Income Tax Appellate Tribunal - Kolkata
Prachar Communications Ltd., Kolkata vs Department Of Income Tax
आयकर अपीलीय अधीकरण, Ûयायपीठ - " िस" कोलकाता,
IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH: KOLKATA
(सम¢)Before ौी एस. भी. मेहरोऽा, लेखा सदःय एवं/and ौी महावीर िसंह, Ûयायीक सदःय)
[Before Hon'ble Shri S. V. Mehrotra, AM & Hon'ble Sri Mahavir Singh, JM]
आयकर अपील संÉया / I.T.A No. 1219/Kol/2009
िनधॉरण वषॅ/Assessment Year: 2004-05
Income-tax Officer, wd-12(1), Kolkata Vs. M/s. Prachar Communications Ltd.
(PAN-AABCP 5657 L)
(अपीलाथȸ/Appellant) (ू×यथȸ/Respondent)
&
C.O. No.61/Kol/2009
In आयकर अपील संÉया / I.T.A No. 1219/Kol/2009
िनधॉरण वषॅ/Assessment Year: 2004-05
M/s. Prachar Communications Ltd. Vs. Income-tax Officer, wd-12(1), Kolkata (Cross
Objector) (Respondent)
For the Revenue: Shri S. K. Roy
For the Assessee: Shri R. Salarpuria
आदे श/ORDER
Per Mahavir Singh, JM ( महावीर िसंह, Ûयायीक सदःय)
सदःय The appeal by revenue and Cross Objection by assessee are arising out of order of CIT(A)-XXXII, Kolkata in Appeal No. 66/CIT(A)-XXXII/ITO/12(4)/08-09/Kol vide dated 27.03.2009. Assessment was framed by Income-tax Officer, wd-12(4), Kolkata for Assessment Years 2004-05 u/s. 143(3) Income Tax Act, 1961(hereinafter referred to as "the Act") vide his order dated 29.12.2006. For the sake of brevity and clarity, we dispose of both these appeal and cross objection by this consolidated order.
2. First issue in this appeal of revenue is against the order of CIT(A) deleting disallowance of commission payment. For this, revenue raised following ground No.1:
"1. Whether, on the facts and in the circumstances of the case, the Ld. CIT(A) is correct in holding that the commission payment of Rs.17,28,996/- is allowable despite the fact that nothing was filed or produced by the assessee to substantiate that actual service was rendered by the commission agent for the purpose of business of the assessee."
3. The brief facts are that Assessing Officer disallowed commission payment of Rs.14,70,353/- paid to Mahananda Securities Ltd. and Rs.2,58,643/- paid to M/s. Jain Trading 2 ITA 1219/K/2009 & CO . 63/K/2009 Prachar Communications Ltd. A.Y.04-05 Company on the basis that the assessee has filed same details, which were filed before DDIT (Inv.), Mumbai at the time of verification enquiry process. According to Assessing Officer, no details were filed except filed before DDIT (Inv.), Mumbai, hence he disallowed above two commissions payments amounting to Rs.17,28,996/- by holding that these are not related fully and exclusively for the purpose of assessee's business. Aggrieved, assessee preferred appeal before CIT(A), who allowed the claim of assessee vide para 7 of his appellate order as under:
"7. I have perused the assessment order, the submission preferred before me by the appellant and the judicial pronouncements relied upon.
It is found that similar payments of commission has been allowed by CIT(A) in appeal for assessment years 2001-02 against which the Department has gone in for appeal and such appeal of the Department has been dismissed by the Hon'ble ITAT in Appeal No. 1550/Kol/05 dated 24.3.2006. While in the assessment year 2003-04 similar addition has been also deleted by CIT(A)-XII, Kolkata in Appeal No. 78/CIT(A)-XII/12(1)/06-07 and payment of commission to Jain & Co. has been fully deleted by the Hon'ble ITAT, Kolkata for assessment years 2001-02 and 2002-03. Copies of all such order have been annexed by the appellant along with its written submission."
