Income Tax Appellate Tribunal - Mumbai
National Stock Exchange Of India Ltd., ... vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH 'B' MUMBAI
BEFORE SHRI R.V.EASWAR, PRESIDENT
SHRI T.R.SOOD, ACCOUNTANT MEMBER &
I.T.A.NO.7492/Mum/2005 - A.Y 1997-98
I.T.A.NO. 7493/Mum/2005 - A.Y 1998-99
I.T.A.NO. 9390/Mum/2004 - A.Y 2001-02
Asst. Commissioner of I.T., Vs. M/s. National Stock Exchange of India
circle 7 (1), Limited,
Mumbai. Exchange Plaza, C-1, Block-G,
Bandra Kurla Complex, Bandra (E),
Mumbai 400 051.
PAN: AAACN 1797 L
(Appellant) (Respondent)
C.O.NOs.200 & 201/Mum/2006 - A.Yrs.1997-98 & 1998-99
(Arising out of I.T.A.Nos.7492 & 7493-Mum-2005)
M/s. National Stock Exchange of vs. Asst. Commissioner of I.T.,
India Limited, circle 7 (1),
Mumbai Mumbai.
(Cross objector) (Respondent)
I.T.A.NO. 9419/Mum/2004 - A.Y 2001-02
M/s. National Stock Exchange of vs. Asst. Commissioner of I.T.,
India Limited, circle 7 (1),
Mumbai Mumbai.
(Appellant) (Respondent)
Revenue by : Shri Satbir Singh. (CIT- DR)
Assessee by : Shri Arvind Sonde.
ORDER
Per T.R.SOOD, AM:
In all these appeals common issues are involved, therefore, they are heard together and are being disposed of by this consolidated order.
2
2. I.T.A.No.9390-M- - A.Y.01-02: In this appeal, Revenue has raised the following grounds:
1. On the facts and in the circumstances of the case and in law, the Ld. CIT[A] erred in directing the AO to treat the expenditure incurred on VSAT shifting expenses, VSAT installation charges and services charges towards repair and replacement of IDU as revenue expenditure ignoring the fact that the assessee had gained a new and different advantage and benefit of enduring nature by incurring these expenses.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT[A] erred in restricting the expenditure connected with earning of interest income exempt u/s.10(15) from 2% to 0.5%.
3. On the facts and in the circumstances of the case and in law, the Ld. CIT[A] erred in directing the AO to grant depreciation as claimed by the assessee on VSAT equipment installed at the premises of the member broker as against the disallowance of 40% of the depreciation disallowed by the AO by invoking the provisions of Sec.38(2).
4. On the facts and in the circumstances of the case and in law, the Ld. CIT[A] erred in not appreciating the VSAT antenna and coding equipment was installed at the members premises and the VSAT network was mainly used for the members for on line and screen base trading. Hence, provisions of Section 38(2) had been rightly applied in disallowing depreciation.
3. Ground No.1: After considering the rival submissions carefully, we find that following earlier years orders AO held that expenditure incurred on VSAT's and shifting, VSAT installation charges as well as repairs and replacement of IDU which were claimed as revenue expenditure, is in the nature of capital expenditure and, therefore, same was disallowed.
4. The Ld. Counsel of the assessee pointed out that identical issue came up for consideration of the Tribunal in assessee's own case for the A.Y 1998-99 and the issue has been decided in favour of the assessee in I.T.A.No.3799/Mum/2004, order dated 27/05/2011.
5. On the other hand, Ld.DR supported the order of the AO. 3
6. We find that the Tribunal adjudicated this issue vide para-14 in I.T.A.No.3799/Mum/04 for A.Y 1998-99 as under:
"14. We have considered the issue. We are of the opinion that the expenditure is Revenue in nature as the assessee has to realign the existing network which is synchronised with earlier satellite to a new satellite which does not give any enduring advantage. It allowed for smooth conduct of the existing operations which are generally through the satellite only for connectivity with various NSE Centers and dealers all over India. In fact as stated by the CIT(A), assessee in a short span has to depute technical persons to various Centres to realign the transponders to the satellite. Most of the expenses are with reference to salary and travel expenses pertaining to the officials/ technical personnel and not to purchase of any asset. In view of this, we agree with the finding of the CIT(A) that the expenditure is revenue in nature. The case law relied upon by the learned D.R. are given in different context of shifting physical plants existing in one place to another place. This is not like that. This is a connection network of advanced nature in which only the transponders were aligned and the expenditure is incurred for deputing persons to do the job. Therefore, the expenditure is rightly considered by the CIT(A) as revenue expenditure. We reject the ground."
Since facts are identical for the year under appeal, and in fact, the addition was made only on the basis of earlier year's orders, following the above, we decide this issue against the Revenue.
