Income Tax Appellate Tribunal - Chennai
Nine Star Information Technologies ... vs Department Of Income Tax on 2 April, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'C' BENCH, CHENNAI
BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER
I.T.A. No. 1650/Mds/2011
(Assessment Year : 2006-07)
The Assistant Commissioner M/s Nine Star Information
of Income Tax, Technologies Ltd.,
Company Circle IV(4), v. Anurag, No.72, Greams Road,
Chennai - 600 034 . Thousand Lights, Chennai - 600006
PAN : AABCN0949B
(Appellant) (Respondent)
Appellant by : Shri Pramod Kumar, CIT-DR
Respondent by : Shri Raja Ganapathi
Date of Hearing : 02.04.2012
Date of Pronouncement : 02.04.2012
O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
In this appeal filed by the Revenue, its grievance is that Commissioner of Income Tax (Appeals)-VI, Chennai, vide his order dated 26.7.2011, allowed a claim of ` 86,47,623/- of the assessee as revenue expenditure.
2 I.T.A. No. 1650/Mds/11
2. Short facts apropos are that assessee engaged in the business of e-publishing, had filed its return for impugned assessment year, which was duly processed under Section 143(1) of Income-tax Act, 1961 (in short 'the Act'). Later on, assessee's case was selected for scrutiny. During the course of scrutiny proceedings, it was noted by the Assessing Officer that assessee had shown a sum of ` 2,51,40,055/- as capital work-in-progress in its balance sheet. In the notes to the balance sheet, assessee explained such sum as expenses for R&D for software development, which was capitalized. Assessing Officer from the computation of income noted that assessee had charged a sum of ` 86,47,623/- coming within the total amount of ` 2,51,40,055/-, as a revenue outgo. Explanation was sought from the assessee as to why the said claim should not be disallowed. In reply, assessee submitted that it had incurred certain expenditure for development of software for getting committed orders. As per the assessee, the expenses incurred for such development were period costs. Since some of the orders were delayed, in the books pro rata expenses were shown as part of work-in-progress for having impressive accounting statements. Further, as per the assessee, the amounts were expenses eligible for charging against income in the succeeding financial year to the extent it was not 3 I.T.A. No. 1650/Mds/11 claimed in the impugned assessment year. As per the assessee, it had not made any further claim in the succeeding year. A.O. from the above submission was of the opinion that it was an admitted position that such expenses were eligible for charging against the income in the succeeding financial year. As per the A.O., such expenditure brought an enduring benefit to the assessee. He, therefore, considered the claim not to be allowable and such claim made through the income computation statement was disallowed.
3. In its appeal before ld. CIT(Appeals), argument of the assessee was that a break-up of the expenditure was submitted to the Assessing Officer during the course of assessment proceedings. As per the assessee, the amount of ` 86,47,623/- disallowed by the A.O. comprised of rent for Chennai Office ` 72,45,000/-, rent for Bangalore Office ` 11,79,000/- and electricity charges of ` 2,23,623/-. Claim of the assessee was that these were allowable under Section 30 of the Act and in any case, these were expenditure wholly attributable to its business activities. Alternatively, it was submitted that the claim was also allowable under Section 35(1)(i) of the Act. Reliance was placed on the decision of Hon'ble Apex Court in the case of Kedarnath Jute Manufacturing Co. Ltd. v. CIT (82 ITR 363) in addition to the 4 I.T.A. No. 1650/Mds/11 decisions of Andhra Pradesh High Court in the case of Nathmal Bankatial Priks & Co. v. CIT (122 ITR 168) and Karnataka High Court in the case of Hanuman Motor Service v. CIT (66 ITR 88). Ld. CIT(Appeals), relying on the decision of Hon'ble Apex Court in the case of Kedarnath Jute Manufacturing Co. Ltd. (supra), held that the expenses claimed by the assessee were essentially period costs. According to ld. CIT(Appeals), treatment in the books of accounts was not relevant for considering whether a deduction claimed by the assessee was allowable or not. He, therefore, deleted the disallowance.