4. We have heard rival contentions and gone through facts and circumstances of the case. As far as commission paid to M/s. Jain Trading Company, Ld. Sr. D. R. as well as Ld. Counsel fairly agreed that issue was considered in earlier years even by Tribunal and deleted the addition for Assessment Year 2001-02 and 2002-03 exactly on same facts. Considering the above position in respect to commission paid to M/s. Jain Trading Company, we confirm the order of CIT(A). This issue of revenue's appeal is dismissed.
5. Now commission paid to Mahananda Securities Ltd amounting to Rs.14,17,353/-, Ld. Counsel as well as Ld. Sr. D. R. fairly agreed that documents produced before CIT(A) was never before Assessing Officer. Even Assessing Officer noted that in absence of documentary evidences commission is disallowed. In view of the above facts, we are of the view that assessee should go back to Assessing Officer and file these details as filed before CIT(A) and Assessing Officer will decide the issue afresh according to law. This issue of assessee's appeal is set aside to the file of the Assessing Officer and partly allowed for statistical purposes.
6. Next issue in this appeal of revenue is against the order of CIT(A) deleting disallowance of salary, wages and bonus. For this, revenue has raised following ground no.2:
"2. Whether, on the facts and in the circumstances of the case, the Ld. CIT(A) was correct in deleting the addition of Rs.6,33,881/- made on account of salary, wages and bonus despite the fact that the assessee failed to even file any corroborative evidence or details to substantiate a sharp rise of expenditure without any reason."
3 ITA 1219/K/2009 & CO . 63/K/2009 Prachar Communications Ltd. A.Y.04-05
7. Brief facts are that Assessing Officer during assessment proceeding disallowed salary & wages payment of Rs.6,33,881/- out of the total salary and wages and administrative expenses debited by the assessee at Rs.34,17,170/-. Assessing Officer disallowed by observing that gross turnover of assessee in the assessment year 2004-05 is Rs.53,85,80,407/- as against turnover of Rs.51,10,64,272/- in assessment year 2003-04, thereby giving rise to increase in turnover of Rs.2,75,16,135/- only. According to Assessing Officer, assessee is engaged in the same line of business over years and increase in administrative, salary and wages expenses is not justified and not related to assessee's business exclusively. Accordingly, he disallowed 1/3rd of expenses under the head salary and wages at Rs.6,33,881/- out of total expenditure of Rs.19,01,644/-. Aggrieved, assessee preferred appeal before CIT(A), who relying on the decision CIT(A) for assessment year 2003-04, allowed the claim of assessee vide para 11 of his appellate order as under:
"11. I have perused the assessment order, the submission of the appellant. I found that this issue has been squarely decided in favour of the appellant for the immediately preceding previous year ended 31.3.2003, relevant to the assessment year 2003-04 by the learned CIT(A)-XII, in the appellant's own case, a copy of which has been placed on records. Respectfully, following the referred appellate order, passed by the Ld. CIT(A) for the Assessment Year 2003-04, the addition of Rs.6,33,881/- on account of payment of salary of Rs.6,33,881/- is deleted."
8. We have heard rival contentions and gone through facts and circumstances of the case. We find that Assessing Officer failed to take into consideration earlier year from which comparison has been made, whereby assessee has incurred expenditure of Rs.21,00,000/- paid to M/s. Jain Trading Co. with respect to maintenance charges and hence, total salary payment during assessment year 2003-04 amounting to Rs.36,15,526/- which comprised of Rs.15,15,526/- directly incurred in respect of salary, wages and bonus and Rs.21,00,000/- in respect to maintenance charges, comparing Rs.34,17,170/- incurred in the Assessment Year 2004-05, i.e. relevant assessment year, which is more than Assessment Year 2003-04. It is also admitted fact that assessee's turnover has also increased considerably to the extent of Rs.2,75,16,135/-. In view of the above facts, we are of the view that the CIT(A) has rightly allowed the claim of assessee and even in earlier year disallowance was deleted by CIT(A). We confirm the order of CIT(A) and this issue of revenue's appeal is dismissed.
