Income Tax Appellate Tribunal - Delhi
Vidut Furnaces, , New Delhi vs Department Of Income Tax on 8 March, 2010
1 ITA No. 2565/Del/2010
Asstt.Year: 2006-07
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `H' NEW DELHI
BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT
AND
SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER
I.T.A.No.2565/Del/2010
Assessment Year : 2006-07
Asstt.Commissioner of Income Tax, vs Vidut Furnaces,
Circle 23(1), Room No.190, 291-A, Hauz Rani,
C.R. Building, I.P. Estate, Malviya Nagar,
New Delhi. New Delhi-110017
(PAN: AACFV5621J)
(Appellant) (Respondent)
Appellant by: Shri Sameer Sharma, Sr. DR
Respondent by : Shri Naresh Bansal
ORDER
PER CHANDRA MOHAN GARG, JUDICIAL MEMBER
This appeal has been preferred by the revenue against the order of the Commissioner of Income Tax(A)-XXIII, New Delhi dated 08.03.2010 in Appeal No. 280/08-09 for AY 2006-07. The grounds raised in this appeal are as under:-
"1. On the facts and on the circumstances of the case the Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 14,85,000/- which was disallowed by the AO on account of sale commission as the assessee failed to substantiate with supporting documents.
2. On the facts and circumstances of the case the Ld. CIT(A) has erred in law and on the facts in deleting the addition of Rs. 22,50,000/- which was disallowed by , the 2 ITA No. 2565/Del/2010 Asstt.Year: 2006-07 AO on account of sale commission as the assessee failed to substantiate with supporting documents.
3. On the facts and circumstances of the case the Ld. CIT(A) has erred in law and on the facts in admitting the additional evidence in violation of provisions laid down under rule 46A(1) of the I.T.Rules .
4. On the facts and circumstances of the case the Ld. CIT(A) has erred in law and on the facts in not appreciating the fact during the course of assessment proceedings and also at the stage of appellant proceedings the assessee had failed to substantiate with supporting evidences with respect to the commission expenses and software development expenses.
5. The appellant craves leave to add, alter or amend any of the grounds of appeal before or during the course of hearing of the appeal."
Ground No.3
2. Apropos legal ground no.3, ld. DR submitted that the Commissioner of Income Tax(A) has erred in law and on facts in admitting the additional evidence in violation of provisions laid down under rule 46A(1) of the I.T. Rules, 1962. The DR further contended that the assessee did not submit required documentary evidence before the AO, hence, the Commissioner of Income Tax(A) cannot admit the same under Rule 46A of the Rules except in exceptional circumstances stipulated in Rule 46A(1) of the Rules.
3. Replying to the above, the assessee's representative pointed out para no. 8 to 14 of the impugned order wherein the Commissioner of Income 3 ITA No. 2565/Del/2010 Asstt.Year: 2006-07 Tax(A) has decided the issue of admission of additional evidence in favour of the assessee. The AR further submitted that the partner of the assessee firm had the files with him which could not be produced before the Assessing Officer as the said partner was dealing with marketing and the accounts division of the assessee did not have access to these files. It was further added by the AR that after evidence had been submitted before the Assessing Officer, no further query was raised and this conduct of the Assessing Officer made the assessee to believe that he was satisfied with the evidence submitted during the assessment proceedings.