4. Now before us, learned D.R., strongly attacking the order of ld. CIT(Appeals), submitted that assessee itself had shown such amount as part of capital work-in-progress. According to him, software is considered as an asset and expenditure incurred for development of software which was shown as part of work-in-progress ought not have been allowed by ld. CIT(Appeals) as revenue expenditure for tax purposes. In any case, according to learned D.R., ld. CIT(Appeals) relied on a break-up furnished by the assessee for allowing the claim, without getting a report of the Assessing Officer. 5 I.T.A. No. 1650/Mds/11
5. Per contra, learned A.R. submitted that details of break-up were submitted before the Assessing Officer. However, the Assessing Officer failed to consider such break-up. As per the learned A.R., treatment in the books of accounts was not relevant for the purpose of determining whether a claim of the assessee was allowable in the Act or not. The sole criteria was whether expenditure was incurred wholly for the purpose of business. By the very nature of expenses which were rent and electricity charges, it was an allowable revenue outgo. Ld. CIT(Appeals) was very much correct in deleting the disallowance. He argued that the order of ld. CIT(Appeals) had to be sustained.
6. We have perused the orders and heard the rival submissions. The total amount of expenses capitalized by the assessee in its books of accounts as part of work-in-progress was ` 2,52,40,055/-. It is not disputed that the sum of ` 86,47,623/- considered for disallowance by the Assessing Officer was part of the above amount. Assessee was admittedly engaged in the business of electronic publishing. Electronic publishing definitely required development of software and such software developed by its very nature will result in enduring benefit to the assessee. For development of such software, 6 I.T.A. No. 1650/Mds/11 assessee had incurred expenses and shown such expenses as part of its capital work-in-progress. This treatment was apparently in accordance with Accounting Standards in respect of accounting for software expenses. However, assessee chose to claim a sum of ` 86,47,623/- as a revenue outgo in its computation statement. Claim of the assessee was that this was rent and electricity and having been incurred wholly for the purpose of business was allowable as revenue outgo and/or under Section 30 of the Act. No doubt, as argued by the assessee, treatment in the books of accounts cannot be a sole determinant for deciding allowability of an amount under the Act. However, in our opinion, treatment in the books of accounts is a pointer as to how the assessee itself treated the outgo for the purpose of its business. Hon'ble Apex Court in the case of CIT v Woodward Governor India P.Ltd (312 ITR 254), in para 21 of its order, has held as under:-
"21. In conclusion, we may state that in order to find out if an expenditure is deductible the following have to be taken into account (i) whether the system of accounting followed by the assessee is mercantile system, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it becomes due and before it is actually received; (ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether 7 I.T.A. No. 1650/Mds/11 the change was bona fide; (iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv) whether the assessee has been consistent and definite in making entries interest he account books in respect of losses and gains; (v) whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted Accounting Standards; (vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation."
It is clear from the above decision of Hon'ble Apex Court that treatment in the books of accounts has a strong bearing on determining whether an amount is allowable or not. We are of the opinion that none of the authorities below considered the relevant Accounting Standards and nature of business of the assessee while deciding the issue. Ld. CIT(Appeals) fell in error in giving allowance to the assessee without verifying such aspects. In our opinion, the matter requires a re-visit by the A.O. We, therefore, set aside the orders of authorities below and remit the issue regarding allowability of claim of the assessee back to the file of the A.O. for fresh consideration in accordance with law and after considering the nature of business of the assessee.
7. In the result, appeal filed by the Revenue is allowed for statistical purposes.
8 I.T.A. No. 1650/Mds/11Order pronounced in the open court after conclusion of hearing on 2nd April, 2012.
sd/- sd/-
(Challa Nagendra Prasad) (Abraham P. George)
Judicial Member Accountant Member
Chennai,
Dated the 2nd April, 2012.
Kri.
Copy to: (1) Appellant
(2) Respondent
(3) CIT(A)-VI, Chennai
(4) CIT-III, Chennai
(5) D.R.
(6) Guard file