9. The next issue in this appeal of the revenue and the Cross Objection of the assessee is against the order of CIT(A) in retaining the addition at Rs.3,48,334/- instead of entire disallowance of Rs.6,96,666/-. For this, revenue has raised the following ground no.3 and assessee has raised following ground no.1:
4 ITA 1219/K/2009 & CO . 63/K/2009 Prachar Communications Ltd. A.Y.04-05 "Revenue's ground:
3. Whether, on the facts and in the circumstances of the case, the Ld. CIT(A) is correct in deleting the addition of Rs.6,96,666/- made on account of Software Development Charge despite the fact that Development of software given rise to benefit of enduring nature and so the expenditure was deferred and held as allowable for three Assessment Year.
Assessee's ground:
1. For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in deleting only Rs.3,48,334/- instead of deleting the entire disallowance of Rs.6,96,666/- made in the assessment @ 2/3rd of Rs.10,45,000/-
incurred on a/c of software development charges. The action of the Ld. CIT(A) was wholly unreasonable, uncalled for and bad in law.
Even otherwise and without prejudice the disallowance made in the assessment was highly excessive and wholly unreasonable."
10. Brief facts are that Assessing Officer disallowed software development expenses of Rs.3,48,334/- out of total software expenses incurred by assessee at Rs.10,45,000/- for the purpose of ad films and clippings for and on behalf of its client. Assessing Officer held that this expenditure is capital in nature and need to be amortised and allowed in part for consecutive few years. The Assessing Officer accordingly, considered reasonable period for three years for which assessee could exploit and enjoy benefit of advertisement software. Accordingly, he disallowed a sum of Rs.4,71,666/- and allowed depreciation on the same, thereby effective disallowance was Rs.3,48,344/-. Aggrieved, assessee preferred appeal before CIT(A), who relying on earlier order of CIT(A) in Assessment Year 2002-03 allowed the claim of assessee vide para 15 of his appellate order as under:
"I have perused the assessment order, the submission preferred by the A.O. and the judicial pronouncements relied upon. It is observed that similar disallowances made by the A.O. in assessment for the assessment year 2003-04 had been fully deleted by the Ld. CIT(A)-XII, Kol in his Appellate Order for the Assessment Year 2003-04.
Respectfully following the decision of the learned CIT(A)-XII, Kolkata in the appellant's own case for the assessment year 2003-04, the addition of Rs.3,48,334/- in respect of software charges is deleted."
Aggrieved, revenue came in appeal before us.
11. We have heard rival contentions and gone through facts and circumstances of the case. We find that Assessing Officer himself has accepted this expenditure to be revenue but proceeded to treat it as deferred revenue expenditure. Thus, allowed 1/3rd of expenditure in relevant year and the balance was disallowed by holding that expenditure to be carried forward 5 ITA 1219/K/2009 & CO . 63/K/2009 Prachar Communications Ltd. A.Y.04-05 for adjustment in next two assessment years. We find that assessee paid this amount of Rs.10,45,000/- i.e. Rs.90,000/- to M/s. Shreeji Infotech for managerial consultancy charges for accounting software and Rs.9,55,500/- to M/s. Ominitech Infosolution Ltd. for Media Data Management for reports etc for 49 customers. Assessee contended that this expenditure is revenue in nature and incurred during the year, hence same is allowable during this year and he cited CIT(A)'s order for Assessment Year 2003-04, whereby the entire expenditure was allowed as revenue expenditure. We find that on this issue Special Bench of Tribunal in the case of Amway India Enterprises Vs. DCIT (2008) 111 ITD 112 (Del.)(SB), wherein certain principles were laid down as under (from Head Notes):
"But the question whether expenditure for acquisition of computer software is capital or revenue cannot be decided on the basis of the ownership test alone but from the point of its utility to a businessman and how important an economic or functional role it plays in his business, because of the peculiar nature of a computer software and its possible use in different areas of business. The fact that generally computer software is acquired on a licence by itself will not be sufficient to conclude that the expenditure is revenue expenditure, if it is found that the expenditure operates to confer a benefit in the capital field. On the other hand, some computer software may have a very limited economic life so as to be treated as capital expenditure, though owned by an assessee.