4. On careful consideration of above submissions and contentions and careful perusal of the relevant part of the impugned order, as well as assessment order, we observe that the Assessing Officer had concluded the assessment proceedings on the basis of explanation and evidence submitted before him. The Assessing Officer held that the assessee failed to furnish any substantial proof or any written agreement in respect of commission paid and the Assessing Officer made certain additions. During the first appellate proceedings, the Commissioner of Income Tax(A) considered the issue of admission of additional evidence. From the impugned order, we observe that the additional evidence has been admitted by the Commissioner 4 ITA No. 2565/Del/2010 Asstt.Year: 2006-07 of Income Tax(A) under Rule 46A of the Rules with following observations:-
"12. On the touchstone of the provisions of law, I may appreciate the facts. During the course of hearing on 3.3.2010, the learned Authorized Representatives of the assessee were specifically questioned as to under what exceptional clause of rule 46A(1) did they fall, which would justify the admission of fresh evidence. The ld. Authorized Representatives in the oral argument submitted that it was on account of circumstances being beyond their control. Elaborating on the same, it was contended that the partner of the assessee firm had the files with him which could not be produced as the said partner was dealing with marketing and therefore, the accounts division did not have access to the files. It was also added, that after the evidences had been adduced before the learned Assessing Officer, no further query was raised, which persuaded them to believe that he was satisfied.
13. I have already mentioned that the learned Assessing Officer in remand report has not raised any objection to the admission of additional evidence. However, the plea of the assessee that the accounts division did not have access to the files as the relevant partner was busy in marketing cannot come to the rescue of the assessee. The assessee firm, was very well aware that the case of the assessee was under scrutiny. As such, by taking the plea that the accounts division did not have access to the files due to the marketing commitments of the partner does not hold good. However, the plea of the assessee that no further queries were raised by the learned Assessing Officer after furnishing of documentary evidence persuading them to have a bona fide belief that the Assessing Officer was satisfied is acceptable. Perusal of the assessment folder suggests likewise as evidence from the order sheet entry dated 5 ITA No. 2565/Del/2010 Asstt.Year: 2006-07 15.12.2008, wherein it is written that the ITP had appeared and had submitted the documents.
14. In HLS Asia Ltd vs DCIT (2009) 19 DTR (Del)(Trib) 148, it has been held that in the absence of any further query raised by Assessing Officer, the assessee would entertain a bona fide impression that Assessing Officer was satisfied with the evidence by it in connection with issue in dispute. Hence, CIT(A) was not justified in refusing to admit further~ evidence. In the case in hand, the assessee is better placed in as much as the query for filing details with evidence with regard to AMCs was never requisitioned by the Learned A.O. Thus, the evidence as filed during the appellate stage is admitted for purposes of disposal of this appeal."
5. In view of above findings of Commissioner of Income Tax(A), we observe that the Commissioner of Income Tax(A) has followed Rule 46A for admission of additional evidence and additional evidence had been accepted after calling remand report from the Assessing Officer and by following due procedure as stipulated in Rule 46A of the Rules. In the light of discussion made hereinabove, we are of the opinion that we are unable to see any perversity or ambiguity in the impugned order pertaining to the admission of additional evidence. Hence, ground no. 3 of the revenue is dismissed. Ground no. 1
6. Apropos ground no.1, ld. DR submitted that the Commissioner of Income Tax(A) erred in law and on facts in deleting the addition of Rs. 14,85,000/- which was disallowed by the AO on account of sale commission 6 ITA No. 2565/Del/2010 Asstt.Year: 2006-07 claimed by the assessee. The DR further contended that the Assessing Officer rightly made the disallowance and addition because the assessee failed to substantiate its claim with supporting documents and cogent evidence. On these submissions of the revenue, the assessee's representative submitted that the payment of commission made to M/s R.D. Process & Machine Inc., Canada was a genuine transaction and the payment was accrued during the financial year under consideration. The AR further contended that the assessee is following mercantile system of accounting, therefore, if payment accrued during the financial year pertaining to a genuine transaction, it will be accounted and claimed during the relevant assessment year. The AR pointed out that after calling remand report from the Assessing Officer, additional evidence was admitted by the Commissioner of Income Tax(A) and on the basis of same evidence, the Commissioner of Income Tax(A) rightly held that the payment of commission made by the assessee to M/s R.D. Process & Machine Inc., Canada was made for the services rendered for the purposes of business of the assessee.
