Income Tax Appellate Tribunal - Delhi
Cosmic Softech Ltd., New Delhi vs Department Of Income Tax on 9 February, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'B' NEW DELHI
BEFORE SHRI B.C. MEENA, ACCOUNTANT MEMBER
AND
SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER
ITA No. 1964/Del/2011
Assessment Year: 2006-07
Deputy Commissioner of Income Tax, vs M/s Cosmic Softech Ltd.,
Circle 3(1), New Delhi. A-14, Mohan Cooperative
Estate, New Delhi.
(Appellant) (Respondent)
Appellant by: Shri Deepak Sehgal, Sr.DR
Respondent by: Shri Manoj Arora
ORDER
PER CHANDRA MOHAN GARG, JUDICIAL MEMBER
This appeal has been preferred by the revenue against the order of Commissioner of Income Tax(A)-VI, New Delhi dated 09.02.2011 for AY 2006-07. The grounds raised by the revenue in this appeal read as under:-
"1. The Ld.CIT(A) has erred on facts and in law in deleting addition of Rs. 30000/- on account of disallowance of STPI charges ignoring the fact that the assessee's unit was not functioning under any of the Software Technology Parks of India Scheme.
2. In the facts and circumstances of the case, the Ld.CIT(A) has erred in law and on facts in deleting addition of Rs.4419249/:- on account of disallowance of 2 ITA No.1964/Del/2011 Asstt. Year: 2006-07 advertisement expenses. Hon'ble Apex Court in its ruling in the case of Madras Industrial Investment Corporation Limited vs. CIT (225 ITR 802) has stated that if the benefit of incurring expenditure is stretched over a number of years then that expenditure can be amortized over a number of years.
3. In the facts and circumstances of the case, the Ld.CIT(A) has erred on facts and in law in deleting addition of Rs.18085/- on account of disallowance of extra depreciation on computer peripherals ignoring that as per the IT Rules 60% depreciation is allowable only on computer and computer software and not on computer peripherals and accessories.
4. In the facts and circumstances of the case, the Ld.CIT(A) has erred in law and on facts in deleting addition ofRs.6788000/- made on account of disallowance of deemed dividend ignoring that the provisions of section 2(22)(e) of the I.T.Act are clearly applicable in this case. Reliance is placed on the decision of Hon'ble Supreme Court in the case of CIT vs. Durga Prasad Mora (82 ITR 540) and Hon'ble Calcutta High Court in the case of Nandlal Kanoria vs. CIT (122 ITR
405)."
2. Briefly stated, the facts giving rise to this appeal are that the assessee company filed its return of income on 29.1.2006 declaring a loss of Rs.1,10,81,036/- and the case was selected for scrutiny. Notice u/s 143(2) of the Income Tax Act, 1961 (for short the Act) along with questionnaire was served on the assessee. After providing due opportunity of hearing, the Assessing Officer finalized the assessment at nil income. The Assessing Officer made certain disallowances pertaining to STPI charges, telephone 3 ITA No.1964/Del/2011 Asstt. Year: 2006-07 expenses, advertisement expenses, maintenance fees and disallowance of part of depreciation on computer peripherals. The Assessing Officer also made an addition on account of deemed dividend u/s 2(22)(e) of the Act as IFOS amounting to Rs.67,88,000.
3. The aggrieved assessee filed an appeal before the Commissioner of Income Tax(A)-VI, New Delhi which was partly allowed by the impugned order. The Commissioner of Income Tax(A) deleted the additions made by the Assessing Officer relating to STPI charges, advertisement expenses, part disallowance of depreciation on computer peripherals and also deleted the addition made on account of deemed dividend. Now, the revenue is before us with this second appeal with the grounds mentioned hereinabove. Ground No.1
4. Ld. DR submitted that the STPI charges claimed by the assessee in Profit & loss account cannot be allowed as business expenses because the assessee unit was not functioning under any of Software Technology Park of India Scheme. The DR, therefore, prayed that the order of Commissioner of Income Tax(A) may be set aside restoring that of the Assessing Officer.
