Income Tax Appellate Tribunal - Delhi
Microsoft Corporation India Pvt. Ltd, ... vs Department Of Income Tax on 9 June, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH : E : NEW DELHI
BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER
AND
SHRI K.G. BANSAL, ACCOUNTANT MEMBER
ITA No.4173/Del/2010
Assessment Year : 2002-03
DCIT, Vs. Microsoft Corporation India Pvt.
Circle 6 (1), Ltd.,
New Delhi. F-40, NDSE I,
New Delhi.
PAN : AAACM5586C
C.O. NO.345/Del/2010
(ITA No.4173/Del/2010)
Assessment Year : 2002-03
Microsoft Corporation India Vs. DCIT,
Pvt. Ltd., Circle 6 (1),
F-40, NDSE I, New Delhi.
New Delhi.
PAN : AAACM5586C
(Appellant) (Respondent)
Assessee by : Shri Salil Kapoor & Shri Sanat Kapoor,
Advocates
Revenue by : Shri N.K. Chand, Sr. DR
ORDER
PER I.P. BANSAL, JUDICIAL MEMBER
The appeal is filed by the department and the Cross Objections by the assessee. Both of them are directed against the order of the CIT (A) dated 9th June, 2010 for assessment year 2002-03. Grounds of appeal and grounds of Cross Objections are as under:-
2 ITA No.4173/Del/2010 CO. No.345/Del/2010 ITA No.4173/Del/20101. The order of Learned CIT (Appeals) is erroneous & contrary to facts & law."
2. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) has erred in annulling the assessment order passed u/s 147/143 (3) of the IT Act.
2.1. The Ld. CIT (Appeals) ignored the fact that the case of the assessee was opened u/s 147/148 of the IT Act after following due procedure laid down by law.
3. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) has erred in deleting the addition of Rs.46,78,313/- made by the A.O. by restricting the depreciation on ITG Networking Equipment @ 25% as against 60% claimed by the assessee without discussing the merits of the addition made by the A.O.
4. The appellant craves leave to add, to alter, or amend any grounds of appeal raised above at the time of hearing."
C.O. No.345/Del/20101. Based on the facts and circumstances of the case, the notice issued under section 148 by the learned Deputy Commissioner of Income-tax 6 (1) (hereinafter referred to as the learned Assessing Officer) is illegal, bad in law, without jurisdiction and barred by time limitation, hence, the reassessment order dated 31st July 2008 passed by the learned Assessing Officer is also illegal, bad in law and without jurisdiction.
2. Based on the facts and circumstances of the case, there is no failure on part of the Respondent to disclose truly and fully all material facts necessary for assessment, hence, the notice issued under section 148 of the Act and the reassessment order are illegal, bad in law and without jurisdiction.
The respondent craves, to consider each of the above grounds of cross objections without prejudice to each other and craves, leave to add, alter, delete or modify all or any of the above grounds of cross objections.
2. Ld. CIT (A) has held that the initiation of re-assessment proceedings in itself was illegal as first proviso to Section 147 was 3 ITA No.4173/Del/2010 CO. No.345/Del/2010 applicable. The re-assessment proceedings were initiated after the expiry of four years from the end of the relevant assessment year and there was no failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment. However, the CIT (A) has declined to go into the merits of the issue which raised a point regarding grant of depreciation of ITG networking equipment which, according to the assessee, was eligible @ 60% i.e., the rate of depreciation provided for computers and, according to the Assessing Officer, the said equipment fall under the head 'Plant and machinery', therefore, eligible for depreciation @ 25%.
3. The department in its appeal is aggrieved on both the issues; firstly that initiation of re-assessment proceedings has incorrectly been held to be invalid by the CIT (A) and, secondly, on the ground that CIT (A) has erred in deleting the addition made on account of difference in the rate of depreciation. The assessee in its Cross Objections is supporting the order of the Ld. CIT (A) on account of application of proviso to Section 148.
4. Brief facts required for determination of the present appeal are that the return of income for the present year originally was filed on 31st October, 2002 declaring an income of Rs.15,11,71,690/- which was later on revised on 31st March, 2004 to Rs.15,03,82,930/-. The assessment was completed u/s 143 (3) on 29th March, 2005 at an income of Rs.24,12,86,195/-. Thereafter, upon noticing that the assessee had claimed depreciation @ 60% amounting to Rs.80,19,964/- on ITG networking equipment which, according to the Assessing Officer, was to be allowable @ 25% i.e., a sum of Rs.33,41,651/-, therefore, excess claim resulted in under-assessment of income at Rs.46,78,313/-. Accordingly, notice u/s 148 was issued, copy of which is placed at pages 100 and 101 of the paper book. The 4 ITA No.4173/Del/2010 CO. No.345/Del/2010 notice issued u/s 148 is dated 18th /23rd July, 2007 and with the said notice, the reasons for issuing the notice u/s 148 as filed at page 101 of the paper book are as below:-
"Microsoft Corporation India Pvt. Ltd.