7. On careful consideration of above submissions and contentions of both the parties and careful perusal of the relevant part of the impugned order (para 15 to 21), we observe that the Commissioner of Income Tax(A) 7 ITA No. 2565/Del/2010 Asstt.Year: 2006-07 has categorically dealt with the explanation and evidence submitted by the assessee about the claim of payment of commission to M/s R.D. Process & Machine Inc., Canada. The Commissioner of Income Tax(A) after detailed marshalling of evidence reached to a conclusion that M/s R.D. Process & Machine Inc., Canada had rendered services to the assessee and payment of commission was made through Federal Bank, C.P. Branch on 06.05.2005. The Commissioner of Income Tax(A) also held that as per invoice dated 04.04.2005 raised by M/s R.D. Process & Machine Inc., Canada, the payment accrued during the year under consideration. The Commissioner of Income Tax(A) also rightly held that the assessee follows mercantile system of accounting, therefore, the accrual of liability could only have been possible after raising of invoice by the person who had rendered services. In view of above factual matrix and findings of Commissioner of Income Tax(A), we are inclined to hold that the claim of payment of commission made by the assessee was related to the services rendered by M/s R.D. Process & Machine Inc., Canada and invoice was raised by this firm on the assessee during the financial year under consideration. Therefore, the liability was accrued and accounted for by the assessee by following mercantile system of accounting in this regard. However, the Assessing Officer disallowed the claim of the assessee pertaining to payment of 8 ITA No. 2565/Del/2010 Asstt.Year: 2006-07 commission but Commissioner of Income Tax(A) after consideration of cogent evidence and explanation of the assessee rightly held that the payment was made for the services rendered to the assessee and the Commissioner of Income Tax(A) also found that the assessee made payment during the next financial year on 06.05.2005. The DR has not disputed this point that the assessee follows the mercantile system of accounting, therefore, accrued liability has to be accounted for the financial year of accrual and the claim of the assessee in this regard cannot be disputed. In the light of discussion made hereinabove, we hold that the impugned order is based on justified principles of law and on the facts of the case and we are unable to see any reason to interfere with the same. Accordingly, ground no. 1 of the revenue is dismissed.
Ground No. 2
8. Apropos ground no.2, ld. DR submitted that the assessee could not make it clear as to why and for what purpose, impugned software development charges were incurred. The DR also pointed out that the Assessing Officer rightly observed that the assessee failed to furnish any sales invoice in support of his claim that the assessee sold four special furnaces on which these software were installed and it was clear from the sales register of the assessee that no such sale was made during the year 9 ITA No. 2565/Del/2010 Asstt.Year: 2006-07 under consideration after purchase of these software. The DR vehemently contended that if for the sake of argument, the claim of the assessee is to be accepted, that software was for some special furnaces and was installed in furnaces which were sold, then the assessee must treat it as an expense in the year in which special furnaces are sold. The DR also contended that the software development charges claimed as an expense cannot be claimed as revenue expenses in the year under consideration.
9. On above contentions of the revenue, assessee's representative placed reliance on paras 25 to 27 of the impugned order and submitted that for claiming an expenditure, the same should have been expended for the purpose of business and not necessarily for the purpose of earning income, profit or gains. The AR placed reliance on the decision of Hon'ble Supreme Court in the case of Madhav Prasad Jatia vs C.I.T.(1979) 118 ITR 200(SC) wherein it has been held that the expression "for the purpose of business" is wider than the expression "for the purpose of earning income, profits or gains". The AR also contended that the Assessing Officer has not conducted any exercise or any other coercive measure to ensure the presence of M/s Centenary Software Pvt. Ltd. and the ld. Assessing Officer did not confront this situation to the assessee. The AR pointed out that the Assessing Officer has not concluded that the transaction between the 10 ITA No. 2565/Del/2010 Asstt.Year: 2006-07 assessee and M/s Centenary Software Pvt. Ltd. was bogus. The AR pointed out that after considering additional evidence submitted by the assessee and remand report submitted by the Assessing Officer thereon, the Commissioner of Income Tax(A) rightly concluded that the expenditure incurred by the assessee has to be considered as revenue in nature. The AR supported the impugned order and submitted that ground no. 2 of the revenue is baseless.
