Income Tax Appellate Tribunal - Mumbai
Walchand Netsoft P.Ltd, Mumbai vs Assessee on 29 October, 2013
`आयकर अपील य अ धकरण "जी" यायपीठ मंब
ु ई म।
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "G, MUMBAI
ी ड. क नाकर राव, लेखा सद य एवं ी ववेक वमा, या यक सद य के सम ।
BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER
AND SHRI VIVEK VARMA, JUDICIAL MEMBER
आयकर अपील सं. : 1525/मम
ु /2012
नधारण वष A.Y. 2002-2003
ITA No. : 1525/Mum/2012
(Assessment year: 2002-2003)
आयकर अपील सं. : 1526/मम ु /2012
नधारण वष A.Y. 2003-2004
ITA No. : 1526/Mum/2012
(Assessment year: 2003-2004)
आयकर अपील सं. : 1527/मम ु /2012
नधारण वष A.Y. 2004-2005
ITA No. : 1527/Mum/2012
(Assessment year: 2004-2005)
Walchand Netsoft Private Vs Deputy CIT, Circle -2(3),
Limited, Aaykar Bhavan,
Construction House, M.K. Road,
5, Walchand Hirachand Marg, Mumbai - 400 020
Ballard Estate,
Mumbai - 400 001
PAN: AAACW 2997 H
अपीलाथ (Appellant) यथ (Respondent)
Appellant by : Shri V.G. Ginde
Respondent by : Dr. Manjunath Karkihalii
सनवाई
ु क तार ख /Date of Hearing : 29-10-2013
घोषणा क तार ख /Date of Pronouncement : 13-11-2013
आ दे श
ORDER
PER BENCH :
The three appeals are filed by the assessee against the orders of CIT(A) 6, Mumbai, all dated 26.12.2011. Since the basic issue involved in all the three appeals are common, we, for the sake of convenience and brevity are passing a consolidated order.
2 Walchand Netsoft Limited ITAs No.1525 to 1527/M/2012
2. In all the three appeals the following grounds have been taken:
FOR AY 2002-03:
Being aggrieved by the order dated 26.12.2011 passed by learned Commissioner of Income Tax (Appeals) - 6, Mumbai. ["CIT(A)"] under section 250 of the Income-tax Act, 1961 ("Act"), your appellant prefers this appeal, among others, on the following grounds of appeal, each of which is without prejudice to, and independent of, the other:
1. On the facts and in the circumstances of the case, and also in law, the learned CIT(A) erred in holding that the re-assessment proceedings under section 147 initiated by the learned AO was valid in law. The learned CIT(A) failed to appreciate, and ought to have held, that the proceedings under section 147 was not sustainable in law. Your appellant, therefore, prays that reassessment order passed under section 143(3) r.w.s. 147 be quashed.
2. On the facts and in the circumstances of the case, and also in law, the learned CIT(A) erred in confirming the disallowance of Rs. 24,42,898/- made by the learned AO out of total technology expenses of Rs. 33,03,623/-, on the ground that the said expenditure was capital in nature and was covered by section 35D of the Act. Your appellant, therefore, prays that said expenditure be fully allowed as revenue expenditure.
FOR AY 2003-04:
Being aggrieved by the order dated 26.12.2011 passed by learned Commissioner of Income Tax (Appeals) - 6, Mumbai. ["CIT(A)"] under section 250 of the Income-tax Act, 1961 ("Act"), your appellant prefers this appeal, among others, on the following grounds of appeal, each of which is without prejudice to, and independent of, the other:
1 On the facts and in the circumstances of the case, and also in law, the learned CIT(A) erred in holding that the re-assessment proceedings under section 147 initiated by the learned AO was valid in law. The learned CIT(A) failed to appreciate, and ought to have held, that the proceedings under section 147 was not sustainable in law. Your appellant, therefore, prays that reassessment order passed under section 143(3) r.w.s. 147 be quashed.
2 On the facts and in the circumstances of the case, and also in law, the learned CIT(A) erred in confirming the disallowance of Rs. 20,67,520/- made by the learned AO out of total technology expenses of Rs. 25,84,398/-, on the ground that the said expenditure was capital in nature and was covered by section 35D of the Act. Your appellant, therefore, prays that said expenditure be fully allowed as revenue expenditure.
FOR AY 2004-05:
Being aggrieved by the order dated 26.12.2011 passed by learned Commissioner of Income Tax (Appeals) - 6, Mumbai. ["CIT(A)"] under section 250 of the Income-tax Act, 1961 ("Act"), your appellant prefers this appeal, among others, on the following grounds of appeal, each of which is without prejudice to, and independent of, the other:
1. On the facts and in the circumstances of the case, and also in law, the learned CIT(A) erred in holding that the re-assessment proceedings under section 147 initiated by the learned AO was valid in law. The learned CIT(A) failed to appreciate, and ought to have held, that the proceedings under section 147 was not sustainable in law. Your appellant, therefore, prays that reassessment order passed under section 143(3) r.w.s. 147 be quashed.
2. On the facts and in the circumstances of the case, and also in law, the learned CIT(A) erred in confirming the disallowance of Rs. 16,36,162/- made by the learned AO out of total technology expenses of Rs. 20,45,201/-, on the ground that the said expenditure was capital in nature and was covered by section 35D of the Act. Your appellant, therefore, prays that said expenditure be fully allowed as revenue expenditure."