7. Ground No.2: After hearing both the parties, we find that during assessment proceedings, AO noticed that assessee had shown a sum of Rs.11,22,74,697/- as interest on tax free bonds which was claimed exempt u/s.10[15]. He further noticed that as per sec.10[15] only the net income by way of interest was exempt and not the gross income. He was of the view that for managing such a large portfolio certainly some managerial and administrative time as well as expenditure must have been devoted by the assessee. Moreover, this item of income was not assessee's main business and, therefore, same could be assessed as income from other sources. Accordingly, he estimated 2% of this income as expenditure and added the same u/s.14A of the Act. 4
8. On appeal, ld. CIT(A) following the order of his predecessor restricted the disallowance to 0.5% of the income. The matter had traveled to the Tribunal and the Tribunal estimated the expenditure at 1% of such income.
9. The Ld.counsel of the assessee submitted that the issue may be decided in the light of the decision of the Tribunal for the A.Y 1998-99.
10. On the other hand, Ld.DR supported the order of the AO.
11. After considering the rival submissions carefully, we find that an identical issue came up for consideration of the Tribunal for the A.Y 1998-99 and the same was decided by the Tribunal vide para-6 which is as under:
"6. Ground No. 4 pertains to the issue of disallowance of expenditure of `7,79,836/- being 0.5% of gross interest earned on tax free bonds and claimed as exempt under section 10(15) of the I.T. Act. The A.O. disallowed 2% of the expenditure whereas the CIT(A) restricted it to 0.5%. On the very same issue the Revenue is also in appeal in ground No. 3 of the Revenue's appeal. Considering the nature of the income and the orders of the authorities we are of the opinion that disallowance of 1% would meet the end of justice. Assessee's ground about the disallowance of 0.5% is rejected."
Following the above order, we hold that expenditure in respect of interest on tax free bonds should be estimated at 1% and AO is directed to make disallowance of only 1%. Accordingly this ground is partly allowed.
12. Ground Nos.3 & 4: After hearing both the parties, we find that during assessment proceedings AO noticed that assessee has installed VSAT net work after obtaining a license from Department of Tele Communication (DTC for short) to operate a closed user group VSAT net work for the purpose of enabling screen basis trading in the capital 5 market through out the country. The DTC has given license and assessee was to act as a main hirer of the net work and the approved user and broker could be termed as subsidiary user of the net work. The assessee being the main hirer was supposed to fulfill all the obligations and formalities including payment of rental, license fees, installation fees and all other dues for all the circuit equipment and components of this net work. This net work was approved to be run at no profit no loss basis. The net work mainly consisted of Hub Equipment which is located in the premises of the assessee and VSAT antenna and coding equipment was located in the member's premises. On the basis of this position, AO concluded that VSAT net work was being used by the members for the purpose of conducting their business and, therefore, this net work was not exclusively used for the purpose of business of the assessee. Therefore, assessee was asked to explain as to why the claim of depreciation should not be restricted in view of the provisions of sec.38 of the Act. The assessee filed detailed submissions. After examination of this explanation, AO observed that the equipment was being used by the members also and though assessee was recovering cost including the depreciation cost, but the same could not be termed as charging of rent from the members because assessee, in any case, was not allowed to charge any rate in terms of the license issued by the DTC.
13. The second contention that assessee could not have been conducted its business without such VSAT communication net work was rejected because AO was of the view that similar contention can 6 be raised by the member broker. The AO further observed that ownership and necessity of VSAT equipment was not clearly established to be that of the assessee company. The analogy to provision of electricity meter by the electric distribution company was rejected on the ground that such electricity company was providing the meter on rental basis and the electricity was sold through such meters. Since assessee was not charging any rental from the broker as the assessee was debarred from making any profit from this venture, this activity of operation of VSAT communication net work could not be treated as part of the business activity. On the basis of these observations, AO estimated that 40% of such net work could be said to have been used for the assessee's business because a transaction could not be executed without such equipment. Accordingly, AO disallowed 60% of the depreciation on this equipment.
14. Before the CIT[A] it was mainly submitted that to give a further boost to the financial reforms, a study group-cum-establishment of New Stock Exchange & Guidelines relating to valuation of new instrument headed by Shri M.J.Sherwani was appointed to look at the stock exchange reforms. In the back-drop of recommendation of this committee formation of NSE was announced in the budget for 1993-94 which was expected to be operated as model stock exchange. Through this stock exchange, the trading was expected to be switched over from "floor trading" (this is some times known as cry out trading) to screen base trading. In the floor trading there was hardly any transparency and jobbing margins were very high, that is why it was 7 decided to start screen based trading. Ultimately, assessee company was floated by banks and financial institutions. For starting the screen based trading telecommunication net work in the form of VSAT net work was required to be installed. Since permission from DOT was sought and was granted with some conditions. It was further explained that VSAT net work was consisted of a hub which was installed in the premises of the assessee and VSAT antenna and monitor was installed at the premises of the brokers. The stock exchange transactions had to be routed through the system provided by the assessee company and the brokers were not authorised to carry out the trading on any VSAT system. Since as per the DOT conditions, assessee company was required to own the equipment and VSAT net work in its own name, the same were acquired by the assessee. It was explained that in the absence of VSAT at the premises of the members, no trade could have been possibly executed. Therefore, such VSAT net work was basically used for the purpose of business of the assessee.