For ascertaining as to whether expenditure on computer software gives an enduring benefit to an assessee, the duration of time for which the assessee acquires right to use the software becomes relevant. Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time, it can be said that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure. Any software having its utility to the assessee for a period beyond two years can be considered as accrual of benefit of enduring nature. However, that by itself will not make the expenditure incurred on software as capital in nature and the functional test as discussed above also needs to be satisfied. The period of advantage in the context of computer software should not be viewed from the point of view of different assets or advantage like tenancy or use of know-how because software is a business tool enabling a businessman's ability to run his business.
The nature of the advantage which the assessee derives has to be seen in a commercial sense. Software normally functions as a tool enabling business to be carried on more efficiently. The scope, power, longevity of such a tool and its centrality to the functions of the business will all bear on its treatment.
Where the assessee-company is engaged in the business of software development as well as running a training centre to impart specialized training to the students in software technology, if the software is used in such business to impart training to the students, it would be part of the profit-making apparatus of the assessee and consequently expenditure on software, capital.
Where the said software helps in compression of size of e-mails and it includes licences for 150 users and it is limited to facilitate merely an effective and fast communication in order to increase in its organizational efficiency, it cannot be treated as forming part of the profit-making apparatus of the assessee. On the other hand, if such software is being used by an assessee engaged in the business of placement agency where the applications from persons seeking jobs are invited through e-mail and are also 6 ITA 1219/K/2009 & CO . 63/K/2009 Prachar Communications Ltd. A.Y.04-05 forwarded to the concerned clients through e-mail, it may form part of the profit- making apparatus of the assessee's business of placement agency and can be treated as a capital asset.
As a general rule the more expensive the computer software the more it is likely to be a central tool of the business and the more enduring is likely to be its effect adding to the profit earning apparatus. If there is associated capital expenditure like purchase of new computer equipment for running the software developed under a project, it can be considered as capital expenditure. This is especially the case where the new hardware is not merely desirable but necessary for this purpose.
Similarly the degree of change intended in the way operations are carried out as a result of the computer software, for example, savings in the number, and changes in the location, of staff used to provide services to customers will have a bearing. The more radical the changes, the more likely that the expenditure will be capital. These changes are likely to be most radical when operations previously carried on manually are computerized.
The presence of an element of upgrading will not necessarily cause the expenditure in question to be capital.
With effect from April 1, 1999, computers were treated as a different class of asset falling within the description of plant and depreciation was allowed at 60 per cent. With effect from April 1, 2003, computer software was also included along with computers. The amendment is prospective. It is not clarificatory for the reason that computer and computer software are two different items of assets. If the Legislature wanted to allow depreciation at 60 per cent. with effect from April 1, 1999, on computer software, it would have said so specifically by making the provisions retrospective. Depreciation can be allowed at 25 per cent. under section 32(1)(i) read with Appendix I, Part A, Division III(1) to the Income-tax Rules, 1962 and with effect from April 1, 2003, computer software having been classified as a tangible asset under the heading "Plant" in Appendix I to the Rules, is entitled to depreciation at 60 per cent.
Maruti Udyog Ltd. v. Deputy CIT [2005] 92 ITD 119 (Delhi) followed.