3. The facts, common in the three impugned years are that the assessee has a website and besides using its own website, it takes on lease, network from Reliance Communication Infrastructure Ltd. (RCIL) and pays lease charges and technical expenses, to RCIL, for
3 Walchand Netsoft Limited ITAs No.1525 to 1527/M/2012 providing and managing the network. This usage of leased network system is done only for the extension of the existing business.
4. These facts have remained the same and identical in all the three impugned years. According to the AR, the modus operandi remained unchanged in all the three years.
5. The case history is as follows:
S. Asst. Date of Section Date of Date of Date of
No. Year Filing of under regular issuing asst.
Return which Asst. notice framed
assessment under under
is framed section section
148 143(3) read
with
sec. 148
1 2002-03 29.10.02 143(3) 21.03.05 20.03.09 23.11.09
2 2003-04 28.11.03 143(1) - 20.03.09 20.11.09
3 2004-05 30.10.04 143(3) 28.12.06 19.03.09 20.11.09
6. From the above chart, we find that:
(a) In assessment year 2002-03, regular assessment was framed
and the revenue authorities proceeded to reopen the proceedings after the lapse of 4 years.
(b) In assessment year 2003-04, summary assessment was made under section 143(1) and the reopening of the proceedings is after the lapse of 4 years, but within six years.
(c) In assessment year 2004-05, regular assessment was framed and the revenue authorities proceeded to reopen the proceedings within the 4 years.
7. From the above facts, that in each year law pertaining to time limit for reopening is different, therefore, each year has to be taken up separately.
Assessment year : 2002-2003 : ITA 1525/Mum/12 :
8. The AR submitted that, for reopening the assessment proceedings, the AO has taken the following reasons for reopening of the assessment "Reasons for reopening of the assessment In this case return of income has been filed declaring a loss of Rs. 1,09,59,468/-. The same was processed under section.143(1) on 26-02-2003. Thereafter, assessment under section. 143(3) was completed on 21-03-2005 determining total loss of Rs. 64,95,630/-.
On perusal of the records it was observed for the first time from the records for AY 2004-05 that the assessee's business is dedicated portal and e-commerce 4 Walchand Netsoft Limited ITAs No.1525 to 1527/M/2012 and earning income from advertisement, web-casting, user database, even management, celebrity management fee, sponsor ship, sale of content and commission on e-commerce.
Assessee, has his own website. Besides it has taken on rental base, a network from Reliance Communication Infrastructure Ltd, and paying rental service charges and paying technology expenses mainly for providing managing the network so taken on rental basis. The network taken on rental is nothing but his existing business. The provisions of section 35D(i)(ii) r.w. sub-section 3(iv) is applicable in the case of the assessee.
During the A.Y.2002-03, it is seen from P & L A/c at Schedule J is Website development and maintenance cost that assessee has debited Rs. 47,89,477/- and the whole such expenditure was allowed instead of restricting it to 1/5th for the each year and 4/5th for rest or next four years.
Thus, within the meaning of the above said provisions laid down in the I. T. Act, has resulted in excess deduction of Rs. 38,31,581/- being handed over to the assessee for A.Y 2002-03 which has resulted in to short levy of tax accordingly. Therefore, I am satisfied and have reason to believe that income chargeable to tax, amounting to Rs. 38,31,581/- has escaped assessment for the A.Y. 2002-
03. The total income chargeable to tax which has escaped assessment for the AY 2002-03 amounts to Rs. 38,31,581/-. As such, the assessment for the A.Y. 2002-03 needs to be reopened.
On the basis of the above mentioned reasons recorded by me, I am satisfied that this is a fit case for issue of notice under section 148 of the I.T. Act, 1961".
9. The assessee vide letter dated 12.10.2009, objected to the reopening proceedings wherein it was submitted, "2.1 At the outset, we submit that the re-assessment proceedings under section. 147 of the Act is legally not sustainable, as the same does not comply with the mandate of the proviso to s. 147. For the above assessment year, assessment was completed under section. 143(3) of the Act vide the assessment order dated 21.03.2005. The notice under section.148 has been issued on 20.03.2009, i.e. clearly beyond the period of 4 years from the end of the assessment year, which period, to be precise, expired on 31/3/2007. As such our case is clearly covered by the proviso to s 147 of the Act, which, inter alia, provides that where an assessment under section. 143(3) has been made for the relevant assessment year, then no action shall be taken under section 147 beyond 4 years, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment for that assessment year. In other words, the escapement of income must be caused by the failure of the assessee to make full and true disclosure of the material fact 2.2 In our case, it is seen from the reasons recorded under section. 148(2), a copy of which has been provided by you, that there is no mention that the income has escaped assessment due to any such failure on our part to fully and truly disclose the material facts. The reason given is that the impugned expenses are covered by s.35D and, therefore, only 115th of the same are allowable in Ay 2002-03 instead of the whole of the expenses. This view is based on the details already furnished by us during the course of the original assessment proceedings, and has emanated out of mere change of opinion by the successor AO. It is now well settled that any change of opinion on reappraisal of the same material already on record does not empower the AO to initiate proceedings uls.147. In any event, where the action is taken beyond the period of 4 years, then the reasons must clearly show that there was failure on the part of the assessee to make full and true disclosure of material facts, and that the income escaped assessment due to such failure. In other words, the fact of escapement must be clearly attributable to such failure. It is, therefore, sine qua non that this specific requirement of the Ia .v must be fulfilled before assumption of lawful jurisdiction under section. 147. Mere change of opinion, therefore, is not sufficient to trigger action under section.147. In this context, we rely on the following judicial pronouncements:
Sr.N. Case laws Covered by
5 Walchand Netsoft Limited
ITAs No.1525 to 1527/M/2012
1 Grindwell Norton Ltd. v/s. Jagdish Prasad Jangid, 267 ITR 673(Bom)
ACIT
2 Shri Warana Sahakari Dudh Utpadak Sang v/s. 284 ITR 477(Bom)
ACIT
3 Mangalore Refinery & Petrochemicals v/s. ACIT 282 ITR 516(Bom)
4 Hindustan Lever Ltd. v/s. R. B. Wadkar, ACIT 268 ITR 332(Bom)
5 Bhor Industries Ltd. v/s. DCIT 267 ITR 161(Bom)
6 Caprihans India Ltd. v/s. Tarun Seem, Dy. CIT 266 ITR 566(Bom)
7 ICICI Bank Ltd. v/s. K. J. Rao, Dy. CIT 268 ITR 203(Bom)
2.3 In view of the above, we submit that the reopening of the assessment is not
valid in law, and, therefore, should be dropped. We further request you to kindly dispose of our preliminary objection to the reopening before considering the matter on merits.