15. It was further argued that VSAT was installed at the remote location by the assessee for the purpose of exclusive use of its business and merely equipments were installed at the members premises which served as enabler to conduct the business of the assessee, could not be interpreted to consider that the equipments were not being exclusively used for the purpose of the business. Reference was also made to the Board's letter No. F.10/14/66/-IT(AI) dated 12th December, 1966, wherein it was provided that fans and air conditioners etc. provided by the employer at the residence of 8 employees should be considered to have been used wholly for the purpose of employer's business. Therefore, same analogy would apply to the VSAT which was provided at the brokers place for the purpose of business of the assessee only.
16. It was also mentioned that merely because assessee company was not generating any profit on use of this equipment by the brokers, would not mean that same was not used for the purpose of business and in this regard reference was made to the restrictions imposed under Essential Commodities Act wherein certain commodities were required to be sold at not more than particular maximum price. Such restriction could affect the profitability of the business enterprise but inability of the business enterprise to make profit does not mean that business activity ceases to be activity of business. Reliance was also placed on some case laws.
17. The ld. CIT[A] after examining the submissions, was of the view that the AO was not justified in holding that VSAT equipments provided by the assessee company at the premises of the directors were not exclusively used for the purpose of business of the assessee and as such AO has failed to consider the over all prospective in the matter. He was also of the view that AO has not interpreted the expression "exclusively used for the purpose of business or profession" properly. He observed that this expression as interpreted by the various High Courts would mean that an asset has not been exclusively used for the purpose of business when such asset is used partly for purpose of business and partly for non business purposes. In this case the 9 business of the assessee company was to provide specialized, advanced, automated and modern facilities for trading, clearing and settlement of securities, with a higher standard of integrity to ensure trading in transparent form and to allow access to the investors from area in and outside India. He also observed that concept of "not profit motivation" has been further emphasised by the AO because the same was governed by the license granted by the DOT, Government of India. It was a case of closed user group and only the members of stock exchange could use this system. He observed that the assessee could not recover more than the cost in the operating system, but simply allowing an apparatus on cost basis, does not mean that assessee was not earning profit. In fact, the recovery of capital cost and revenue had an element of recuperation. He also noted that members of directors could not have utilised VSAT system for any other purpose than the purpose laid down in the contract i.e. to deal with the NSE. The assessee could not have offered this facility to any other person other than the member and, therefore, it could not be said that the equipment was installed in the premises of a third party. The net work was providing as a facility to the trading members, registered participants and other institutions such as custodians, clearing agents, depositories, who were required to contact directly to the exchange in execution of trade clearing or settlement of funds and all securities and the only purpose of installation of such net work was to achieve the business objective of the assessee. He also observed that there was no dispute that assets were owned by the assessee and 10 if the members did not comply with the various conditions specified in the agreement, then the company had a right to deactivate any of the VSAT.
18. He noted that whatever recovery was made from the members, it was retained by the assessee company and was duly reflected in the profit & loss account. It was also noted that the AO has failed to appreciate that whatever profits were generated by the assessee company were generated from or through the members of the stock exchange and to earn such profits by way of various mechanisms, assessee company was required to provide certain facility to the members and for providing such facility cost was also recovered. The ld. CIT[A] compared the case of the assessee with that of the telecommunication service providers, like MTNL and observed that for providing telephonic services MTNL would provide connectivity as well as instrument to be used by a customer. Since the instrument is used by a customer and not by the MTNL, it cannot be said that no depreciation could be claimed on such instrument by MTNL. In view of the detailed discussion, ld. CIT[A] held that the assessee would be entitled to full depreciation for the said equipment and restriction of the provisions of sec.38(2) were not applicable.
19. Before us, ld. DR carried us through the assessment order and submitted that undisputedly VSAT equipment provided to the brokers was used by the brokers only. Therefore, it cannot be said that assessee has used the VSAT equipment exclusively for the purpose of 11 its business only. In such cases, restriction provided u/s.38(2) had to be applied. In this regard, he relied on the following decisions:
a) L.P.Hospitality P. Ltd. vs. ACIT 301 ITR 377 (Del).
b) CIT vs. A.L. Basin & Co. 59 DTR 112 (Patna)
c) Punjab Bone Mills vs. CIT 14 DTR 17 (P&H)
20. On the other hand, Ld. Counsel of the assessee explained in detail as to how the National Stock Exchange came into existence, mainly for the purpose of starting screen based trading in India. He argued that for the purpose of starting a screen based trading assessee was required to set up a electronic hub and the hub was installed in the assessee's premises and the VSAT antenna had monitors were set up in the premises of member brokers through which members could place orders from the screen which were to be executed electronically. Since telecommunication is strictly controlled by the government, the system was installed after obtaining the approval of the DOT and under those conditions the assessee company was required to own the system and assessee company would collect only user charges from the members and the whole system was to be operated on no profit no loss basis. Without installing the VSAT antenna and monitor at the premises of the members, the members could not have executed any trade. There was other condition of DOT by which members would not have taken their own VSAT system and, therefore, compulsorily assessee had to install such system with the members for which even user charges have been charged to the members. Merely because part of the equipment was installed in the members premises, it cannot be said that the same has not been used 12 for the exclusive business of the assessee. Such system could not have been used for any other purpose by the members except for execution of the trade through the exchange of the assessee. Therefore, the whole system has been installed for the purpose of the business. He further argued that commercial transactions are always entered into in such a way that it benefits mutually both the parties and if the other party is also benefited it cannot be an issue and in this regard he relied on the observations of the Hon'ble Supreme Court in the case of Eastern Investment Ltd. vs. CIT [20 ITR 1]. He contended that what is required to be seen herein is commercial expediency, in the sense that without installing the vs. antenna and monitor at the members premises assessee could not have generated any business in this regard he relied on the observations of the Hon'ble Supreme Court in the case of CIT vs. Chandulal Keshavlal & Co. [38 ITR 601].
