IL & FS EDUCATION & TECHNOLOGY SER. P. LTD, MUMBAI V. ITO 10(1)-2, MUMBAI

ITA 765/MUM/2009

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3834 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 2 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-04-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 30-10-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 04-02-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: D V LAKHANI
• Keywords: Charitable institution; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 37(1); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES I, MUMBAI BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND DR. S.T.M. PAVALAN, JUDICIAL MEMBER ITA NO.: 765/MUM/2009 ASSESSMENT YEAR: 2004-05 IL & FS EDUCATION & TECHNOLOGY SERVICES PVT. LTD. THE IL & FS FINANCIAL CENTER, 3 RD FLOOR, PLOT NO. C-22, G BLOCK, BANDRA-KURLA COMPLEX, BANDRA (E), MUMBAI 400 051 PAN NO.: AABCH 2106 H INCOME TAX OFFICER 10(1)-2 MUMBAI (APPELLANT) VS. (RESPONDENT) APPELLANT BY : SHRI D.V. LAKHANI RESPONDENT BY : SHRI SANJAY AGRAWAL DATE OF HEARING : 14.02.2013 DATE OF PRONOUNCEMENT : 10.04.2013 ORDER PER DR. S.T.M. PAVALAN, JM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF THE LD.CIT(A)-X, MUMBAI DATED 17.10.2008 FOR THE ASSESS MENT YEAR 2004-05. 2. IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOLLO WING GROUNDS: 1. ON THE FACTS & CIRCUMSTANCES OF THE CASE THE AP PELLANT SUBMIT THAT THE LD.CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWA NCE OF RS.83,20,821/- TREATING THE SAID EXPENDITURE AS CAP ITAL IN NATURE. ON THE FACTS & CIRCUMSTANCES OF THE CASE THE APPELLANT SUBMIT THAT THEY HAVE INCURRED REVENUE EXPENDITURE UNDER VARIOUS HEA DS AGGREGATING TO RS.83,20,821/- FOR DEVELOPMENT OF CONTENTS, IN THE COURSE OF THEIR BUSINESS. THE APPELLANT COULD NOT SUCCESSFULL Y MARKET CERTAIN CONTENTS FOR WHICH THE REVENUE EXPENDITURE IS INCUR RED AGGREGATING TO RS.83,20,821/-. THE APPELLANT THEREFORE SUBMIT T HAT THE CONCLUSION REACHED BY THE LD.CIT(A) THAT THE EXPEND ITURE OF RS.83,20,821/- IS A CAPITAL EXPENDITURE IS ERRONEOU S AND SUCH ADDITION MAY BE DELETED. ITA NO.: 765/MUM/2009 IL & FS EDUCATION & TECHNOLOGY SERVICES PVT. LTD. ASSESSMENT YEAR: 2004-05 2 2. ON THE FACTS & CIRCUMSTANCES OF THE CASE THE APP ELLANT SUBMIT THAT THE LD.CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWA NCE OF RS.66,75,460/- BEING THE WRITE OFF OF THE ADVANCES CLAIMED AS BUSINESS LOSS. THE APPELLANT IN THE COURSE OF BUSIN ESS HAS ADVANCED RS.66,75,460/- AND THE APPELLANT COULD NOT RECOVER THE SAID ADVANCES WHICH WERE WRITTEN OFF IN THE BOOKS OF ACC OUNTS. THE APPELLANT SUBMIT THAT THEY ARE ENTITLED TO DEDUCTIO N OF RS.66,75,460/- IN A.Y. 2004-05. THE APPELLANT PRAYS THAT THE DEDUCTION OF RS.75,460/- MAY BE ALLOWED. 