. THE AO CONSIDERED THIS ISSUE AT PAGE 10. AT PARA 8.3 TO 8.5, WHEREIN HE HELD AS FOLLOWS : 8.3 THE PREMIUM HAVING BEEN PAID FOR A PERIOD OF 1 2 MONTHS, ONLY THE PREMIUM RELATING TO THE UNEXPLAINED PERIOD OF THE Y EAR SHOULD HAVE BEEN CHARGED TO THE PROFIT AND LOSS ACCOUNT AND THE BALA NCE BE CARRIED AS PREPAID TO BE ADJUSTED AGAINST THE NEXT YEARS PROFITS. 8.4 WHEN CONFRONTED WITH THE SAME THE ASSESSEE HAS BASICALLY IN HIS SUBMISSION GIVEN ARGUMENTS ON THE ALLOWABILITY OF T HE EXPENDITURE UNDER THE ACT AND THE FACT THAT THE DIRECTORS ON WHOSE LIFE T HE POLICY WERE TAKEN WERE INDEED KEYMEN. HE FURTHER ADDS THAT THE COMPANY HAS INCURRED LIABILITY AS SOON AS THE POLICY WAS TAKEN, AND IT WILL CONTINUE, AND THAT THE PREMIUM PAID IS NOT REFUNDABLE, THEREFORE THE SAME SHOULD BE ALL OWED. I HAVE CONSIDERED THE SUBMISSION, AND NO DOUBT I AG REE THAT KEYMAN INSURANCE PREMIUM IS AN ALLOWABLE EXPENDITURE, HOWE VER I DO NOT AGREE THAT THE ENTIRE LIABILITY OF PAYING THE PREMIUM OVER T HE LIFE ACCRUED IMMEDIATELY. THAT WOULD HAVE BEEN THE CASE IF IT WA S A SINGLE PREMIUM POLICY. IN THE POLICIES THAT HAVE BEEN TAKEN THE PR EMIUMS HAVE TO BE PAID FOR A SPECIFIC PERIOD ON A REGULAR BASIS, THEY MAY BE Q UARTERLY, HALF YEARLY OR YEARLY. THE PORTION OF PREMIUM ALLOWABLE CAN ONLY B E IN RESPECT OF THE PERIOD DURING WHICH THE POLICY HAS BEEN TAKEN TO TH E END OF THE YEAR. THE FACT THAT AN AMOUNT IS NOT REFUNDABLE DOES NOT MAKE IT AN ALLOWABLE DEDUCTION IN THAT YEAR, IN THE MERCANTILE SYSTEM AS VERY APTLY OBSERVED BY THE COURT ABOVE. 8.5 ACCORDINGLY THE PREPAID AMOUNT OF RS.30,31,327/ - IS DISALLOWED AS EXPENDITURE FOR THIS YEAR. THE SAME WILL BE ALLOWAB LE IN THE NEXT YEAR, BEING RELATED TO THAT YEAR. 11.1 THE FIRST APPELLATE AUTHORITY CONSIDERED THE S UBMISSION OF THE ASSESSEE AT PARA 5.4 TO 5.7 AND HELD AS FOLLOWS : 6 5.4 I HAVE GONE THROUGH THE ORDER OF THE A.O. AND SUBMISSION OF THE APPELLANT. THE APPELLANT IS FOLLOWING MERCANTILE SY STEM OF ACCOUNTING. IN ACCORDANCE WITH THE PROVISIONS OF SECTION 145(1), T HE APPELLANT CAN EITHER FOLLOW CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGU LARLY EMPLOYED BY IT. IT IS NOT FOR THE ASSESSEE TO FOLLOW A MIXED SYSTEM OF ACCOUNTING AS IN THE CASE WITH THE APPELLANT WITH RESPECT TO CERTAIN EXPENSES LIKE COMPUTER SOFTWARE, INSURANCE, KEYMAN INSURANCE AND NEWSPAPER AND PERIO DICALS. 5.5 CONSIDERING THE SMALLNESS OF AMOUNTS WITH RESPE CT OF EXPENSES OTHER THAN KEYMAN INSURANCE AND IN VIEW OF PRACTICALITIES , THE A.O. DID NOT COMPUTE THE OTHER EXPENSES ON PRO RATA BASIS, DOES NOT MEAN THAT HIS ACTION TO DISALLOW PREPAID AMOUNT OF KEYMAN INSURANCE PREM IUM IS INCORRECT. 