21. He further argued that it has been observed by the Hon'ble Madras High Court in the case of Waterfall Estates Ltd. vs. CIT [131 ITR 223] that sec.38 has to be understood as a whole and sub-sec.(1) could not be divorced from sub-sec.(2). It has been observed that sub- sec.(1) dealt with cases where the expenditure was partly personal and partly for the purpose of the business. Similarly, sub-sec.(2) of sec.38 would apply to cases where part of the expenditure was with reference to non business activity. In the case before us since it is not alleged that part used by the member broker was for non business purpose, therefore, sub-sec.(2) could not be applied. Similarly, again Hon'ble Madras High Court in the case of CIT vs. Indian Express (Madurai) Pvt. 13 Ltd. [255 ITR 69] observed that sub sections 30,31 and 32 have uniformly used expression "used for the purpose of the business or profession" and, therefore sub-sec.(2) would also mean that benefit could be denied if the assets were used for non business purposes. Lastly, he referred to the decision in the case of CIT vs. Goyal Gases Pvt. Ltd. [188 ITR 216] wherein the assessee was carrying on the business of distributing gas in the cylinders to the customers wherein depreciation was held to be allowable to the assessee on such gas cylinders. He vehemently argued that if a gas cylinder which was used by the customer and depreciation was still held to be allowable because the same were held to be used for business purposes, then same analogy would apply to the usage of VSAT antenna and monitor which is though used by the brokers, but was for the purpose of the business of the assessee.
22. We have considered the rival submissions carefully and find that with a view to give boost to the financial reforms Government of India decided to ensure improvement in trading practices for transparency and speedy settlement a National Stock Exchange was supposed to be established in the budget for F.Y 1993-94. Ultimately, assessee company was incorporated by nationalized banks to start screen based trading to replace the existing floor based trading in stocks and shares. For this screen based trading the assessee company was required to install VSAT net work which consisted of a hub and VSAT antenna and monitor. The hub was installed in the premises of the assessee company, whereas VSAT antenna and monitor were installed in the 14 premises of member brokers. The whole electronic system was installed with a prior permission of DOT under which the whole system was required to be owned by the assessee and was to be operated on no profit no loss basis because certain concessions were given in respect of customs duty. There was a further condition that all transactions were to be carried out through this system only and brokers could not trade transactions on the system owned by them which means that the whole system was to be owned by the assessee and even the part of the system which was also to be owned by the assessee company for the usage of this system by the members, assessee had charged only usage charges as per the cost. No doubt, part of the system had been used by the brokers also but the question is whether the business of the assessee was possible without the installation of VSAT antenna and monitor in the premises of members. In the absence of installation of VSAT antenna and monitor in the premises of the members, member brokers could not have executed various transactions in the stock exchange. Therefore, naturally the system was meant for the business of the assessee. In any case, the assessee has already charged usage charges and, merely because assessee has not charged rent from the members, will not make the system not for the purpose of assessee's business. Further, the member brokers could not have possibly used the system for any other purpose than to execute the share transactions with the assessee. even if assuming that brokers also got some benefit out of this system, 15 it cannot be said that same has not been used for the purpose of business of the assessee.
23. The Hon'ble Supreme Court in the case of in the case of Eastern Investment Ltd. vs. CIT [supra] had observed at page-5 as under:
"The next point on which some stress was placed was that there was complete identity of person between the person whose shares were sold and the person who took the debentures and that the transaction resulted in considerable benefit to him. In the absence of a suggestion of fraud this is not relevant at all for giving effect to the provisions of section 12(2) of the Income-tax Act. Most commercial transactions are entered into for the mutual benefit of both sides, or at any rate each side hopes to gain something for itself. The test for present purposes is not whether the other party benefited, nor indeed whether this was a prudent transaction which resulted in ultimate gain to the appellant, but whether it was properly entered into as a part of the appellant's legitimate commercial undertakings in order indirectly to facilitate the carrying on of its business."
Thus, from the above, it is clear that generally commercial transactions are entered into for the mutual benefits and even some benefit accrued to the other party, it cannot be said that the same was not for carrying on the business of the assessee. Again the Hon'ble Supreme Court in the case of CIT vs. Chandulal Keshavlal & Co. [supra] at page- 610 has held as under:
"Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party (Usher's Wiltshire Brewery Ltd. vs. Bruce) Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby : Eastern Investments Ltd. vs. CIT (supra). But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee."16
From the above it is clear that it is the commercial expediency which has to be seen while deciding the allowability of expenditure. In the case before us, without installation of this system, it was not expedient to carry on the business of the assessee.