3. Explanation why there is no escapement of income:
3.1 Without prejudice to our above submissions objecting to the very reopening of the assessment under section. 147, we would also like to place our submissions on the merit of the matter, as under.
3.2 We submit that technology expenses of Rs. 47,89,477/- charged during the year, details of which were submitted in the course of original assessment, consisted of two components. Out of the total expenditure of Rs. 47,89,477/-, the expenses of Rs. 33,05,472/- were actually incurred in the previous year pertaining to AY 2002-03, and balance of Rs. 14,84,005/- were in the nature of deferred revenue expenses, which were incurred in preceding previous year, but were written off in the current year. It was further submitted vide letter dated 14.02.2005 that the amount of Rs. 25,27,517/- paid to Search Internet Development Services Pvt. Ltd., included Rs. 11,00,000/- paid in earlier year but amortized in this year.
3.3 In this connection we invite your attention to the computation of income, more specifically to note 4, in which it is stated that:
"in accordance with the Guidance note issued by the Institute of Chartered Accountants of India for dot. corn companies, the website development cost of Rs. 29,68,011/- incurred during the previous assessment year 2001- 02, is amortised in the books of over a period of 2 years, for the purpose of Income Tax, the cost is considered as capital expenditure: Accordingly, the sum of Rs. 14,84,005/-, being the amortised expenditure debited to the profit and loss account is disallowed while arriving at the business expenditure."
Accordingly, an amount of Rs. 29,68,011/- which was incurred in the previous year pertaining to AY 2001-02 was amortized in two years i.e. AY 2001-02 and AY 2002-03. Thus, amount of Rs. 47,89,477/- includes Rs. 14,84,005/- being amortized amount incurred in the preceding previous year. 3.4 It is further submitted that during the previous year ended 31.03.2001, the Company set up the website at a cost of Rs. 84,30,070/-, which included Rs. 29,68,011/- incurred on technology expenses, along with other cost of Rs. 54,62,059/-. Said expenditure was treated as capital expenditure and the Company claimed depreciation as specified under section 32(1) of the Act. Kindly refer to note no. 6 of the Computation of Income. Thus, for the purpose of accounts the Company treated the technology expenditure incurred in AY 2001- 02 of Rs. 29,68,011/- as deferred revenue expenses to be written off over a period of two years, but for tax purposes, it was treated as capital expenditure, and claimed depreciation thereon as per IT Rules. However, the amount debited to the P&L A/c. as deferred revenue expenditure was disallowed in computing the business income. Thus, our Company has actually claimed expenses of Rs.33,05,4721-in the current financial year as revenue expenditure, which in fact was the actual expenditure incurred during the current year. 3.5 We further invite your kind attention to the fact that in the course of original assessment under section 143(3), the then Assessing Officer disallowed Rs. 9,11,988/- out of the Rs.25,27,517/- paid to Search Internet Development Services Pvt. Ltd (SIDS). This amount was debited as a part of total Technology Expenses of Rs.47,89,477/-. Said amount was disallowed for want of reconciliation of the amount paid to SIDS as shown in the expenditure statement submitted in the course of hearing and amount confirmed by SIDS. The matter 6 Walchand Netsoft Limited ITAs No.1525 to 1527/M/2012 was carried before the Hon'ble ITAT in ITA No. 4592/M/06 and it was heard on 07.07.2009. The order is awaited, 3.6 We are resubmitting the statement of technology expenses, giving the break-up of the expenses actually incurred in the AY 2002-03 and expenses incurred in preceding previous year but charged to the Profit and Loss account in current year as a part of deferred revenue expenditure. We further submit that expenditure incurred in the current year and claimed as revenue expenditure is basically maintenance cost of the website and cost of feeding /inserting latest data on the website for the benefit of its users. Thus, the expenditure was rightly claimed by' the Company as revenue expenditure. 3.7 As regards the issue of applicability of the provisions of s. 35D, we reiterate the same submissions as are made for the AY 2003-04, vide our submissions of even date, separately being submitted to you, and we wish not to repeat the same for sake of brevity.
3.8 In view of the above explanation, we state that assessee-company has rightly claimed the technology expenses as revenue expenditure, and there is no need to reassess the income of the Company. Accordingly, no income chargeable to tax has escaped the assessment as alleged in the notice under section.148. We therefore request you to drop the proceedings initiated under section 147/148".