5.6 THE KEYMAN INSURANCE POLICY OF LIC IS FOR THE P ERIOD 19-01-2005 TO 18-01-2006 AND THE PREMIUM AMOUNT IS RS.36,37,592/- . THE PREPAID AMOUNT IN THIS CASE IS QUITE SUBSTANTIAL I.E. RS.30,31,327 /-. 5.7 UNDER THE MERCANTILE SYSTEM OF ACCOUNTING, MATC HING PRINCIPLE IS IMPORTANT AND EXPENSES ATTRIBUTABLE TO CURRENT YEAR SHOULD BE ALLOWED IN THE PRESENT YEAR. FOR EXAMPLE, IF GOODS ARE PURCHASES I N A MANUFACTURING COMPANY AND ONLY 50% OF GOODS ARE USED AS INPUT, ON LY 50% IS CONSIDERED FOR COMPUTING THE CURRENT YEARS INCOME AND BALANCE 50% IS CONSIDERED OPENING STOCK FOR THE NEXT YEAR. 11.2 BEFORE US THE LEARNED COUNSEL VEHEMENTLY CONTE NDS THAT THE EXPENDITURE IS REVENUE EXPENDITURE AND IT HAS TO BE ALLOWED IN THE YEAR IN WHICH IT IS INCURRED, DESPITE THE FACT THAT THE BENEFIT WOULD RESULT IN F UTURE YEARS. HE RELIED ON THE CIRCULAR NO. 762 DATED 18-2-1998 PARA 14.4 WHERE IT IS STATED THAT THE PREMIUM PAID ON KEYMAN INSURANCE POLICY IS ALLOWABLE AS BUS INESS EXPENDITURE. HE RELIED ON THE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CAS E OF CIT VS. BHOR INDUSTRIES LTD. 264 ITR 180 FOR THE PROPOSITION THAT THE EXPEN DITURE SHOULD BE ALLOWED ON 7 BEING INCURRED. IN OUR OPINION, THIS JUDGMENT DOES NOT APPLY TO THE FACTS OF THE CASE AS IT IS NOT A CASE WHERE THE ASSESSEE HAVING INCUR RED PRE-PAID EXPENDITURE. IT WAS A ONE TIME EXPENDITURE INCURRED UNDER VOLUNTARY RETIR EMENT SCHEME. THE EXPENDITURE CANNOT BE CONNECTED TO A PERIOD. 11.3 THE LEARNED COUNSEL ALSO RELIED ON THE JUDGMEN T OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. ASHIMA SYNTEX LTD. 117 ITD 1 (AHD.) (SB). HERE ALSO THE EXPENDITURE IS NOT THAT WHICH IS INCURRED FOR A PERIOD. IN THE CASE ON HAND, THE EXPENDITURE IS A PERIOD COST. FOR EXAMPLE, IF 1 2 MONTHS RENT IS PAID IN ADVANCE, THE PRE-PAID RENT CANNOT BE ALLOWED IN THE YEAR OF PAYMENT JUT BECAUSE IT IS A REVENUE EXPENDITURE. 11.4 THE LEARNED DR, ON THE OTHER HAND, SUBMITTED T HAT THE EXPENDITURE IS PREPAID EXPENDITURE AND IT HAS BEEN RIGHTLY DISALLOWED. 11.5 ON A CAREFUL CONSIDERATION OF THE FACTS AND CI RCUMSTANCES OF THE CASE, WE FIND THAT THERE IS NO DISPUTE ON THE FACT THAT THE PREMIUM PAID ON KEYMAN INSURANCE POLICY IS ALLOWABLE AS BUSINESS EXPENDITU RE. THE PERIOD COVERED IS FROM 19-01-2005 TO 18-01-2006. AS POINTED OUT BY THE LEA RNED CIT(APPEALS), THE PRE- PAID INSURANCE AMOUNT IS QUITE SUBSTANTIAL. UNDER T HE NORMAL ACCOUNTING PRINCIPLES, PRE-PAID EXPENDITURE IS NOT ALLOWABLE. THE PROPORT IONATE CLAIM IS TO BE ALLOWED IN THE FINANCIAL YEAR 2004-05. THE BALANCE CLAIM CAN B E CLAIMED AND ALLOWED IN THE FINANCIAL YEAR 2005-06. WITH THESE OBSERVATIONS, WE DISMISS THIS GROUND OF THE ASSESSEE. 