24. In any case, Ld. Counsel of the assessee had rightly relied on the decision of the Hon'ble Delhi High Court in the case of CIT vs. Goyal Gases Pvt. Ltd. [supra]. In this case assessee was carrying on the business of filling gas bought by it in the cylinders and supplying the same to the customers. Though cylinders are directly used by the customers, but the assessee could not have carried out its business without giving such cylinders to the customers. Therefore, it was held that assessee was entitled to deduction of repairs as well as depreciation on such cylinders. In the case before us, the analogy of gas cylinders is fully applicable to the VSAT antenna and monitor installed in the premises of the broker members because without it assessee could not have carried on its business. Again in the case of CIT VSAT. Indian Express (Madurai) Pvt. Ltd. [supra], wherein the assessee company had purchased a tele typesetter which was located in the premises of assessee's sister concern at Bombay but was used for the purpose of assessee's business. The depreciation was restricted u/s.38(2). Before deciding this issue, the Hon'ble Madras High Court quoted the observations of Hon'ble Supreme Court in the case of CIT vs. Chandulal Keshavlal & Co. [supra] as under:
"The Supreme Court in the case of CIT vs. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC) : 16R.507, held that if the payment or 17 expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party. The Court also held that if the expenditure is incurred for fostering the business of another only, or was made way of distribution of profits, or was wholly gratuitous, or for some improper or oblique purpose outside the course of business, then the expense is not deductible. The Court further held that another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of the trade or business of the assessee."
In the above background, it was ultimately held that the machine was used exclusively for the business and profession of the assessee.
25. As far as the decision relied on by the ld. DR in the case of L.P. Hospitality (P) Ltd. [supra] is concerned, in that case the assessee company during the assessment year had entered into an agreement with Moet's Kababs by virtue of which it transferred 85% of its daily restaurant and bar sales to Moet's Kababs in lieu of material and labour supplied by it. The AO in this case observed that assessee did not run the business of bar and restaurant during the year as it had not purchased any raw material or employed any man power and it was Moet's who did everything and even the bar license fee has not been paid by the assessee. on these facts, disallowance of depreciation u/s.39(2) was upheld by the Hon'ble High Court because fixed assets were not exclusively used for the purpose of assessee's own business; whereas, in the case before us, VSAT antenna and monitor have been used for the purpose of assessee's business.
26. Similarly, in the case of Punjab Bone Mills vs. CIT [supra], disallowance of depreciation u/s.38(2) was held to be valid because a 18 boiler installed by the assessee was partly used by the sister concern of the assessee for their benefit and even expenses were shared by the assessee with the sister concern. In the case before us, the equipments installed with the members have been exclusively used for the purpose of assessee's business. Similarly, in the case of CIT vs. K.L.Basin & Co. [supra], disallowance of depreciation u/s.38(2) in respect of car at 1/4th was held to be not allowable because such car was partly used for the personal benefit of the partner. In the case before us, there is no allegation that equipments installed with the members have been used for personal benefits of such members. In view of the above discussion, we find nothing wrong with the order of the Ld. CIT[A] and confirm the same.
27. In addition to the above, the Revenue has raised the following additional ground:
"On the facts and in the circumstances of the case and in law, the Ld. CIT[A] erred in directing the AO to grant depreciation @ 60% on computer software as against 25% granted by the AO ignoring the fact that there is no provision in the Act to provide depreciation @ 60% to the computer software for the A.Y 2001-02."
28. After hearing both the parties, we find that assessee has claimed depreciation on software @ 60%. The AO held that such computer software was in the nature of an intangible asset and, therefore, as per the proviso to sec.32, depreciation on intangible asset was only 25% and, accordingly, allowed depreciation @ 25%. However, Ld. CIT[A] allowed the depreciation at 60%.
29. Before us, ld. DR while supporting the order of the AO submitted that before introducing special rate of depreciation at 60% 19 from A.Y 2003,04 the software could be construed only as an intangible asset and, therefore, depreciation had been rightly allowed by the AO at 25%.
30. On the other hand, Ld. Counsel of the assessee submitted that he would have no objection if Revenue's ground is allowed because by this time majority of computer software acquired by the assessee in that year would get amortaised even @ 25%.
31. After considering the rival submissions carefully, we agree with the submissions of the ld. DR. Further in view of the concession of the Ld. Counsel of the assessee, we set aside the order of the ld. CIT[A] and direct the AO to allow depreciation on computer software @25%.
32. In the result, Revenue's appeal in I.T.A.No.9390/M/04 for A.Y 201-02 is partly allowed.
33. I.T.A.No.9419/Mum/19 - A.Y 2001-02 [assessee's appeal]: In this appeal assessee has raised various grounds of appeal, but at the time of hearing Ld. Counsel of the assessee submitted that issues have been summarized in the chart furnished during the hearing and appeal may be adjudicated accordingly.