The AO rejected the objections, as raised by the assessee after observing, "The mere production of the balance-sheet, profit and loss account or account books and details will not necessarily amount to disclosure within the meaning of the proviso. In the present case, as can be seen from the records the Assessing Officer overlooked the aforestated item under re-assessment. Therefore, at the time of passing the original order of assessment, he could not be said to have opined on the above item. This issue is supported by Hon'ble Bombay High Court's decision in the case of Dr. Amin's Pathology laboratory vs. JCIT and others reported in 252 ITR 673.
The assessee's objections are, therefore, rejected".
The AO, on rejecting the objections of the assessee proceeded to frame the assessment under section 143(3) under reassessment proceedings.
10. The assessee approached the CIT(A) on the issues of reassessment and merits.
11. The CIT(A), dealing with the reassessment issue held, "The appellant has claimed website development of Rs. 47,89,477/- as revenue expense whereas the AO after being satisfied that the expense is a capital expense in nature, recorded the reasons for reopening the assessment and issued notice under section. 148 to the appellant. The appellant filed a letter requesting to treat the return of income filed originally as filed in response to notice under section.148. The appellant filed a letter before AO dated 12.10.2009 stating that there was no failure of assessee to make full and true disclosure of material facts and the case cannot be reopened beyond 4 years. The AO passed a detailed order rebutting assessee's objection dated 11.02.2009 and the same is also reproduced in the assessment order and the AO at Para 5 observed as under:
'The mere production of the balance-shee4 profit and loss account or account books and details will not necessarily amount to disclosure within the meaning of the proviso. In the present case, as can be seen from the records the Assessing Officer overlooked the aforestated items under re-assessment. Therefore, at the time of passing the original order of assessment, he could not be said to have opined on the above item. This issue is supported by Hon'bie 7 Walchand Netsoft Limited ITAs No.1525 to 1527/M/2012 Bombay High Court's decision in the case of Dr. Amin's Pathology Laboratory vs. JCIT and other reported in 252-ITR-673.
The assessee's objections were, therefore, rejected.' 2.1 In course of appeal proceedings, the appellant reiterated that it has disclosed fully and truly all material facts necessary for assessment and as all material facts were disclosed in the assessment made uls.143(3) the reopening is bad in law.
2.2 I have gone through the order of the AO and submission of the appellant. It is obvious that in the assessment proceedings under section.143(3), the material fact about the website development cost being capital expenditure was not examined nor the appellant disclosed the material fact of website development cost being a capital expenditure. The appellant's submission, that it has disclosed all material facts, is found to be factually not correct. The material fact in the present case was that the website development cost was a capital expenditure and this material fact was nowhere disclosed in the accounts of the assessee or even in the assessment proceedings. The AO in course of original proceedings under section.143(3) never examined the issue of website development expense being capital or revenue in nature. Therefore the appellant's argument that it is a case of 'change of opinion' is found to be not valid. The AO has recorded the reasons for reopening the assessment and has followed all procedures for reopening the case, the reassessment is therefore found to be valid. Ground I is, therefore, dismissed
12. The CIT(A), also rejected the ground pertaining to the merits of the case.
13. Aggrieved, the assessee is before the ITAT.
14. Before us, the AR submitted that the basic fact, pertaining to reassessment proceedings in the current year is that there was a regular assessment & the AO proceeded to initiate and reopen the assessment after the lapse of 4 years from the end of the assessment year. Hence the case came within proviso to section 147. To prove this point of argument, the AR referred to the replies given by the assessee during the regular assessment proceedings and pointed out that in the computation attached to the return of income, the assessee had added back cost of website development expenditure considered as capital expenditure and deferred revenue expenses and had appended appropriate notes to the computation. The AR further referred to the letter dated 08.11.2004 written to the AO giving/submitting details asked for which included technological expenditure, the detail has also been placed as marked as separate annexures. In further reply dated 21.02.2005, the assessee further produced the details on technological expenses along with the details of remittances. The AR, therefore, 8 Walchand Netsoft Limited ITAs No.1525 to 1527/M/2012 submitted complete details had been filed pertaining to technological expenses.
15. The AR also submitted that the expenses were deferred in the two preceding years and in the current year, it had been claimed, which became the subject matter of investigations, conducted by the AO in the regular assessment proceedings.
16. On the reasons, the AR submitted that in the reasons, there is no mention with regard to the factum that there was a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment and also that such failure caused escapement of income. The fact that there has to be application of section 35D and 1/5th expense had to be allowed was the subject matter of dispute in the regular assessment proceedings, which had reached the ITAT.
17. The mere fact that the reopening was initiated on this aspect, it is a change of opinion, which bars the department to such facts of reopening. It was submitted that a burden has been cast on the department to prove, (a) there was an escapement of income in the return of income and (b) this fact came to light in the interim period between completion of regular assessment and recording of reasons for reopening. This burden, the department has failed to discharge.
18. The DR placed reliance on the orders of the revenue authorities and submitted that the issue pertaining to the claim was never looked into by the AO, and that itself, opens the doors for the revenue authorities, to resort to and take recourse to the initiation of reassessment proceedings and hence the revenue authorities were correct to resort to reopening under section 148/147.
9 Walchand Netsoft Limited ITAs No.1525 to 1527/M/2012
19. We have heard the arguments from either side and have perused the papers placed in the APB and the correspondences and orders of the revenue authorities.