5. Replying to the above submissions, the counsel for the assessee submitted that the Assessing Officer noted that the assessee company has paid STPI charges during the year under consideration and the same has 4 ITA No.1964/Del/2011 Asstt. Year: 2006-07 been claimed as business expenses in the Profit & Loss account. He further submitted that the Assessing Officer wrongly held that the STPI charges cannot allowed as business expenses as the assessee unit is not functioning under any of the Software Technology Parks of India Scheme. The counsel for the assessee vehemently argued that undisputedly the assessee company is engaged in the business of software and the IT enabled services, business school and export of jewellery, therefore, the STPI registration charges are for business purpose only which should be allowed as revenue expenditure because this is not pre condition for the STPI registration that the assessee should be functioning from or under any Software Technology Park of India Scheme.
6. After careful consideration of the rival submissions of both the parties, we observe that the assessee company has paid a sum of Rs.30,000 to STPI (an organization which regulates export of software from India). STPI does not necessarily mean that the company has to operate from the Software Technology Parks only. Ld. Commissioner of Income Tax(A) rightly observed that the expenditure on registration in STPI was for the purposes of business and he rightly deleted the addition. We are unable to see any reason to interfere with the findings of the ld. Commissioner of Income Tax(A). Therefore, ground no. 1 of the revenue is dismissed. 5 ITA No.1964/Del/2011 Asstt. Year: 2006-07 Ground no.2
7. During the assessment proceedings, the Assessing Officer made an addition of Rs.44,19,249/- with the following observations:-
"ADVERTISEMENT EXPENSES:-
It is noticed that during the year under consideration the assessee has debited a sum of Rs 55,24,062/- as advertisement expenses as compared to a sum of Rs 9,10,2011- in the A Y 05-06. The perusal of P/L Account reveals that the total income of the assessee, in fact has come down from 5.44 cr. to 5.24 cr. In view of this the assessee was asked to provide the details of advertisement expense along with justification in this regard. However, no justification for allowability of such a huge expenditure was submitted. It has been held by the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. vs. Commissioner of Income Tax (225 ITR 802) that a single expenditure on item which has an enduring benefit for the assessee and because of its quantum, it is distorting the profits for the year under consideration, the whole of such expenditure cannot be allowed in a single year, rather it should be differed over a period of few years. In view of above 4/5th of this expenditure of Rs. 55,24,062/- is disallowed and added to the total income of the assessee.
Without prejudice to the above stand, it is noticed from the details field by the assessee regarding advertisement expenses that no TDS was deducted by the assessee in many cases such as payment made to Magnum creative of Rs. 33,220/- on 27.05.05, payment to Quantum Communication of Rs.
25,383/- on 30.05.05, of Rs. 45,550/- on 04.06.05 of Rs 42,935/- on 10.06.05, Rs. 38,378/- on 10.06.05, payment of Rs 79,711/- to Falcon Advertisers on 09.06.05, etc. In fact there are many other payments made by the assessee on a/c of advertisement on which no TDS was deducted, even though the provisions of TDS under the act requires deduction of TDS. However no disallowance is being made in this regard 6 ITA No.1964/Del/2011 Asstt. Year: 2006-07 as 4/5th of advertisement expenditure has already been disallowed as discussed above."
8. The DR submitted that the Assessing Officer rightly observed that the payment made by the assessee on account of advertisement was of enduring nature which brought enduring benefit for the assessee company. Therefore, the whole of such huge expenditure cannot be allowed in a single year, rather it was rightly deferred and distributed over a period of five years. The DR supported the assessment order.
9. The counsel for the assessee vehemently contended the above submissions and replied that the Assessing Officer followed a hyper technical approach and made the disallowance and addition on erroneous grounds which was rightly deleted by the Commissioner of Income Tax(A). The AR further submitted that the Assessing Officer has not given any basis as to how the expenditure pertaining to the year under consideration should be spread over a period of specific five years. The AR relied on the judgment of Hon'ble Jurisdictional High Court of Delhi in the case of Commissioner of Income Tax vs Jai Parablic Springs Ltd. (2008) 306 ITR 42 (Delhi) wherein it was held that the revenue expenditure which was incurred wholly and exclusively for the purposes of business must be allowed in its entirety for the year in which it was incurred. Their lordships 7 ITA No.1964/Del/2011 Asstt. Year: 2006-07 also held that this kind of expenditure cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. The Hon'ble High Court of Delhi considered the ratio of judgment of Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. vs Commissioner of Income Tax (1997) 225 ITR 802(SC).