3. THE APPELLANT CRAVES THE PERMISSION TO ADD, ALTE R OR AMEND THE GROUNDS OF APPEAL AT THE TIME OF HEARING. 3. GROUND NO 1 RELATES TO THE DISALLOWANCE/ADDITION OF RS.83,20,841/- MADE BY THE AO AND THE SAME WAS CONFIRMED BY THE LD.CIT( A) TREATING THE EXPENDITURE FOR DEVELOPMENT OF CONTENTS AS THE CAPITAL EXPEND ITURE AS AGAINST THE THE ASSESSEE CLAIMING IT AS REVENUE EXPENDITURE. 3.1 BRIEFLY STATED, DURING THE YEAR UNDER CONSIDE RATION, THE ASSESSEE, A COMPANY ENGAGED IN THE BUSINESS OF DEVELOPMENT OF EDUCATION SOFTWARE HAD DEBITED A SUM OF RS.83,20,841/- UNDER THE HEAD DETAILS OF EXCEPT IONAL ITEMS I.E BEING INFRUCTUOUS CAPITAL PROJECTS AND CLAIMED DEDUCTION OF THE SAME. IN THE ASSESSMENT FRAMED U/S 143(3), THE AO DISALLOWED THE AMOUNT TRE ATING THE SAME AS THE EXPENDITURE WAS CAPITAL IN NATURE. ON APPEAL, THE L D.CIT(A) CONFIRMED THE DISALLOWANCE MADE BY THE AO. AGGRIEVED BY THE IMPUG NED DECISION, THE ASSESSEE HAS RAISED THIS GROUND IN THE APPEAL BEFORE US. 3.2 BEFORE US, THE LD.AR HAS STATED THAT THE EXPEND ITURE RELATES TO ACQUISITION OF RIGHTS, LICENSE, EXPENSES FOR DEVELOPMENT OF EDU CATIONAL SOFTWARE AND OTHER RELATED EXPENSES. IN KEEPING WITH THE COMPANYS POL ICY, THESE EXPENSES ARE TO BE CAPITALIZED AS INTELLECTUAL PROPERTY RIGHTS (IPR) U PON COMPLETION OF THE PROJECT. AFTER CAPITALIZATION, THEY ARE AMORTIZED OVER A PER IOD OF FIVE YEARS. HOWEVER, DURING THE CURRENT YEAR, IT IS REALIZED THAT SOME O F THESE PROJECTS ARE NOT LIKELY TO RESULT IN ANY ECONOMIC BENEFITS AND HENCE THE CAPIT AL WORK IN PROGRESS OF THESE PROJECTS IS WRITTEN OFF AND THE PROJECTS HAVE BEEN ABANDONED. THE CAPITAL WORK IN ITA NO.: 765/MUM/2009 IL & FS EDUCATION & TECHNOLOGY SERVICES PVT. LTD. ASSESSMENT YEAR: 2004-05 3 PROGRESS WRITTEN OFF PERTAINS TO CERTAIN SOFTWARE U NDER DEVELOPMENT FOR EDUCATIONAL PROGRAMS. HOWEVER, THESE SOFTWARE ARE N OT READY FOR MARKETING AND HENCE THE SAME WERE WRITTEN OFF. IN SUPPORT OF THE CONTENTION THAT THE EXPENSES ARE REVENUE IN NATURE, THE LD.AR HAS RELIED ON THE DECISIONS OF THE ITAT IN THE CASES OF DCIT VS. MAGNETIC METER SYSTEM INDIA LTD. [2012, 13 ITR (TRIB) 43 CHENNAI] AND ACIT, SURAT VS. ESSAR STEEL LTD [(2012 ) 53 SOT 40]. HOWEVER, THE LD.DR HAS RELIED ON THE ORDERS OF THE AO AND THE LD .CIT(A) IN SUPPORT OF THE REVENUES CASE. 3.3 WE HAVE HEARD BOTH THE PARTIES ON THIS GROUND A ND PERUSED THE MATERIAL ON RECORD. IT IS PERTINENT TO NOTE THAT IN THE CASE OF DCIT VS. MAGNETIC METER SYSTEM INDIA LTD. [2012, 13 ITR (TRIB) 43 CHENNAI], THE ITAT, IN SIMILAR SET OF FACTS AND CIRCUMSTANCES, HAS HELD THAT THE EXPENDITURE FOR DEVELOPMENT OF A NEW PRODUCT IN THE SAME LINE OF BUSINESS IS A REVENUE E XPENDITURE . IT IS ALSO