20. The basic issue pertains to the treatment of technology expenses incurred by the assessee. It is an undisputed fact that entire material and evidence pertaining to the treatment of the expense was examined by the AO in the regular assessment proceedings, complete with all details and vouchers. Since the AO was still not convinced, he made certain additions. The addition as made, on the issue, traveled upto ITAT stage, where, however, the issue was set aside by the coordinate Bench.
21. Subsequently, as late as 20.03.2009, the AO initiates the reassessment proceeding on the same issue. As observed earlier, the issue was examined by the AO thread bear, is apparent from the fact that the disallowance made by the AO on technological expenses traveled upto the ITAT, itself proves the issue against the revenue authorities, that they were proceeding on the aspect with a different reasoning. This, has been examined by the various authorities and fora, from time immemorial, and in catena of decisions, that the law does not allow proceedings based on change of opinion from one incumbent to the other. Full Bench of Hon'ble Delhi High Court in the case of Kelvinator of India vs CIT reported in 256 ITR 1 is on this issue and which now stands approved by the Hon'ble Supreme Court in CIT vs Kalvinator of India, reported in 320 ITR 561. We are therefore of the opinion that the AO in the instant case traveled beyond the statutory accord.
22. We, therefore, quash reassessment proceedings and as a consequence thereof, the consequential proceedings are annulled.
23. Since we have quashed the reassessment proceedings, we are not going into the merits, which become infructuous.
10 Walchand Netsoft Limited ITAs No.1525 to 1527/M/2012
24. The appeal filed by the assessee is, therefore, allowed.
Assessment year: 2004-2005 : ITA 1527/Mum/12 :
25. The assessee has raised the following grounds of appeal:
Being aggrieved by the order dated 26.12.2011 passed by learned Commissioner of Income Tax (Appeals)-6, Mumbai. ["CIT(A)"] under section 250 of the Income-tax Act, 1961 ("Act"), your appellant prefers this appeal, among others, on the following grounds of appeal, each of which is without prejudice to, and independent of, the other:
1. On the facts and in the circumstances of the case, and also in law, the learned CIT(A) erred in holding that the re-assessment proceedings under section 147 initiated by the learned AO was valid in law. The learned CIT(A) failed to appreciate, and ought to have held, that the proceedings under section 147 was not sustainable in law. Your appellant, therefore, prays that reassessment order passed under section 143(3) r.w.s. 147 be quashed.
2. On the facts and in the circumstances of the case, and also in law, the learned CIT(A) erred in confirming the disallowance of Rs. 16,36,162/- made by the learned AO out of total technology expenses of Rs. 20,45,201/-, on the ground that the said expenditure was capital in nature and was covered by section 35D of the Act. Your appellant, therefore, prays that said expenditure be fully allowed as revenue expenditure."
26. In the instant year regular assessment was framed under section 143(3) on 28.12.2006. The AO initiated the reassessment proceedings by the issue of notice under section 148 on 19.03.2009. The assessee after submitting the letter dated 26.03.2009, to treat the original return as return in response to section 148, requested the AO to supply the reasons as recorded for reopening the assessment. The AO supplied the reasons as recorded, which are, "Reasons for reopening of the assessment "In this case return of income has been filed declaring a loss of Rs. 1,48,18.130/-. The some was processed under section.143(1). Thereafter, assessment under section. 143(3)(ii) was completed on 28-12-2006 determining total loss of Rs. 1,26,41,780/-.
On perusal of the records it was, observed from the records for ÀY 2004-05 that the assessee's business is of dedicated portal and e-commerce and earning income from advertisement, web-casting, user database, event management. celebrity management fee, sponsor ship, sale of content and commission on c- commerce.
Assessee has, his own website. Besides it has taken on rental base, a network from Reliance Communication Infrastructure Ltd. and paying rental service charges and paying technology expenses mainly for providing managing the network so taken on rental basis. The network taken on rental is nothing but his further extension of his existing business. The provisions of section 35D(i)(ii) r.w. sub-section 3(iv) is applicable in the case of the assessee. During the A.Y.2004-05, it is seen from P L Al c at Schedule 'M' is Website development and maintenance cost that assessee has debited Rs. 20,45,201/- and the whole such expendi1ure was allowed instead of restricting it to 1/5th for the each year and 4/5th for rest of next four years. Thus, within the meaning of the above said provisions laid down in the I.T. Act, has resulted in excess deduction of Rs.16,36,161/- being handed over to the assessee for AX 2004-05 which has resulted in to short levy of tax accordingly.
11 Walchand Netsoft Limited ITAs No.1525 to 1527/M/2012 Therefore, I am satisfied and have reason to believe that income chargeable to tax, amounting to Rs.1 6,36. 61/- has escaped assessment for the A.Y.- 2004-
05. The total income chargeable to tax which has escaped assessment for the ÀY 2004-05 amounts to Rs. 16,36,161/-. As such, the assessment for the ÀY. 2004-05 needs to be reopened.
On the basis of the above mentioned reasons recorded by me, I am satisfied that this is a fit case for issue of notice under section 148 of the I.T. Act,1961.".
27. Thereafter, the assessee filed its objections, which are as follows, "Objection to reopening of assessment under section.147:
2.1 We object to the reopening of the assessment under section.147 since the same is based on mere change of opinion formed by the successor AO on the same set of facts/material already on record.