10. On careful consideration of above submissions and careful perusal of the relevant part of the impugned order, we observe that the Commissioner of Income Tax(A) has decided the issue with following observations and findings:-
"{25} I have considered the impugned order as well as the remand report of the Learned A.O. The submissions made by the Ld. AR of the assessee has also been closely perused. It is undisputed that during the course of assessment proceedings, the assessee had submitted the invoices raised by M/s Centenary Software Pvt. Ltd. It is also undisputed that notice under section 131 of the Act was issued, to which no compliance was made. The assessee contends that the said notice was never received by the said entity, as they had moved out from the said office and had also changed their name. Perusal of the assessment folder does not manifest any such communication. However, the order sheet entries which has faithfully recorded the requisitions made, also do not reveal that the assessee was confronted with regard to this issue of non compliance. It only states that why the expenditure should not be treated as capital expenditure? Be that as it may, assuming for a 11 ITA No. 2565/Del/2010 Asstt.Year: 2006-07 moment that M/s Centenary Software Pvt. Ltd., did not respond to the notice under section 131, no adverse inference can be drawn against the assessee as the relationship between the assessee and M/s Centenary Software Pv.t Lltd. is that of a supplier and a purchaser. The assessee does not have any control over the said entity. In fact, the assessee should have been asked to produce the said entity. The records do not suggest that any such exercise was taken or that any coercive measures followed to ensure the presence of M/s Centenary Software Pvt. Ltd. Nor were filed enquiries conducted.
{26} Notwithstanding the above, it is the stand of the assessee that the software developed by M/s Centenary Software Pvt Ltd. was embedded in galvanizing lines. The stream of development of the case as it appears from the order sheet entries suggest that the Learned A.O. confronted the assessee that why the same should not be taken as a capital expenditure. If this was the consideration, certainly adverse inference of non attendance of M/s Centenary Software Pvt. Ltd. cannot be drawn as it only suggest that the transaction was not bogus.
{27} Further, the customize software was embedded in the equipment, it means that it was purported to be an essential component of the goods sold or proposed to be sold. It is immaterial whether the goods eventually got sold. However, one thing is clear that the assessee had not acquired any equipment, plant or machinery which was meant for acquiring or bringing into existence of an asset. This was an expenditure incurred absolutely for running the business or working it with a view to produce profits. This was also not an expenditure incurred for acquisition of source of profit, as this was only an equipment procured to be embedded in the galvanizing lines proposed to be sold. These are some of the tests, provided for in the decision of the Delhi High Court in CIT vs JK Synthetics Ltd (2009) 222 CTR (Del) 339. The 12 ITA No. 2565/Del/2010 Asstt.Year: 2006-07 Hon'ble jurisdictional High Court has listed out the tests after a detailed deliberation of the various Supreme Court and High Court decisions. As such, the expenditure incurred has to be considered as Revenue in nature. For the sake of argument, as has been done by the Learned A.O , it has been stated that there were no sales in the RARAS and Lisco Projects. Assuming for a moment that this contention is correct, this does not made the case of the assessee any weak, as it is settled law that for claiming expenditure, the same should have been expended for the purpose of business and not necessarily for the purpose of earning income, profits or gains. In Madhav Prasad Jatia vs ClT (1979) 118 ITR 200 (SC) it has been held that the expression 'for the purpose of business' was wider in scope than the expression 'for the purpose of earning income, profits or gains'. For this purpose, the decisions of Apex Court in CIT vs Malayalam Plantations Ltd (1964) 53 lTR 140 (SC) and CIT vs Birla Cotton Spinning and Weaving Mills Ltd (1971) 82 ITR 166 (SC) can also be gainfully referred to.
{28} In view of the discussion above, the assessee deserves to succeed in grounds of appeal No 3(b), 6 & 6.1."