RELEVANT TO EXTRACT THE HEAD NOTE OF THE DECISION OF THE MU MBAI ITAT IN THE CASE OF ACIT, SURAT VS. ESSAR STEEL LTD [(2012) 53 SOT 40] WHICH READS AS UNDER: SECTION 37(1) OF INCOME-TAX ACT, 1961 - BUSINESS E XPENDITURE - ALLOWABILITY OF - ASSESSMENT YEAR 1998-99 - ASSESSEE-COMPANY WAS ENGA GED IN BUSINESS OF MANUFACTURING OF STEEL - IT STARTED A NEW PROJECT F OR PRODUCTION OF HOT ROLLED COIL (HRC) - ASSESSING OFFICER NOTICED THAT WHILE PREPAR ING BALANCE SHEET AND PROFIT AND LOSS ACCOUNT, ASSESSEE HAD TAKEN INCOME AND EXPENSE OF HRC PROJECT TO WORK-IN- PROGRESS BECAUSE COMMERCIAL PRODUCTION OF HRC START ED AFTER 31-3-1996 - HOWEVER, WHILE FILING RETURN OF INCOME ASSESSEE HAD CLAIMED SAME AS REVENUE EXPENDITURE - ACCORDING TO ASSESSEE, IT HAD STARTED TRIAL PRODUCTION DURING PREVIOUS YEAR AND MADE SUBSTANTIAL SALES AND, THUS, IT WAS E NTITLED TO CLAIM EXPENSES IN QUESTION AS DEDUCTION - ASSESSING OFFICER DISALLOWE D EXPENSES ON GROUND THAT BUSINESS OF HRC PROJECT HAD NOT STARTED COMMERCIAL PRODUCTION - WHETHER SINCE HRC PROJECT WAS AN EXTENSION OF EXISTING BUSINESS, REVENUE EXPENDITURE INCURRED EVEN PRIOR TO COMMERCIAL PRODUCTION HAD TO BE ALLOW ED AS DEDUCTION - HELD, YES - WHETHER, FURTHER, ASSESSEE'S CLAIM IN RESPECT OF IN TEREST ON CAPITAL BORROWED AND LEASE RENT RELATING TO SAID BUSINESS WAS ALSO TO BE ALLOWED - HELD, YES [IN FAVOUR OF ASSESSEE]. ITA NO.: 765/MUM/2009 IL & FS EDUCATION & TECHNOLOGY SERVICES PVT. LTD. ASSESSMENT YEAR: 2004-05 4 FOLLOWING THE RATIOS IN THE SAID DECISIONS OF THE C O-ORDINATE BENCHES OF THE ITAT, WE ARE OF THE VIEW THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON INFRUCTUOUS CAPITAL PROJECTS IN THE INSTANT CASE IS IN THE NATU RE OF REVENUE EXPENDITURE AND THE ASSESSEE IS ENTITLED FOR DEDUCTION OF THE SAME. ACC ORDINGLY, WE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES ON THIS COUNT AND T HUS DELETE THE IMPUGNED ADDITION OF RS.83,20,841/-. GROUND NO 1 IS THEREBY ALLOWED. 4. GROUND 2 RELATES TO THE DISALLOWANCE MADE BY TH E AO ON ACCOUNT OF WRITTEN OFF OF ADVANCES AMOUNTING TO RS.66,86,104 A ND THE SAME CONFIRMED BY THE LD.CIT TO THE EXTENT OF RS.66,75,460/- AFTER GI VING A RELIEF OF RS.10,644/-. 4.1 BRIEFLY STATED THAT THE ASSESSEE HAD PAID ADVAN CES OF RS.66,86,104/- FROM TIME TO TIME AND CLAIMED THAT THE ADVANCING WERE MA DE DURING THE COURSE OF THE BUSINESS AND BECOME IRRECOVERABLE THUS WRITTEN OFF THE SAME. HOWEVER, IN THE ASSESSMENT FRAMED U/S 143(3), THE AO DISALLOWED THE CLAIM OF THE ASSESSEE AS THE ADVANCES WRITTEN OFF IS NOT AN ALLOWABLE DEDUCT ION U/S 36(1) (VII) SINCE THE CONDITIONS LAID DOWN U/S 36(2) OF THE ACT WERE NOT FULFILLED. HENCE, THE ADDED THE IMPUGNED AMOUNT TO THE TOTAL INCOME OF THE ASSESSEE . ON APPEAL, THE