2.2 In our case, for the above assessment year; assessment order under section.
143(3) was passed on 28.12.2006. During the course of the assessment, we had furnished complete details of the technology expenses, which were considered by the then AU. This is evident from the fact that in respect of one of the items, the AU held the same to be capital expenditure and disallowed the same; though he allowed depreciation @ 60%. This disallowance was contested by us in appeal before the learned CIT(A). Thus, it is submitted that the original assessment was passed after duly considering the material placed on record and taking a certain view of the matter by the then AO. Now, on perusal of the reasons recorded under section. 148(2), it is seen that the assessment has been reopened because the very same technology expenses are now being considered as covered under section.35D. Whether this new view is correct or not is a different matter, which has been dealt with in our submissions to follow hereinafter. However, it is clear that the whole basis of the reopening is mere change of opinion formed on the same set of facts material on record. This is clearly not permissible in law.
2.3 In view of the above, we submit that the reopening of the assessment is not valid in law, and, therefore, the same should be dropped. We further request you to kindly dispose of our preliminary objection to the reopening before considering the matter on merits.
3. Explanation why there is no escapement of income:
3.1. In this connection we submit that the technology expenses of Rs. 20,45,202/-
were claimed during the year, details of which were submitted in a separate statement during the course of assessment proceedings under section 143(3), along with high value invoices. We are resubmitting the said statement of expenses for your ready reference.
From the statement, it may be observed that the payments were made directly to Reliance Communication Infrastructure Limited. Or reimbursed to Walchand Capital Limited, who in-turn paid to Reliance Communication Infrastructure Limited, a unit of Reliance Infocom Limited.
3.2 As regards the issue of applicability of the provisions of s.35D, we reiterate the same submissions as are made for the AY 2003-04, vide our submissions of even date, separately being submitted to you, and we wish not to repeat the same for sake of brevity.
3.3 From statement you will find that Rs.1,260/- were paid to M/s Direct Information Pvt. Limited for renewal of the domain names owned by the Company.
3.4 The Company has reimbursed Rs. 344,495/- to M/s Walchand Capital Limited which in turn paid to M/s Reliance Communication Infrastructure Limited. The charges paid to them were mainly consisting of web hosting charges, data transfer charges and load balancing charges.
3.5 The Company has also paid Rs. 1,811/- for acquiring software, which is utilized for updating data on the web site. This is nothing but utilization of the data contents on the website in better manner and is purely in the nature of revenue expenditure.
3.6 The company has also paid Rs. 35,000/- M/s Techgyan, for buying licensed version of software namely, "Adobe Photoshop Ver. 7.0". Copy of bill was given in the course of assessment proceedings under section 143(3). Said expenditure is basically incurred to enhance utility value of the website owned and run by 12 Walchand Netsoft Limited ITAs No.1525 to 1527/M/2012 the Company. It may be relevant to note that learned AO, while completing assessment under section 143(3) of the Act has considered this as capital expenditure and disallowed under section 37. The teamed AO, however, allowed depreciation under section 32 @ 60% of Act. The company carried the matter before Hon'ble CIT(A), who allowed the aforesaid expenditure as revenue expenditure vide his appellate order No. CIT(A)-XXX/IT2O7/Rg.2(3)/07..08 dated 15.12.2008 for the said year. To this extent the assessment order passed under section 143(3) is merged with that of the order of CIT(A). 3.7 From the explanations submitted above it crystal clear that what has been claimed is purely revenue expenditure. There is no acquisition or designing of any new website, which can be regarded as capital expenditure, much less as preliminary expenses as sought to be considered by you. 3.8 In view of the above explanation, we state that assessee-company has rightly claimed the technology expenses as revenue expenditure, and there is no need to reassess the income of the Company. Accordingly, no income chargeable to tax has escaped the assessment as alleged in the notice under section 148. We therefore request you to drop the proceedings initiated under section l47/l48"-
28. The AO, on receipt of the objections from the assessee disposed it off, rejecting them, as follows, "4.3 The assessee has mainly based its argument on the doctrine of merger, i.e. the merger of the assessment order with that of the CIT(A). The subject matter of the CIT(A) 's order in this case was disallowance of software expenses of Rs. 35,000/- paid to one M/s. Techgyan which was treated as capitol expenditure by the A.O. The other ex-expenditures, which were part of expenditures of Rs. 20,45,201/-, were neither considered by the A.O. nor was the subject of appeal. The doctrine of merger has no applicability in this case.
4.4 Further, mere production of the balance-sheet, profit and loss, account or account. Book and details will not necessarily amount to disclosure within the meaning of the proviso. In the present case, as can be seen from the records the Assessing Officer overlooked the aforestated items under re-assessment. Therefore, at the time of passing the original order of assessment, he could not be said to have opined on the above item. This view is supported by Hon'ble Bombay High Court's decision in the case of Dr. Amin's Pathology Laboratory vs. JCIT and others reported in 252 ITR 673.
5.0 The assessee's objections are, therefore, rejected".
29. The basic facts pertain to the treatment of technology expenses, which in the current has been examined by the AO in the regular assessment. The investigation having been conducted on the impugned expenses were exactly in the lines adopted by the AO as in assessment year 2002-03. These details and figures have been picked up by the AO from the computation of income attached to the ROI and the annexures appended to the Balance Sheet and Profit & Loss Account for the year under consideration.
13 Walchand Netsoft Limited ITAs No.1525 to 1527/M/2012
30. The basic issue pertains to the treatment of technology expenses incurred by the assessee. It is an undisputed fact that entire material and evidence pertaining to the treatment of the expense was examined by the AO in the regular assessment proceedings, complete with all details and vouchers and that basis, as a result of which, the AO made certain additions. The issue has traveled upto ITAT stage, where, however, the issue was set aside by the coordinate Bench.