10. In the present case, admittedly, an expenditure on advertisement was made by the assessee for the purpose of business and in the nature of revenue. The Assessing Officer has not raised any objection about the amount of advertisement expenditure. We are unable to see any justified reason on which the advertisement expenditure incurred during the year under consideration was spread over a period of five years by the Assessing Officer. On the other hand, ld. Commissioner of Income Tax(A) rightly held that the advertisement expenditure of revenue in nature should be allowed in the year in which it was actually incurred. We are unable to see any infirmity or perversity in the findings of ld. Commissioner of Income Tax(A). Accordingly, respectfully following the judgement of Hon'ble High Court of Delhi in the case of Jain Parabolic Springs Ltd. (supra), ground no. 2 of the revenue is dismissed.
8 ITA No.1964/Del/2011Asstt. Year: 2006-07 Ground no.3
11. Ld. DR submitted that the Assessing Officer observed that the assessee has claimed 60% depreciation on computer accessories and peripherals which was restricted @15% as per statutory provisions. Therefore, the Assessing Officer rightly disallowed the excessively claimed depreciation and made an addition of Rs.18,085 on valid reasons.
12. Replying to the above submissions, the AR submitted that as per judgment of Hon'ble Jurisdictional High Court of Delhi in the case of Commissioner of Income Tax vs BSES Rajdhani Power Ltd. in ITA No. 1266/D/2010 vide order dated 31.8.2010, the computer accessories and peripherals cannot be used without computer, therefore, as a part of computer system, they are entitled to depreciation at the higher rate of 60%.
13. Respectfully following the judgment of Hon'ble High Court of Delhi in the case of BSES Rajdhani Powers Ltd. (supra), we hold that ground no. 3 of the revenue is devoid of merits and deserves to be dismissed and we dismiss the same.
Ground No.4
14. Ground No.4 is related to the deletion of addition made by the Assessing Officer by invoking the provisions of section 2(22)(e) of the Act. The Assessing Officer observed that from Annexure IV enclosed with the 9 ITA No.1964/Del/2011 Asstt. Year: 2006-07 3CD report of the assessee, the Assessing Officer noted that Shri J.P. Srivastava, Shri Ajay Prakash Srivastava and Anand Prakash Srivastava are the major promoters of the group. Their holding directly or indirectly is major shareholding in most of the concerns. The Assessing Officer also observed that above mentioned persons are controlling and exercising major influence in the day-to-day business of these concerns and all these companies/concerns are private limited and closely held companies. The Assessing Officer also noted that the amount of Rs.2,98,97,670/- was shown as share application money in the balance sheet of the assessee company pending for allotment and from the assessee's explanation, it was observed that this share application money was received from the related concerns of the assessee company.
15. The Assessing Officer also observed that the assessee has not allotted shares against share application money received by it which was lying with the assessee for the last 6-7 years and yet there was no allotment of shares to the share applicants and depositors. The Assessing Officer finally held that the funds had been transferred from one concern to another with the sole purpose of circumventing the provisions of the Act and avoiding the tax deduction. After considering the explanation and submission of the assessee, the Assessing Officer held that a sum of Rs.67,88,000 deserves to 10 ITA No.1964/Del/2011 Asstt. Year: 2006-07 be treated as deemed dividend u/s 2(22)(e) of the Act and added the same to the total income of the assessee.