LD.CIT(A) THE DISALLOWANCE TO THE EXTENT OF RS.66,75,460/- WH ILE GIVING A RELIEF OF RS.10,644/-. AGGRIEVED BY THE IMPUGNED DECISION, TH E ASSESSEE HAS RAISED THIS GROUND IN THE APPEAL BEFORE US. 4.2 BEFORE US, THE LD.AR HAS STATED THAT THE ASSESS EE HAD PAID ADVANCES IN THE COURSE OF BUSINESS IN RESPECT OF BUSINESS ACTIVITY. AS THE ASSESSEE CANNOT NOT RECOVER THIS AMOUNT WHICH ARE REFLECTED IN THE BALA NCE SHEET UNDER THE HEAD ADVANCES, THE AMOUNTS HAVE BEEN WRITTEN OFF AS IRRE COVERABLE. AS THE AMOUNTS ARE PAID IN THE COURSE OF BUSINESS THE ASSESSEE IS ENTITLED FOR THE DEDUCTION OF THE SAME. ON THE OTHER HAND, THE LD.DR HAS RELIED ON TH E ORDER OF THE LD.CIT(A) IN SUPPORT OF THE REVENUES CASE. HE HAS FURTHER STATE D THAT THE PURPOSE FOR WHICH THE ADVANCES ARE MADE DOES NOT QUALIFY THE EXPENDIT URE AS REVENUE IN NATURE AND THUS THE ASSESSEE IS NOT ENTITLED FOR THE DEDUCTION . ITA NO.: 765/MUM/2009 IL & FS EDUCATION & TECHNOLOGY SERVICES PVT. LTD. ASSESSMENT YEAR: 2004-05 5 4.3 WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. FOR THE SAKE OF CONVENIENCE, THE DETAILS OF THE ADVANCE S WRITTEN OF CLAIMED BY THE ASSESSEE IS REPRODUCED HEREUNDER: NAME OF THE PARTY AMOUNT (RS.) PURPOSE ANANT ELECTRONICS PVT. LTD. 1828 PAYMENT OF WCT IN 2001-02 NO WRITTEN OFF BANDRA KURLA COMPLEX. 4350 ADVANCES TO PARTY NOT RECOVERABLE HENCE WRITTEN OFF BUNTS SINGHAS S M SHETTY HIGH SCHOOL 4146 -DO- CAMILE M. GONSALVES 1878 SALARY ADVANCE GIVEN TO STAFF NOT RECOVERABLE AND HENCE WRITTEN OFF GANESH SHERMON 16000 -DO- HDFC REALITY LTD. 38609 ADVANCES TO PARTY NOT RECOVERABLE HENCE WRITTEN OFF HDFC STANDARD LIFE INSURANCE CO. LTD. 7345 -DO- IFFCO-TOKIO GENERAL INSURANCE 3479 PAYMENT OF SERVICES TAX FOR FY 2002-03 NOW WRITTEN OFF INFRASTRUCTURE LEASING & FINANCIAL SER. LTD. 440356 ADVANCES TO PARTY NOT RECOVERABLE HENCE WRITTEN OFF KALAKSHI PRINTING WORKS 56649 PAYMENT WCT IN 2001-02 NOW WRITTEN OFF KIRTI TRIVEDI 780950 ADVANCES FOR DEVELOPMENT OF MULTIMEDIA PROTOTYPES USED AND A CLASSROOM AT A VERY LOW COST. KRISHNAN PREMNARAYEN 2500000 ADVANCE FOR MARKETING PLANS AND DISTRIBUTION OF EDUCATIONAL PRODUCTS. MAHA AUTO WORKS 82175 PAYMENT OF TDS ON RENT FOR ASSESSMENT YEAR 2001-02 NOW WRITTEN OFF. PREM ASSOCIATES ADVERTISING 2638520 ADVANCE FOR MARKETING PLANS AND DISTRIBUTION OF EDUCATIONAL PRODUCTS. SINDH BRAHMA SIKHAYA SAMELAN 12480 ADVANCES TO PARTY NOT RECOVERABLE HENCE WRITTEN OFF THE BRITISH SCHOOL SOCIETY 95000 PAYMENT OF SERVICES TAX FOR FY 2002-03 NOW WRITTEN OFF. THE BYRAMJEE JEEJEBHOY PARSEE CHARITABLE INSTITUTION 2069 ADVANCES TO PARTY NOT RECOVERABLE HENCE WRITTEN OFF. 4.3.1 IT IS RELEVANT TO POINT OUT THAT THE LD.CIT(A ) IN HIS ORDER HAS STATED THAT THIS IS CLEARLY NOT A CASE OF WRITTEN OFF