31. Subsequently, as late as 20.03.2009, the AO initiates the reassessment proceeding on the same issue. As observed earlier, the issue was examined by the AO thread bear, is apparent from the fact that the disallowance made by the AO on technological expenses traveled upto the ITAT, itself proves the issue against the revenue authorities, that they were proceeding on the aspect with a different reasoning. This, has been examined by the various authorities and fora, from time immemorial, and in catena of decisions, that the law does not allow proceedings based on change of opinion from one incumbent to the other. Full Bench of Hon'ble Delhi High Court in the case of Kelvinator of India vs CIT reported in 256 ITR 1 is on this issue and which now stands approved by the Hon'ble Supreme Court in CIT vs Kalvinator of India, reported in 320 ITR 561. We are therefore of the opinion that the AO in the instant case traveled beyond the statutory accord.
32. We, therefore, quash reassessment proceedings and as a consequence thereof, the consequential proceedings are annulled.
33. Since we have quashed the reassessment proceedings, we are not going into the merits, which become infructuous.
34. The appeal, as filed by the assessee, is allowed.
14 Walchand Netsoft Limited ITAs No.1525 to 1527/M/2012 Assessment year: 2003-2004 : ITA 1526/Mum/12 :
35. Instant year is factually different from assessment years 2002- 03 and 2004-05, as, there was no regular assessment framed under section 143(3). The AO, proceeded to initiate reassessment proceedings in the instant year, primarily on the reasons, as recorded for reopening, pertaining to assessment years 2002-03 and 2004-05, where regular assessments had been framed under section 143(3).
36. The assessee has raised the following grounds of appeal:
"Being aggrieved by the order dated 26.12.2011 passed by learned Commissioner of Income Tax (Appeals)-6, Mumbai. ["CIT(A)"] under section 250 of the Income-tax Act, 1961 ("Act"), your appellant prefers this appeal, among others, on the following grounds of appeal, each of which is without prejudice to, and independent of, the other:
1. On the facts and in the circumstances of the case, and also in law, the learned CIT(A) erred in holding that the re-assessment proceedings under section 147 initiated by the learned AO was valid in law. The learned CIT(A) failed to appreciate, and ought to have held, that the proceedings under section 147 was not sustainable in law. Your appellant, therefore, prays that reassessment order passed under section 143(3) r.w.s. 147 be quashed.
2. On the facts and in the circumstances of the case, and also in law, the learned CIT(A) erred in confirming the disallowance of Rs. 16,36,162/- made by the learned AO out of total technology expenses of Rs. 20,45,201/-, on the ground that the said expenditure was capital in nature and was covered by section 35D of the Act. Your appellant, therefore, prays that said expenditure be fully allowed as revenue expenditure."
The AR submitted that the AO, as in the other assessment years, initiated reassessment proceedings in the current year as well, which for the sake of record, it was submitted that the initiation was after the lapse of four years. The reasons, as supplied to the assessee, are as follows :
"Reasons for reooenina of the assessment In this case return of income has been filed declaring a net loss of Rs. 2,46,16,610/- as seen from profit & loss account. The some was only processed under section.143(1) of the IT Act On perusal of the records It was observed from the records for AY 2003-04 that the assessee's business is of dedicated portal and e-commerce and earning income from advertisement, web-casting, user database event management, celebrity management fee, sponsor ship, sole of content and commission on e- commerce.
Assessee has his own website. Besides it has token on rental base a network from Reliance Communication Infrastructure Ltd. and paying rental service charges and paying technology expenses mainly for providing managing the network so taken on rental basis. The network taken on rental is nothing but his further extension of his existing business. The provisions of section 35D(i)(ii) r.w. subsection 3(iv) is applicable in the case of the assessee. During the AY.2003-04, it is seen from P & L A/c of Schedule 'J' is Website development and maintenance cost that assessee has debited Rs. 25.84,398/-
15 Walchand Netsoft Limited ITAs No.1525 to 1527/M/2012 and the whole such expenditure was allowed instead of restricting it to 1/5th for the each year and 1/5th for rest of next four years.
Thus, within the meaning at the above said provisions laid down in the I.T. Act, has resulted in excess deduction of Rs. 20,67,515/- being handed over to the assessee for A.Y 2003-04 which has resulted in to short levy of tax accordingly. Therefore. I am satisfied and hove reason to believe that income chargeable to tax, amounting to Rs. 20,67,518/- has escaped assessment for the A.Y. 2003-
04. The total income chargeable to tax which has escaped assessment far the AY 2003-04 amounts to Rs. 20,67,518/-. As such the assessment for the A.Y. 2003-04 needs to be reopened .
On the basis of the above mentioned reasons recorded by me, I am satisfied that this is a fit case for issue of notice under section 148 of the I.T. Act, 1961".
37. Thereafter, the assessee filed its objections, which are as follows, "2. Before we proceed to explain the nature of Technology Expenses under the head Website Development & Maintenance Expenses, it is necessary to give background of our business activities. The company during the relevant previous year carried on the business of running a website called cricketnext.com dedicated to the game of cricket, where information, data and live cricket matches were being uploaded for the benefit of visitors to this website The website was launched in the AY 2001-02, the until cost of setting up and launching the same was duly capitalized for the purpose of income tax though in the books it was written off as deferred revenue expenditure over two years, as explained in our submissions of even date for the AY 2002-03.