12. GROUND NO. 5 IS ON THE DISALLOWANCE OF NON-REFU NDABLE DEPOSIT PAID FOR MEMBERSHIP IN O T C CARD. THE FACTS ARE BROUGHT OUT AT PAGE 10 PARA 9 OF THE AOS ORDER. ON GOING THROUGH THE SAME WE FIND THAT THE ASSESSEE HAS WRITTEN OFF AN ASSET AND CLAIMED THE SAME AS EXPENDITURE. IN OUR C ONSIDERED OPINION, THE 8 DISALLOWANCE HAS BEEN RIGHTLY MADE. THE EXPENDITURE WAS INCURRED IN THE YEAR 2001-02 WHEN THE OTC EXCHANGE CARD WAS CORPORATIZED . ONE MR. NIKHIL MEHTA, DIRECTOR OF THE COMPANY HAD ORIGINALLY PURCHASED TH IS CARD IN 1998 AND THE COMPANY HAS TAKEN OVER THE SAME IN 2001-02. THE WRI TE OFF OF THIS OTC CARD CANNOT BE HELD TO BE AN ALLOWABLE EXPENDITURE. THE ASSESSEE MADE AN ALTERNATIVE CLAIM OF DEPRECIATION. IN OUR CONSIDERED OPINION, N O SUCH DIRECTION CAN BE GIVEN AT THIS STAGE OF APPEAL. ACCORDINGLY, WE DISMISS THIS GROUND. 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED IN PART. 14. WE NOW TAKE UP THE DEPARTMENTAL APPEAL FOR THE ASSESSMENT YEAR 2005-06 IN ITA NO. 7010/MUM/2008. 14.1 THE FIRST ISSUE IS ALLOWABILITY OF DEPRECIATIO N ON BSE CARDS. THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F THE HONBLE SUPREME COURT IN THE ASSESSEES OWN CASE REPORTED IN 327 ITR 323 (SC ). RESPECTFULLY FOLLOWING THE SAME, WE DISMISS GROUND NO.1 OF THE REVENUE. 14.2 GROUND NOS. 2 TO 8 ARE ON THE ISSUE OF DISALLO WANCE U/S 40A(IA) ON THE GROUND THAT NO TDS HAS BEEN MADE ON CHARGES PAID ON LEASELINE TO V-SAT AND CHARGES PAID TO BSE AND NSE. CONSISTENT WITH THE V IEW TAKEN BY US ON THE VERY SAME ISSUE FOR THE ASSESSMENT YEAR 2004-05, WE DISM ISS THESE GROUNDS OF THE REVENUE. 15. THE LAST GROUND IS ON THE ALLOWANCE OF BAD DEBT S. CONSISTENT WITH THE VIEW TAKEN BY US ON THIS ISSUE FOR THE ASSESSMENT YEAR 2 004-05, WE FOLLOW THE JUDGMENT OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF SHREYAS MORAKHIA (SUPRA) AND DISMISS THIS GROUND OF THE REVENUE. 151. IN THE RESULT, THE APPEAL OF THE REVENUE IS DI SMISSED. 9 16. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE ALLOWED IN PART AND BOTH THE APPEALS OF THE DEPARTMENT ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST JANUARY , 2011. SD/- SD/- (ASHA VIJAYRAGHAVAN)) (J. SUDHAKA R REDDY) JUDICIAL MEMBER. ACCOUNTANT MEMBER MUMBAI, DATED: 21 ST JANUARY, 2011. WAKODE COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, I-BENCH (TRUE COPY) BY ORDER ASSTT. REGISTRA R, ITAT, MUMBAI BENCHES, MUMBAI.