11. In view of above findings of the Commissioner of Income Tax(A), we are of the considered opinion that the Assessing Officer has not disputed the genuineness of the claim of the assessee and the same has not been found bogus by the Assessing Officer. The Assessing Officer has disallowed the claim of the assessee by observing that the software development charges cannot be claimed as expenditure in the year under consideration. The Assessing Officer has also held that the assessee failed to furnish sales 13 ITA No. 2565/Del/2010 Asstt.Year: 2006-07 invoice in support of his claim and the assessee also failed to establish the fact that the assessee sold four special furnaces on which these software were installed or embedded. Per contra, the Commissioner of Income Tax(A) admitted additional evidence by following due procedure as stipulated in Rule 46A of the Income Tax Rules and after considering additional evidence and remand report of the Assessing Officer. The Commissioner of Income Tax(A) held that if M/s Centenary Software Pvt. Ltd. did not respond to the notice of the Assessing Officer issued u/s 131 of the Act, no adverse inference can be drawn against the assessee as the relationship between the assessee and software supplier firm i.e. M/s Centenary Software Pvt. Ltd. is that of a supplier and a purchaser. The Commissioner of Income Tax(A) has categorically held that the assessee should have been asked to produce the said entity and the Assessing Officer has not undertaken any such exercise or any coercive measure to ensure the presence of M/s Centenary Software Pvt. Ltd. The Commissioner of Income Tax(A) also observed that the customized software was embedded in the equipment which means that it was purported to be an essential component of the goods sold or proposed to be sold. The Commissioner of Income Tax(A) has also held that the impugned expenditure incurred as software development charges was absolutely for the purpose of business with a view 14 ITA No. 2565/Del/2010 Asstt.Year: 2006-07 to produce profits. The Commissioner of Income Tax(A) has also held that the expenditure was made to procure the equipment to be embedded in the galvanized lines proposed to be sold. Therefore, the expenditure incurred has to be considered as revenue in nature in the year under consideration. In these circumstances and observations made by the Assessing Officer and findings in the impugned order, we observe that perhaps the Assessing Officer was confused between the explanation "for the purpose of business"
and "for the purpose of earning income, profits or gains". Therefore, the Assessing Officer made emphasis to find the fact that whether the assessee effected sale of some special furnaces or the assessee installed furnaces which were sold during the year under consideration. Respectfully following the judgment of Hon'ble Apex Court in the case of Madhav Prasad Jatia vs C.I.T. (supra), we are inclined to hold that if any genuine claim of expenses which has been incurred by the assessee during the year under consideration to procure essential component of the goods sold or proposed to be sold, then the expenditure so claimed deserves to be treated as revenue in nature and if actual sale held in any other year, even then the claim of the assessee cannot be denied or rejected. The Commissioner of Income Tax(A) rightly held that the expenses incurred for the purpose of business cannot be disallowed.15 ITA No. 2565/Del/2010 Asstt.Year: 2006-07
12. On the basis of discussion made hereinabove, we are of the view that the Assessing Officer wrongly disallowed the claimed expenditure which was rightly allowed by the Commissioner of Income Tax(A) as software development charges during the year under consideration. We are unable to find any valid reason to interfere with the impugned order in this regard and ground no. 2 of the revenue being devoid of merits is dismissed. Ground no.4
13. Since ground no. 1 and 2 of the revenue have been dismissed as per former part of this order, therefore ground no. 4 does not survive for adjudication and we dismiss the same. Ground no. 5 of the revenue is general in nature which needs no adjudication.
14. In the result, the appeal of the revenue is dismissed.
Order pronounced in the open court on 29.11.2013.
Sd/- Sd/-
(G.D. AGRAWAL) (CHANDRAMOHAN GARG)
VICE PRESIDENT JUDICIAL MEMBER
DT. 29th NOVEMBER 2013
'GS'
Copy forwarded to:-
1. Appellant
2. Respondent
3. C.I.T.(A)
4. C.I.T. 5. DR By Order
Asstt.Registrar