3. In the above background, we submit that the technology expenses of Rs.
25,84,398/- charged during the year, details of which are submitted in a separate statement attached herewith, were nit for setting up or establishing the new website, but merely to maintain the existing operating website. From the statement it may be noticed that payments were min1y made/reimbursed to Walchand Capital Limited, a group company, who in turn paid to GTL Ltd and Reliance Industries Limited.
4. Our explanation is now sought as to why these expenses should not be covered under section 35D of the IT Act, 1961 as allegedly incurred for extension of an "Industrial Undertaking". This is factually and legally not correct. To fall under section. 35D, assessee must own Industrial Undertaking, and expenses are to be incurred for extension thereof. It is clarified that assessee does not own any industrial undertaking; hence the question of its extension does not arise at all.
5. Expenses sought to be branded as for extension of industrial undertaking is nothing but normal recurring expenditure incurred for maintaining our website and continuous updating thereof with fresh mew data content to be used/viewed by the web visitor. The expenses incurred are merely in the nature of web hosting charges charged periodically by the service provider with whom servers are hosted.
6. From statement you will find that Rs.2,090/- were paid to M/s Direct Information Pvt Ltd. for the renewal of the domain name owned by the company. The company has reimbursed Rs. 14,46,290/- to M/s Walchand capital Limited which were in turn paid by them to M/s GTL Limited. The charges paid to them were mainly consisting of quarterly web hosting charges, data transfer charges. It also includes bandwidth usage charges for handling additional traffic during the ICC Championship Trophy played between cricket playing countries. You will appreciate that all those expenses are inherently in the nature of revenue expenses, and had nothing to do with any extension of any 'industrial undertaking'.
7. In the course of the year the company migrated w.e.f. O1.12.2002 from M/s GTL Ltd to M/s Reliance Communications Infra Limited of Reliance Infocom Ltd as its Server Hosting Station for better services and lower cost. During the year company has reimbursed Rs. 11,31,791/- to M/s Walchand Capital Limited which were in turn paid by them to M/s Reliance Communications Infrastructure Limited, a unit of Reliance Infocom Ltd.. The charges paid to them were mainly consisting of quarterly web hosting charges, data transfer charges. It also includes provision charges for servers to handle additional load arising on account ICC Cricket World Cup played during the relevant period.
16 Walchand Netsoft Limited ITAs No.1525 to 1527/M/2012 8 The company has also paid Rs 4227/- for acquiring Software, which was utilized for data synchronization and automatic data back-up on the website. This is nothing but utilization of the data contents on the website in a better manner.
9. From the explanations submitted above it crystal clear that what has been claimed is purely revenue expenditure. There is no acquisition or designing of any new website, which can be regarded as capital expenditure, much less as preliminary expenses as sought to be covered under section.35D In view of the above explanation, we state that assessee-company has rightly claimed the technology expenses as revenue expenditure, and there is no need to reassess the income of the company. We therefore request you to drop the proceedings initiated under section 147/148".
38. It is important to note that the facts pertaining to the instant year are exactly the same as that in the years, where the assessments had been reopened. It is matter of fact that complete details had been before the AO, which were part of the computation and appended therewith, as the details were appended in the two corresponding years, and the matter travelled upto the appellate stages.
39. It is also a fact that neither the AO nor the DR was able to pinpoint, as to what material was gathered or came to light, which was resulted or indicated that there was an escapement of income, to attract reassessment proceedings. Also, the issue which travelled upto the ITAT level, itself proves that there are doubts with regard to escapement of income. In our considered opinion that once the assessee has produced complete details, on which the claim has been made and till such time those details are not derailed by the revenue authorities, the burden stays on the revenue authorities to prove their case, which has not been discharged by them.
40. In such a case, we cannot sustain the reopening of assessment even in summary assessments. We also gather strength to demolish the case of the revenue authorities, from the fact that we have quashed reassessment proceedings on the identical facts and grounds in the preceding year and in the subsequent year in this consolidated order.
17 Walchand Netsoft Limited ITAs No.1525 to 1527/M/2012
41. On the basis of the above observations, we quash the reassessment proceedings in the instant year as well.
42. Since we have quashed the reassessment proceedings, we do not find any reason to go into and adjudicate on the ground raised on merits, which has become infructous.
43. The appeal, as filed by the assessee is allowed.
In the result, appeals filed by the assessee in ITA No. 1525/Mum/2012 is allowed ITA No. 1526/Mum/2012 is allowed ITA No. 1527/Mum/2012 is allowed. Order pronounced in the open Court on 13th November, 2013.
Sd/- Sd/-
( ड. क नाकर राव) ( ववेक वमा)
लेखा सद य याईक सद य
(D. KARUNAKARA RAO) (VIVEK VARMA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
ममबई
ु Mumbai, दनाक Date: 13th November, 2013
त/Copy to:-
1) अपीलाथ /The Appellant.
2) यथ /The Respondent.
3) आयकर आयु त(अपील) -6, Mumbai / The CIT (A)-6, Mumbai.
4) The CIT-2,/Concerned _____, Mumbai,
5) वभागीय त न ध "जी" , आयकर अपील य अ धकरण, मंुबई/ The D.R. "G" Bench, Mumbai.
6) गाड फाईल Copy to Guard File.
आदे शानसार ु /By Order / / True Copy / / उप/सहायक पंजीकार आयकर अपील य अ धकरण, मंुबई Dy./Asstt. Registrar I.T.A.T., Mumbai *च हान व. न.स