[The Tribunal restored the matters to the file of the Assessing Officer to examine the question whether expenditure on computer software was capital or revenue in the light of the criteria laid down in the order after giving an opportunity of being heard to the assessees. If on such examination, the Assessing Officer came to the conclusion that the expenditure was capital expenditure, the question regarding depreciation was to be decided in accordance with the principles laid down by the Tribunal.]"
In view of the above, Special Bench has summarized the issue of expenditure on computer software, whether capital or revenue, and laid down following principles:
(i) When the assessee acquires a computer software or for that matter the license to use such software, he acquires a tangible asset and becomes owner thereof.
(ii) Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time, it can be said that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure. Any software having its utility to the assessee for a period beyond two years, can be considered as accrual of benefit of enduring nature.
7 ITA 1219/K/2009 & CO . 63/K/2009 Prachar Communications Ltd. A.Y.04-05 However, that by itself will not make the expenditure incurred on software as capital in nature and the functional test also needs to be satisfied.
(iii) Once the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred on computer software is capital or revenue has to be seen from the point of view of its utility to a businessman and how important an economic or functional role it plays in his business. In other words, the functional test becomes more important and relevant because of the peculiar nature of the computer software and its possible use in different areas of business touching either capital or revenue field or its utility to a businessman which may touch either capital or revenue field."
AO is directed to find out facts in view of the above principles and decide the issue. This issue of assessee's appeal is set aside to the file of AO and allowed for statistical purposes.
12. Next issue in this appeal of revenue is against the order of CIT(A) deleting disallowance of advertisement and business promotion expenses. For this, the revenue has raised following ground no.4:
"4) Whether, on the facts and in the circumstances of the case, the Ld. CIT(A) is correct in deleting the addition of Rs.7,70,480/- made on account of Advertisement & Business Promotion Expenses despite the fact that assessee failed to prove how these expenses related to business and to whom such payments/gifts were made."
13. Brief facts leading to above issue are that Assessing Officer disallowed advertisement and business promotion expenses of Rs.7,70,480/- out of the total expenses debited at Rs.27,98,468/-. The assessee has debited this amount includes major expenses incurred for the purpose of silver glass and frames, ornaments and silver bowls amounting to Rs.23,11,439/-. The assessee produced copies of related bills and explained as to whom said items were gifted/distributed and claimed that entire expenditure relates wholly and exclusively for the purpose of assessee's business. Assessing Officer did not accept explanation of the assessee and disallowed 1/3rd of the expenditure as not related to the assessee's business and thereby making addition of Rs.7,70,488/-. Aggrieved, assessee preferred appeal before CIT(A), who relying on Tribunal's decision for Assessment Year 2002-03 deleted the addition by observing as under:
"It is observed that this ground of appeal is squarely covered in favour of the appellant by the order of the Learned CIT(A)-XII, for the assessment years 2002-03 and 2003-04. Further, the Hon'ble ITAT, Kolkata in Appeal own case in ITA No. 748/Kol/07 for assessment year 2002-03 has upheld such decision of the learned CIT(A)-XII, Kolkata and has dismissed the appeal preferred by the Department.
Respectfully, following the decision of the Hon'ble ITAT (supra) and also that of the learned CIT(A)-XII decided in the appellant's own case, the addition of Rs.7,70,480/- is deleted."
8 ITA 1219/K/2009 & CO . 63/K/2009 Prachar Communications Ltd. A.Y.04-05
14. We find that the Tribunal in assessee's own case exactly on similar facts has taken a view, hence, we cannot interfere with the finding of CIT(A) and uphold the same. This ground of appeal of revenue is dismissed.
15. Next issue in this appeal of revenue is against the order of CIT(A) deleting disallowance of foreign travel expenses. For this, revenue has raised following ground no.5:
"5)On the facts and the circumstances of the case, Ld. CIT(A) erred in allowing Rs.2,60,930/- on account of Foreign travel expenses by the director and the members of his family which was not wholly related for the purpose of business."