Assessment Year - 2002-2003 Reasons for issuing notice u/s 148 of the IT Act, 1961.
In the case of M/s Microsoft Corporation India Pvt. Ltd., it has been found that depreciation on "networking equipments"
has been allowed inadvertently @ 60% under the category of 'computer' whereas it should have been allowed @ 25% as in the case of 'Plant and Machinery', as Networking equipments"
forms a part of plant and machinery. The incorrect allowance of incorrect depreciation has resulted into under assessment of income by Rs.46,78,313/-. In addition, interest u/s 234B has also been undercharged.
Therefore, I have reasons to believe that income of the assessee for the A.Y. 2002-2003 chargeable to tax amounting to Rs.46,78,313/- has escaped assessment, I am also satisfied that the case of the assessee for the A.Y. 2002-2003 is a fit case for taking action u/s 147/148 of the IT Act, 1961.
Notice u/s 148 of the IT Act issued to the assessee.
Sd/-
DCIT, Circle 6 (1)"
5. The objections against initiation of re-assessment proceedings were filed vide letter dated 8th January, 2008 which was disposed of by the Assessing Officer vide order dated 7th July,2008. The copy of objections dated 8th January, 2008 is filed by the assessee in the paper book at pages 102 to 112. The assessee had submitted that during the course of original assessment proceedings the office of the Assessing Officer had specifically examined the issue of depreciation on networking equipment in the context of eligible depreciation rate and subsequent to explanation offered by the assessee vide written reply dated 17th March, 2005 has allowed the claim of depreciation on such networking equipment @ 60%. In the very objection it was submitted 5 ITA No.4173/Del/2010 CO. No.345/Del/2010 that the initiation of the proceedings u/s 148 are time barred as the initiation is barred by the first proviso to Section 147 and the said proviso was also reproduced in the said reply. It was submitted that there was no failure in filing the return of income and there was no failure to disclose fully and truly all material facts necessary for the assessment and, thus, it was claimed that initiation of re-assessment proceedings is bad in law. However, the Assessing Officer did not accept such submissions of the assessee and has framed re- assessment vide impugned order dated 31st July, 2008 passed u/s 147/143 (3) of the Act.
6. Ld. DR, after narrating the facts, relying upon the order of Assessing Officer, pleaded that re-assessment proceedings were validly initiated, therefore, the CIT (A) was wrong in holding that the proceedings u/s 147/148 were void and, therefore, quashing the impugned assessment order. On merits, he pleaded that the Assessing Officer was right in restricting the depreciation @ 25% on ITG networking equipments.
7. On the other hand, relying upon the reply filed by the assessee in response to reasons for reopening the assessment and relying upon the findings recorded by the CIT (A) that there was no failure on the part of the assessee to disclose fully and truly all material facts, Ld. AR submitted that CIT (A) has rightly quashed the assessment order on the ground that re-assessment proceedings were time barred.
8. Ld. AR further placed reliance inter alia upon the following two decisions of Hon'ble Delhi High Court:-
i) Well Intertrade Pvt. Ltd. (formerly Wel Intertrade Ltd.) & Another, Petitioners vs. ITO (2008) (308 ITR 22) 6 ITA No.4173/Del/2010 CO. No.345/Del/2010
ii) M/s Haryana Acrylic Manufacturing Company vs. CIT-IV and Another 308 ITR 38.
9. These decisions were relied upon by him for raising the contention that where the assessee has disclosed fully and truly all material facts necessary for assessment, pre-condition for invoking proviso to Section 147 is not satisfied and notice as well as proceedings pursuant thereto are liable to be quashed and also the contention that where reasons recorded did not indicate the failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment, then also, the initiation of re-assessment proceedings would be without jurisdiction as per proviso to Section
147. He also relied upon the decision of ITAT in the case of Bank of Tokyo-Mitsubishi UFJ Ltd. vs. ADIT, International Taxation, Kolkata dated 12th December, 2008 wherein both the aforementioned decisions of jurisdictional High Court were considered and it was held that where there is no specific averment made in the reasons recorded regarding the failure on the part of the assessee to disclose fully and truly all material facts relating to assessment, the proviso to Section 147 will be applicable and he drew our attention towards the observations of the Tribunal contained in para 6. The copy of the order has been placed at pages 57-79 of the paper book in which one of us (Accountant Member) is a party.