16. On appeal by the assessee, the Commissioner of Income Tax(A) dealt this issue as ground no. 9, 10 and 11 and deleted the addition with the following observations:-
"7.1 Briefly stated facts of the case are that the assessee company has taken loan from number of parties. A detailed chart is given on page 3 & 4 of the assessment order. The Assessing Officer noticed that apart from M/s. Kotak Mahindra and GE Countrywide, the assessee has taken loan from number of companies/concerns in which the promoters of the assessee has control or major- influence. The assessee was asked to provide the shareholding pattern of various related parties including the assessee itself. The assessee provided the shareholding of various concerns which has been reproduced on page 4 to 6 of the assessment order. The Assessing Officer observed that Sh. JP Srivastava, Shri Ajay Prakash Srivastava and Anand Parkash Srivastava are the major promoters of this group. Their holding directly or indirectly is major shareholding in most of the concerns. In other words, they are controlling or exercising major influence in the running of these concerns. Further, it is to be noted that all these companies/concerns are private/closely held companies. In such a situation it is not difficult at all for these promoters to control the board proceedings and get the resolutions passed on various matters. Also it becomes a case of convenience whereby the shareholding pattern of various concerns is managed in such a manner so as to circumvent the provisions of section 2(22)(e) of the Act so as to avoid deemed dividend in the hands of concerns taking loan. This in a way is defeating the whole purpose and the objective of the legislature for enacting the provisions of section 2(22)(e). Further, it was noted that 11 ITA No.1964/Del/2011 Asstt. Year: 2006-07 an amount of Rs. 2,98,97,6701- is shown as share application money in the balance sheet pending for allotment. The assessee was asked to produce the details of this share application money. It was observed that this share application money is again from the related concerns. The share application money has come in the F.Y. 02-03. The assessee has not allotted any shares against the share application money received by it. The Assessing Officer took the view that funds have been transferred from one concern to another, called by whatever name, with sole purpose of circumventing the provisions of the Act and avoiding tax. The Assessing Officer analysed the transaction in the light of the provisions of section 2(22)(e) of the Act and came to the conclusion that the real thrust is on the controlling shareholders which does not necessarily mean direct or registered shareholder. The modus operandi adopted by the assessee is that the accumulated profits of the concerns are being siphoned off in the form of loans through Conduit Pipe, through the network of group companies and finally reaching the desired companies. The whole network of companies for transfer of funds is arranged in a manner so as to defeat the provisions of section 2(22)(e) and legislative intent and in the process escape taxability. He, therefore, treated the sum of Rs. 67,88,000/- as deemed dividend u/s of section 2(22)(e) of the Act.
7.2 During the proceedings before me, it was submitted that the Assessing Officer has no where established that any of the conditions prescribed under section 2(22)(e) has been fulfilled which are necessary to attract tax under this sub-clause. Complete details establishing that none of the loans received by the assessee company attracts the provisions of sub-section 2(22)(e) were submitted before the Assessing Officer. These details specifically mentions the reason why section 2(22)(e) is not attracted to each such loans. It was explained before the Assessing Officer that as regards Maharishi Ayurveda Product Pvt. Ltd., no shareholder owing 12 ITA No.1964/Del/2011 Asstt. Year: 2006-07 shares of 10% of the equity capital in MAPPL is holding shares of more than 20% in CSL. M/s Maharishi Foundation is not a company. In M/s Maharishi Solor Technology P.Ltd., no shareholder owing shares of 10% of the equity capital is holding shares of more than 20% in CSL. Moreover MSTPL does not have any accumulated profit. In M/s Maharishi Vedic Construction Corp. P. Ltd., no shareholder owing shares of 10% of amount of the equity capital is holding shares of more than 20% in CSL. Moreover MVCCPL does not have any accumulated profit. In M/s Picasso Digital Media Pvt. Ltd. also no shareholder owing shares of 10% of the equity capital is holding shares of more than 20% in CSL. Similarly, in M/s Trans Bharat Aviation Pvt. Ltd., no shareholder owing shares of 10% of amount of the equity capital is holding shares of more than 20% in CSL. Moreover TBA does not have any accumulated profit. The Assessing Officer has extended the fiction of section 2(22)(e) beyond the legislative intention and carried it to an illogical length. The Assessing. Officer has made an adhoc addition of Rs. 67,88,000/- as deemed dividend u/s 2(22)(e) without any basis and without specifying any details as to how he has arrived at the figure of addition.