34. The first issue is regarding disallowance of lease premium paid to Bombay Metropolitan Regional Development Authority [BMRDA] amounting to `.1,17,15,935/-.
35. After hearing both the parties, we find that the claim for proportionate amortization of lease premium paid to BMRDA was disallowed following the orders of earlier years and was confirmed by the ld. CIT[A] accordingly.
20
36. The Ld. Counsel of the assessee fairly conceded that this issue was decided against the assessee and in favour of the Revenue by the Tribunal vide order dated 22nd December, 2008 in I.T.A.No.1955/M/99 & Ors. for the earlier years. On the other hand, ld. DR supported the order of the CIT[A].
37. After considering the rival submissions carefully, we find that in the earlier year in the assessee's own case, the issue was decided against the assessee by following the decision of the Special Bench of the Tribunal in the case of JCIT vs. Mukund Ltd. [13 SOT 558] (Mum) (S.B) vide paras 13 & 14 which are as under:
"13. We find under identical facts the Special Bench of the Tribunal in the case of Mukund Ltd., [supra], after considering various decisions including the decision of the Hon'ble Bombay High Court in the case of CIT VSAT. Khimline Pumps Ltd. [supra] and the various other decisions cited by both the sides has held in that case that the consideration of `.2.04 crores paid by the assessee for obtaining leasehold land from Maharashtra Industrial Development Corporation in its favour for a period of 99 years was capital in nature and accordingly, it was held that the same was not allowable as deduction. We find the Tribunal at para 26 of the order has observed as under:
"26. We find that the facts of the case before us are similar to the facts of the case in the case of Khimline Pumps Ltd. (supra). We are not impressed by the argument of the learned counsel for the assessee that the ratio of decision of Hon'ble Bombay High Court in Khimline Pumps Ltd. case (supra) is distinguishable since in Khimline Pumps Ltd. case (supra) the assessee was not the original lessee. This distinction pointed out by the learned counsel for the assessee is not sustainable for the reason that the decision of the Hon'ble High Court is not based on the fact that the assessee was not the original lessee of the premises. All other facts of the case of the assessee before us are similar to the facts of the case of Khimline Pumps Ltd. (supra). The ratio of the decision of Hon'ble jurisdictional High Court in the case of Khimline Pumps Ltd. (supra) is clearly applicable to the facts of the case of the assessee. In this case of the assessee all the essential ingredients of treating the amount of Rs. 2.04 crores paid by the assessee for acquisition of leasehold rights for 99 years in the land as capital in nature are present. The benefit conferred on the assessee of lease rights is for 99 years against the lump sum payment of Rs. 2.04 crores is 21 of enduring nature. There is no material on record to suggest that the sum of Rs. 2.04 crores had been paid by way of advance rent nor was there any provision for its adjustment towards rent or for its repayment to the assessee. We find that in case, the assessee terminates the lease agreement and handovers the vacant position of the land to MIDC (lessor) prior to the expiry of lease period of 99 years, it shall not be entitled to any refund out of the amount of Rs. 2.04 crores paid by the assessee. There is also no material on record to show that the assessee has made the advance payment of rent for future years to secure any reduction in the rent payable for the future years or for any other business consideration.
Considering the totality of the facts and circumstances of the case and the terms of the agreement dt. 5th March, 1992 entered into between the assessee company and MIDC as a whole, we hold that the consideration of Rs. 2.04 crores paid by the assessee company for obtaining the leasehold rights from MIDC in favour of the assessee for a period of 99 years is capital in nature and therefore, not allowable as deduction to the assessee. The decision of the Hon'ble Supreme Court in the cases of Panbari Tea Co. Ltd. 57 ITR 422 (SC), Durga Das Khanna 72 ITR 796 (SC), Aditya Minerals (P) Ltd. vs.CIT 239 ITR 817 (S.C) and Hon'ble jurisdictional High Court in the case of Khimline Pumps Ltd. 258 ITR 459 (Bom) would squarely apply to the facts of the case of the assessee, and being binding in nature, we decide the issue in ground of appeal No. 10 of the Revenue in favour of the Revenue and the ground of appeal No. 10 of the Revenue is allowed and the issue referred to the Special Bench by the President, Tribunal is answered in the negative and in favour of the Revenue.
14. Further, we also do not find any merit in the chart filed by the assessee to justify the savings on account of lower rent paid per sq.ft. as against the higher rent, since this, in our opinion is only a self serving document without any authenticity. Since the facts of the present case are identical to that of the case )Mukund Ltd. [supra]) decided by the Special Bench of the Tribunal, which in turn has followed the decision of the Hon'ble jurisdictional High Court in the case of Khemline Pumps Ltd. [supra], therefore, respectfully following the same, we hold that the CIT[A] was justified in upholding the AO's action in treating the payment of lease premium amounting to `.7,75,736/- as capital in nature. The ground raised by the assessee on this issue is accordingly dismissed." Following the above, we decide this issue against the assessee.