DEBTS U/S 36(1)(VII), AS WRITING OFF ADVANCES DOES NOT FULFIL THE CRITERIA OF SECTION 36(2). HENC E, THE CLAIM OF THE ASSESSEE HAS TO BE CONSIDERED UNDER THE GENERAL PROVISIONS OF SE CTION 28/37(1). THE ASSESSEE HAS ONLY GIVEN DETAILS WITH REGARD TO WRITE OFF OF RS.25 LAKHS TO KRISHAN PREM NARAYAN AND RS.7.80 LAKHS TO KIRTI TRIVENI. BOTH TH ESE ADVANCES HAVE BEEN MADE ON CAPITAL ACCOUNT FOR MEETING CAPITAL EXPENSES. HE NCE, WHILE WRITING OFF THE ITA NO.: 765/MUM/2009 IL & FS EDUCATION & TECHNOLOGY SERVICES PVT. LTD. ASSESSMENT YEAR: 2004-05 6 SAME, THEY WOULD QUALIFY AS CAPITAL LOSSES AND THER EFORE, CANNOT BE ALLOWED AS DEDUCTION U/S 28 TO 37. LIKEWISE, EXPENDITURE OF RS .26.38 LAKHS TO M/S. PREM ASSOCIATES IS ALSO ON CAPITAL ACCOUNT AND THEREFORE , DOES NOT QUALIFY FOR REVENUE EXPENDITURE. 4.3.2 HOWEVER, CONSIDERING THE NATURE OF THE BUSINE SS OF THE ASSESSEE AND THE PURPOSES FOR WHICH THE ADVANCES MADE, WE ARE OF THE VIEW THAT THE LD.CIT(A) HAS ERRED IN HOLDING THAT THE ADVANCE OF RS.25 LAKHS TO KRISHAN PREM NARAYAN FOR MARKETING PLANS AND DISTRIBUTION OF EDUCATIONAL PRO DUCTS AND THE ADVANCE OF RS.7.80 LAKHS TO KIRTI TRIVENI FOR THE PURPOSE OF D EVELOPING MULTIMEDIA PROTOTYPES USED AND A CLASSROOM AMOUNT TO CAPITAL EXPENDITURE. IN FACT, THESE ADVANCES ARE MADE IN THE COURSE OF BUSINESS WHICH MUST NECESSARI LY QUALIFY FOR THE EXPENDITURE OF REVENUE IN NATURE. ALSO THE SAME WITH THE ADVANC E OF RS.26,38,520/- TO PREM ASSOCIATES ADVERTISING FOR THE PURPOSES OF MARKETI NG PLANS AND DISTRIBUTION OF EDUCATIONAL PRODUCTS. WHILE WE CONCUR WITH THE VIEW OF THE LD.CIT(A) THAT THIS IS CLEARLY NOT A CASE OF WRITTEN OFF OF BAD DEBTS U/S 36(1)(VII), WE ARE OF THE VIEW THAT THE SAID ADVANCES QUALIFY FOR THE DEDUCTION U/ S37(1) OF THE ACT. THUS, WE DELETE THE DISALLOWANCE/ADDITIONS OF RS.25 LAKHS, R S.7.80 LAKHS AND RS.26,38,520/- WRITTEN OFF AS IRRECOVERABLE FROM KR ISHAN PREM NARAYAN, KIRTI TRIVENI AND PREM ASSOCIATES ADVERTISING RESPECTIVEL Y. IN ADDITION, WE SUSTAIN THE RELIEF OF RS. 10,644/- ALREADY GIVEN BY THE LD.CIT( A). WE DIRECT AND ORDER ACCORDINGLY. THUS, GROUND NO 2 IS PARTLY ALLOWED. 5. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 10 TH DAY OF APRIL 2013. SD/- SD/- (D. KARUNAKARA RAO) (DR. S.T.M. PAVALAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DT: 10.04.2013 RASIKA* ITA NO.: 765/MUM/2009 IL & FS EDUCATION & TECHNOLOGY SERVICES PVT. LTD. ASSESSMENT YEAR: 2004-05 7 COPY FORWARDED TO : 1. THE APPELLANT, 2. THE RESPONDENT, 3. THE C.I.T., CONCERNED MUMBAI 4. CIT (A) CONCERNED MUMBAI 5. THE DR, - BENCH, ITAT, MUMBAI //TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI ITA NO.: 765/MUM/2009 IL & FS EDUCATION & TECHNOLOGY SERVICES PVT. LTD. ASSESSMENT YEAR: 2004-05 8