16. Brief facts are that Assessing Officer disallowed 50% of expenses incurred by assessee on foreign travel at Rs.5,21,861/-. The assessee company incurred foreign travel expenses on account of visit of Rajesh Jain, Ms. Vineeta Jain and Master V. Jain and Rakesh Jain and his family. It was claimed by assessee that these persons visited foreign locations for the purpose of shooting of advertisement film were either directors or employees of the company. Assessing Officer noting this fact that on both occasions director accompanied family members consisting of wife and minor children, foreign travel expenses cannot be said to be wholly and exclusively for the purpose of business. Accordingly, he disallowed 50% not related to assessee's business. Aggrieved, assessee preferred appeal before CIT(A), who relying on earlier year's decision of CIT(A) allowed the claim of the assessee by holding in para 23 of his appellate order as under:
"I have perused the assessment order and the submission of the appellant. It is found that the appellant's case is squarely covered in its own case by the Ld. CIT(A)-XII, for the assessment year 2003-04.
Respectfully, following the decision of the Ld. CIT(A)-XII, passed in the appellate order for the assessment year 2003-04, the addition of Rs.2,60,930/- made is deleted.
Accordingly, the ground No. 5 of the appellant is allowed."
Aggrieved, revenue is in appeal before us.
17. We find that findings of Assessing Officer is very clear and categorical that directors of assessee company was accompanied with families consisting of wives and minor children and expenses is also incurred including wives and minor children of directors. Even before us, assessee could not rebut this finding. In view of the above, we restore the order of Assessing Officer and allow this issue of revenue's appeal.
9 ITA 1219/K/2009 & CO . 63/K/2009 Prachar Communications Ltd. A.Y.04-05
18. Next issue in this Cross Objection of assessee is against the order of CIT(A) confirming disallowance of donations. For this, assessee has raised following ground no.2:
"2. For that in view of the facts and circumstances of the case the Assessing Officer was wholly wrong and unjustified in disallowing the deduction of donation of Rs.1,64,705/- without assigning any reason for such disallowance and without considering the facts that it was a revenue expenditure incurred for and in connection with smooth running of the business and not in the nature of donation. The Ld. CIT(A) was equally wrong and unjustified in confirming the disallowance in absence of details. Actions of both the A.O. and the Ld. CIT(A) were wholly unreasonable, uncalled for and bad in law."
19. We have heard rival contentions and gone through facts and circumstances of the case. We find that there is no discussion in the assessment order on this issue and even the CIT(A) has noted that no details in respect to donations were filed by assessee, but assessee in his written submission mentioned that the details were filed. To remove this ambiguity, let this issue be examined by AO afresh and assessee if want to file details he can file in respect of donation. The AO will also decide the nature of expenditure.
20. In the result, appeal of revenue and CO of assessee, are partly allowed for statistical purposes as indicated above.
21. Order pronounced in open court on 12.8.2011 Sd/- Sd/-
ौी एस. भी. मेहरोऽा, लेखा सदःय वीर िसंह, Ûयायीक सदःय
महावी
महा वीर
(S. V. Mehrotra) (Mahavir Singh)
Accountant Member Judicial Member
तारȣख)
तारȣख) Dated 12th August, 2011
(तारȣख
वǐरƵ िनǔज सिचव Jd.(Sr.P.S.)
आदे श कȧ ूितिलǒप अमेǒषतः- Copy of the order forwarded to:
1. अपीलाथȸ/APPELLANT - ITO, Ward-12(1), Kolkata.
2 ू×यथȸ/ Respondent, M/s. Prachar Communications Ltd., 79, Upendra Mitra
Lane, Salkia, Howrah-711 106.
3. आयकर किमशनर (अपील)/ The CIT(A), Kolkata
4. आयकर किमशनर/CIT, Kolkata
5. वभािगय ूितनीधी / DR, Kolkata Benches, Kolkata
स×याǒपत ूित/True Copy, आदे शानुसार/ By order,
सहायक पंजीकार/Asstt. Registrar.