38. The second issue is regarding disallowance of prior period expenses. After hearing both the parties, we find that during the 22 assessment proceedings AO noticed that assessee has debited a sum of Rs.1,00,000/- to prior period expenses which was on account of payment to Invest India Economic Foundation for the sponsorship of the 4th Annual Stock Exchange Summit held from 26-5-1999 to 25-9- 1999. On enquiry, it was explained that the same was erroneously could not be debited to the expenses account in the previous year. Since assessee was following mercantile method of accounting, same was disallowed by the AO.
39. Before the CIT(A) it was mainly submitted that it is not always possible for a businessman to estimate and provide for all expenses with an arithmetical accuracy and since actual expenses has been incurred, it ought to have been allowed. The ld. CIT(A) found that the liability had arisen in the last year and it was recognized in the last year and payment was also made in the last year. Therefore, there is no reason except negligence for not claiming the same in the preceding year and, therefore, disallowance was confirmed.
40. Before us, La. Counsel of the assessee reiterated the submissions made before the CIT(A). On the other hand, Ld. DR strongly supported the order of the CIT(A).
41. After considering the rival submissions, we find that the expenditure pertained to the last year and even payment was made last year. There is no material before us to show that there was any dispute or liability crystallizing in this year. Since the assessee is following the mercantile system of accounting and every year is an 23 independent year for assessment, accordingly, we confirm the disallowance.
42. The third issue is interest on delayed payment of TDS disallowance and the same was not pressed before us. Therefore, same is dismissed as not pressed.
43. The fourth issue is regarding disallowance of expenses in relation to exempt income u/s.10(15). After hearing both the parties, we find that this issue came up for consideration in Ground No.2 of the Revenue's appeal in I.T.A.No.9390/Mum/04 and while adjudicating the Revenue's appeal, we had estimated the expenditure at 1% by following the Tribunal's order vide para-11 and following that, we estimate the expenditure at 1%. Since the ld. CIT(A) has estimated the expenditure at 0.05%, therefore, assessee's ground is rejected.
44. The last issue is regarding disallowance of depreciation to 60% of the claim on computer system because, according to the AO, the system was put to use for less than 180 days. After hearing both the parties, we find that assessee had acquired a computer system from CMS Ltd. Which had been capitalized during the year and depreciation was claimed @ 50% as the date of installation was claimed to be 30-9- 2000 by the assessee. On enquiry copy of installation was filed by the assessee , according to which, acceptance report was dated 16-1-2001 and date of acceptance was mentioned as 31-12-2000. It was also mentioned in this report that all components installed on 30-9-2000 are under observation till 31-12-2000. According to the AO it became clear from the report that the system was not installed completely as on 30- 24 9-2000, which in turn, means that the system was used for less than 180 days and accordingly 50% claim of depreciation was allowed.
45. On appeal, the action of the AO was confirmed by the ld. CIT(A).
46. Before us, La. Counsel of the assessee submitted that order for system was placed on 30-3-2000 with CMS Computers Ltd. Most of the items were received by May, 2000 and in this regard he referred to the various delivery challans, copies of which are places at pages 74 to 79 of the paper book, which pertained to the month of May, 2000. As per the system and procedure followed by the assessee, such systems are installed and put under acceptance test before they are finally accepted. During installation of this system some technical problems had arisen which were taken up by CMS Computers Ltd and ultimately the system was installed in December, 2000. He particularly invited our attention to the letter of CMS Computers Ltd. copy of which is available at pages 81 & 82 of the paper book, where CMS Computers Ltd have accepted the problems at their end and had offered additional six months of warranty on hardware assets as well as software components and ultimately reckoned 1st October, 2000 as cut off date for all warranty related delivery. He emphasized that this clearly shows that this system even if considered not started was definitely running on trial basis and even that has to be considered as user and in this regard he relied on the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Union Carbide India Ltd. [254 ITR 488]. 25
47. On the other hand, Ld. DR carried us through the assessment order and submitted that AO has given a clear finding that as installation report clearly mentioned the date of acceptance as 31-12- 2000, therefore, the system can be said to have been installed only from that date, which in turn means, that the same was used for less than 180 days and, therefore, disallowance of 50% depreciation was justified.
48. We have considered the rival submissions carefully. We find that various delivery challans issued by CMS Computers Ltd are dated 6-5- 2000 to 20-5-2000. Thus, it is clear that various components of computers were delivered in the Month of May, 2000. It seems there were certain technical problems. The letter written by CMS Computers Ltd on September 2, 2000 is relevant and the relevant paras 1 & 4 of the same read as under:
"1. SQL BT implementation on Digital platform could not be done due to withdrawal of support from Veritas for the above platform. We are extremely sorry for the inconvenience caused. However we would like to confirm that you will be able to backup oracle online using RMAN agents on verities as and when you migrate to oracle 8 x. This has been tested and demonstrated to you. This limitation currently has been overcome by a work around and you will continue using SQL BT manually as usual using scripts given by us.
This might warrant additional resources and the same will be added by CMS at no extra cost to you till you migrate to Oracle 8.x and the Online backups are possible as required by NSE with RMAN. During this period the above mentioned additional resources would remain property of CMS and all expenses towards AMC, insurance [if any] etc would be taken care by CMS. Upon migration to Oracle 8.x and successful demonstration with RMAN thereafter, the above referred resources would be taken back with NSE's concurrence. However, NSE would have an option to buy these resources at negotiated prices at appropriate time."