10. We have heard both the parties and we have carefully gone through the documents referred to by the Ld. AR. The reasons have already been reproduced in the above part of this order. The perusal of reasons will reveal that even the Assessing Officer while recording the reasons has not specifically pointed out that there was any failure on the part of the assessee to disclose fully and truly all material facts relating to the assessment. The only reason for which the re- assessment proceedings were to be initiated was regarding the 7 ITA No.4173/Del/2010 CO. No.345/Del/2010 difference in rate of depreciation on ITG Networking equipment which, according to the department was inadvertently allowed at a higher rate applicable to computer. However, by way of evidence, the assessee has been able to prove that during the course of original assessment proceedings, the query relating to applicable rate of depreciation on ITG networking equipment was raised and a specific reply was given by the assessee on the basis of which the claim of the assessee was admitted in the original assessment order and, thus, the averment of the Assessing Officer in the reasons recorded that it was inadvertently allowed @ 60% is not supported by the material available on record. A conscious decision was taken by the Assessing Officer regarding grant of depreciation.
11. If the notice is to be issued for re-assessment proceedings in a case where assessment is framed u/s 143 (3), then, the notice cannot be issued after the expiry of four years from the end of the relevant assessment year unless there is a failure on the part of the assessee to make a return u/s 139 or in response to notice issued under sub- section (1) of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for its assessment for that assessment year.
12. According to the facts of the present case, it is not the allegation of the department that the assessee did not file return either u/s 139/142 (1) or u/s 148. It is found that in response to notice u/s 148 the assessee vide letter dated 30th August, 2007 has offered the income as per revised return filed on 31.03.2004. Such fact is stated in the reply filed by the assessee dated 8th January, 2008, copy of which is filed at pages 102 to 112 of the paper book. Thus, returns having been filed in response to notice u/s 139 as well as Section 148, the other condition to be fulfilled for non-applicability of first proviso to 8 ITA No.4173/Del/2010 CO. No.345/Del/2010 Section 147 is that there should not be a failure on the part of the assessee to disclose fully and truly all material facts necessary for assessment. From the above discussion, it has already been made clear that neither it is the allegation of the Assessing Officer that there was any such failure of the assessee nor the record has shown such failure. Rather, the issue on merit was required to be explained by the Assessing Officer and the same was explained during the course of original assessment proceedings. Having fulfilled the aforementioned twin conditions, the first proviso to Section 147 debarred the initiation of reassessment proceedings as the notice u/s 148 is issued on 18/23.07.2007 which is beyond the four years from the end of relevant assessment year which period ends on 31.03.2003.
13. The ratio of two decisions of jurisdictional High Court relied upon by Ld. AR, as mentioned in para 8 of this order, are fully applicable to the present case, relying upon which, the co-ordinate Bench in the case of Bank of Tokyo-Mitsubishi UFJ Ltd. vs. ADIT, International Taxation, Kolkata (supra) has held that re-assessment proceedings were not valid. Conclusion of the Tribunal as contained in para 6 is reproduced below:-
"6. We have considered the facts of the case and rival submissions. It is clear from the decisions of jurisdictional High Court in the case of Haryana Acrylic Manufacturing Co. and Wel Intertrade Pvt. Ltd. (supra) that a specific averment has to be made in the recorded reasons regarding failure on the part of the assessee to disclose fully and truly all material facts relating to the assessment in a case where proviso to section 147 is applicable. Admittedly, the aforesaid provision is applicable to the facts of the case. Therefore, the averment about the failure has to be made in the recorded reasons. Such an averment cannot be inferred from the correspondence between the assessee and the AO for the reason that the jurisdiction is derived from the recorded reasons, which are communicated to the assessee. On perusal of the reasons recorded in this case, we find that no such averment has been made therein. Therefore, the ratio of the aforesaid decisions is 9 ITA No.4173/Del/2010 CO. No.345/Del/2010 squarely applicable to the facts of the case. Besides that, it is clear that the provision made and the provision written back to profit & loss account were added to and subtracted from the income while drawing the statement of income, which was annexed to the return by the assessee. The figures shown therein were reproduced in the assessment order while making the original assessment. Thereafter, computation was made u/s 36(1)(viia)(b), which was also accepted by the AO. The figures of the provision made and the provision written back were taken from the annual accounts, which were also annexed with the return of income. In the light of these facts, it will be difficult, well nigh impossible, to conclude that there was a failure to disclose all material facts on the part of the assessee. It is also clear that no allegation of the failure has been made in the recorded reason which was supplied to the assessee. Therefore, it is held that the pre-condition, as mentioned above, for issue of notice u/s 148, is not satisfied or even does not exist. It is not a case where the information lay embedded, which the department could discern but did not discern. The information was disclosed in the most transparent manner in the statement of income, which was adopted in the assessment order. Therefore, the ratio of the decision of jurisdictional High Court, mentioned above, is squarely applicable to the facts of the case. Accordingly, it is held that the AO did not have jurisdiction to issue notice u/s 147. Consequently, assessment made thereon was bad in law.