7.3 I have carefully considered the submissions of ld. AR and have gone through the assessment order. Although the Assessing Officer has invoked the specific provisions of section 2(22)(e) of the Act, however it is not established as to how the transactions in the present case got covered under these provisions, nor has it been clarified as to how the deemed dividend is worked out at Rs. 67,88,000/- . On page 4 to 6 of the assessment order, the Assessing Officer has discussed the shareholding pattern of 6 companies including the appellant company. The amounts of loans or deposit are reproduced on page 3 & 4 of the assessment order. The working of Rs. 67,88,000/- is not linked up with these details. In such circumstances, I find that the addition made by the 13 ITA No.1964/Del/2011 Asstt. Year: 2006-07 Assessing Officer is not justified and the same is directed to be deleted."
17. We have heard rival arguments of both the parties on this issue and note that the Assessing Officer has observed the material fact that an amount of Rs.2,94,97,670 has been shown as share application money in the balance sheet of the assessee company. The Assessing Officer also observed that this huge share application money was lying with the assessee for the last 6- 7 years and after passing substantial time, there was no allotment of shares to the share applicants and depositors. From these facts, the Assessing Officer concluded that the funds have been transferred from one concern to another with the sole purpose of circumventing the provisions of the Act and avoiding the tax payment.
18. On the other hand, the Commissioner of Income Tax(A) held that it is not established as to how the transactions in the present case got covered under the specific provisions of section 2(22)(e) of the Act. The ld. Commissioner of Income Tax(A) has also noted that it has not been clarified how the deemed dividend was worked out at Rs.67,88,000 by the Assessing Officer.
19. In view of above and after thoughtful consideration of the facts and circumstances of the case, we hold that the Assessing Officer has discussed the shareholding pattern of six companies including the appellant company 14 ITA No.1964/Del/2011 Asstt. Year: 2006-07 and the details of amount of loans and deposits are reproduced on page 3-4 of the assessment order. On perusal of paras 7.1, 7.2 and 7.3 of impugned orders as reproduced hereinabove, we observe that the authorities below have not given any specific findings on the details of amount of loans emerged from Annexure IV of 3CD report and this issue has not been examined by them in the light of Section 2(22)(e) of the Act.
20. We therefore observe that the Assessing Officer has invoked provisions of section 2(22)(e) of the Act but for that he has to clarify as to how the deemed dividend is worked out at Rs.67,88,000/-. At the same time we also observe that the details of share application money lying with the assessee for the last 6-7 years and huge loans amounts emerged from annexures to 3CD report can not be ignored on hyper technical grounds and additions made in this regard by the Assessing Officer cannot be deleted by first appellate authority i.e. Commissioner of Income Tax(A) on hyper technical, perverse and erroneous grounds. In view of above, we are not in agreement with the findings of the Commissioner of Income Tax(A) that only because the working of Rs.67,88,000 was not linked up with these details, the addition is deleted, therefore, we hold that the Commissioner of Income Tax(A) was not justified in directing the Assessing Officer to delete 15 ITA No.1964/Del/2011 Asstt. Year: 2006-07 the addition in this regard and we hold that his findings are perverse and deserve to be set aside and we set aside the same.
20. Therefore, we are of the opinion that this issue deserves to be restored to the file of Assessing Officer for de novo adjudication according to the letter and spirit of the provisions of section 2(22)(e) of the Act. The Assessing Officer will decide the issue without being prejudicial to our observations made here in this order after affording due opportunity of hearing to the assessee-respondent. Accordingly, ground no. 4 of the revenue is allowed as above.
21. To sum up, ground no. 1, 2 and 3 of the revenue are dismissed and ground no. 4 is allowed in the manner as indicated above.
22. This appeal of the revenue may be treated as partly allowed for statistical purposes.
23. In the result, the appeal of the revenue is partly allowed.
Order pronounced in the open court on 22.1.2013.
Sd/- Sd/- ( B.C. MEENA ) (CHANDRAMOHAN GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER DT. 22nd JANUARY 2013 'GS' 16 ITA No.1964/Del/2011 Asstt. Year: 2006-07 Copy forwarded to:- 1. Appellant 2. Respondent 3. Commissioner of Income Tax(A) 4. C.I.T. 5. DR By Order Asstt. Registrar