"4. As token of atonement we will offer you additional six months support of hardware as well as software components. We will resolve 26 the issue by end Sept. 2000 for enabling commencement of warranty period as stated above."
Para-1 clearly shows that there were certain technical problems on the part of CMS Computers Ltd. and they had clearly accepted their mistake and that is why had offered additional six months support on hardware as well as software components. Even finally the date of warranty has been taken from October 1, 2000. This clearly shows that the system was under installation for the period before September, 2000. The Hon'ble Calcutta High Court in the case of CIT vs. Union Carbide India Ltd. [supra] has observed as under:
"Under s. 32 of the Income-tax Act, 1961, it is necessary that the machinery is owned wholly or partly by the assessee and "used for the purpose of the business" it is the interpretation of the word "use" in this phrase which would be partly determinative of this reference. Once ownership by the assessee and the lapse of the whole previous year are established, a full year of shelf-life of the machinery in question has inexorably lapsed. If it is found that during that year the machinery cannot be said to have been used for the purpose of the assessee's business, then depreciation cannot be allowed but once it is shown that the assessee has put the machinery to use, for the purpose of the assessee's business, then further inquiry about the degree or type of use is not permitted to be scrutinised by the language of the section. It might be that the assessee's use is to keep it as a stand-by for the whole year; it might again be that the assessee has to use it for a trial production or in some other purpose for the assessee ' s business, which is not immediately productive of commercial profit; these would again not go against the assessee. Once the assessee can establish bona fide use of the machinery for the purposes of the assessee ' s business, then and in that event, the assessee establishes the assessee's right to claim depreciation."
From the above, it is clear that even usage for trial period would constitute user. In the case before us, various components were delivered in the month of May, 2000. Thus, assessee acquired ownership of the equipment in May, 2000. Later on it was in the process of installation and various trials had been carried out and 27 because of technical problems same was reckoned to be installed later. Para 4 of the CMS Computers Ltd's letter shows that even after extending the warranty, same was reckoned from 1-10-2000 which means that the system was either under control or in any case fully installed before that date. Therefore, in our view, the system stood installed and was being used for the trial period which would also constitute 'user' for the purpose of depreciation u/s.32 in terms of the decision of the Hon'ble Calcutta High Court in the case of CIT vs. Union Carbide India Ltd. [supra]. Therefore, we set aside the order of the ld. CIT(A) and direct the AO to grant full depreciation on the computer system.
49. In the result, assessee's appeal in I.T.A.No.9419/M/04 is partly allowed.
50. I.T.A.Nos.7492 & 7493/Mum/05 [Revenue's appeals]: In both these appeals the only issue raised by the Revenue's is regarding allowance of full depreciation ignoring the restrictions provided u/s.38(2) by the Ld. CIT(A).
51. This issue has been adjudicated by us while adjudicating the Revenue's appeal for A.Y 2001-02 in I.T.A.No.9390/Mum/04 above vide paras 21-25 and following that order, we decide this issue against the Revenue.
52. In the result, both these appeals are dismissed.
53. C.O.Nos.200 & 2001/Mum/06: Through these cross objections assessee has raised various grounds challenging the reopening of the assessment.
28
54. Before us, , Ld. Counsel of the assessee submitted that as far as A.Y 1997-98 is concerned, the sanction for issuing notice u/s.151(1) was not obtained by the AO and in this regard he referred to the copy of notice placed at page 20 of the paper book, which has left the column regarding sanction of approval of Commissioner blank. Because of this, we had directed the Revenue to verify the records and clarify the matter and the matter was posted for hearing for the next date i.e. 13-5-11. The Revenue has filed a copy of the form for recording reasons below which the Commissioner has clearly accorded the approval. Further, a copy of letter dated 1-3-2004 addressed by the ACIT, Circle-7(1) to the CIT showing the grant of approval for reopening has also been filed. In view of this, this objection is rejected.
55. The , La. Counsel of the assessee has further submitted that original assessment was completed on 20-8-2000 for A.Y 1997-98 and on 18-12-2000 for A.Y 1998-99 and notice u/s.148 has been served on 8-4-2004 i.e. beyond four years. Such notice cannot be issued unless and until there is a failure to disclose fully and truly the material facts. There is no failure on the part of the assessee to disclose the facts fully and truly and, therefore, reopening was bad in law.
56. On the other hand, Ld. DR supported the re-assessment orders.
57. After considering the rival submissions, we find that there is no failure on the part of the assessee to disclose fully and truly all material facts for the purpose of assessment and, therefore, such assessments could not have been reopened in view of the proviso to sec.147. Accordingly, we are of the view, that the assessments have been 29 reopened validly and, accordingly, annulled the action of the AO of reopening the assessments.
58. In the result, cross objections are allowed.
Order pronounced in the open Court on this day of 27th May,2011.
Sd/- Sd/-
(R.V.EASWAR) (T.R.SOOD)
President Accountant Member
Mumbai:27th May,2011.
P/-*