14. So far as it relates to merits of the issue i.e., regarding grant of depreciation @ 60% on ITG networking equipments, it was the contention of Ld. AR that this issue is covered in favour of the assessee by the Special Bench decision in the case of DCIT vs. Data Craft India Ltd., a decision recently rendered by Special Bench on 9th July, 2010 and reported as 40 SOT 295, a copy of which is filed at pages 225 to 234 of the paper book. He specifically relied upon the following observations from the said decision:-
"In short, "Router" is a hardware device that routes data (hence the name) from a local area network (LAN) to another network connection. A router acts like a coin sorting machine, allowing only authorized machines to connect to other computer systems. Most routers also keep log files about the local network activity. Now the question is whether this "machine"10 ITA No.4173/Del/2010 CO. No.345/Del/2010
can be used independent of computer. If yes, then it cannot be called "Computer Hardware" in all circumstances.
When "Computer Hardware" is used as a component of the computer, it becomes part and parcel of the computer, as in the case of operating software in the computer. In such a situation, hardware in question can be considered as a part of a computer and hence a 'computer.' Per contra, when the machine is not used as a necessary assessory or in combination with a Computer, it cannot be called... Coming to the Routers, it is seen that these can also be used with a Television and in such use, no computer is required. These are also called T.V. routers. Similarly, "Internet Service Providers" give connectivity, by installing a router in the premises of the persons/institutions availing the internet connection. In these cases the router is not used along with a computer. In such a situation, it would be a "Stand alone" equipment. In such cases this cannot be considered a component of a computer or computer hardware. Giving another example, a computer software can be used in many devices including washing machine, televisions, telephone equipment, etc. When such software is used in those devices, it integrates with that particular devices. The predominant function of the device determines its classification. Only if the computer software, resides in a computer, then it become a part and parcel of a computer and, as long as it is as integral part of a computer, it is classified as a 'computer.' In view of the above discussion, we are of the considered view that router and switches can be classified as a computer hardware when they are used along with a computer and when their functions are integrated with a 'computer.' In other words, when a device is used as part of the computer in its functions, then it would be termed as a computer."
15. We find that vide letter dated 17th March, 2005 submitted by the assessee to the Assessing Officer during the course of original assessment proceedings, the note as required by the Assessing Officer with regard to justification of claim of depreciation @ 60% was submitted as under:-
"14. Note on depreciation rate of 60 per cent on ITG networking equipments.
As per the Income Tax Rules, 1962 ("the rules"), depreciation is available on computer and computer software at the rate of 60 11 ITA No.4173/Del/2010 CO. No.345/Del/2010 per cent. The definition of 'computer systems' has been provided under section 36 (1) (xi) of the Act to mean:
'a device or collection of devices including input and output support devices and excluding calculators which are not programmable and capable of being used in conjunction with external files, or more of which contain computer programmes, electronic instructions, input data and output data, that performs functions including, but not limited to logic, arithmetic, data storage and retrieval, communication and control"
As evident from the details of additions included within the tax audit report, the equipments included within ITG networking primarily includes routers, switches, modems, etc. which are primarily in the nature of input and output support devices that performs functions including communication and control. Accordingly, such assets qualify as computer systems under the Act and depreciation at the rate of 60 percent has been claimed."
16. From the above note, it is clear that the above equipment primarily include the routers, switches, modems, etc. which are in the nature of input and output support devices which performs the functions including communication and control and, thus, they are computer hardware when they are used along with computer and when their functions are integrated with 'computer.' Such devices used as part of the computer in its functions and, thus, it can be termed as 'computer' only, therefore, eligible for depreciation @ 60%. Therefore, also we find no infirmity in the claim of the assessee of depreciation @ 60% of ITG networking equipments.
17. In view of the above discussion, the departmental ground No.2 and 3 are dismissed. Ground No.1 and 4 are general in nature and need no separate adjudication.
18. The Cross Objections filed by the assessee are merely supporting the order of the CIT (A). As the order of the CIT (A) has been upheld, 12 ITA No.4173/Del/2010 CO. No.345/Del/2010 the Cross Objections filed by the assessee have become infructuous, therefore, they are also dismissed.
19. In the result, the appeal filed by the Department as well as the CO filed by the assessee both are dismissed.
The order pronounced in the open court on 19.11.2010.
Sd/- Sd/-
[K.G. BANSAL] [I.P. BANSAL]
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated, 19.11.2010.
dk
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
TRUE COPY
By Order,
Deputy Registrar,
ITAT, Delhi Benches