Income Tax Appellate Tribunal - Chennai
Sherston Educational Software Private ... vs Assessee on 3 June, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
"D" BENCH, CHENNAI
BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER
I.T.A. Nos. 1866 & 1867/Mds/2012
(Assessment Years : 2004-05 & 2005-06)
M/s Sherston Educational The Income Tax Officer (OSD) /
Software Pvt. Ltd., The Assistant Commissioner of
Chandragiri Technopark, v. Income Tax,
Trivandrum - 695 581. Company Circle - VI(2),
Chennai - 600 034.
PAN : AAECS 6565 R
(Appellant) (Respondent)
Appellant by : Ms. Jharna B. Harilal, CA
Respondent by : Shri S. Dasgupta, JCIT
Date of Hearing : 03.06.2013
Date of Pronouncement : 13.06.2013
O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER :
These are appeals filed by the assessee against orders dated 24.1.2012 of Commissioner of Income Tax (Appeals) - VI, Chennai.
2. These appeals have been filed with a delay of 208 days. A petition for condonation has been filed and in the said petition, assessee states that it is a wholly owned subsidiary of M/s Sherston 2 I.T.A. Nos. 1866 & 1867/Mds/12 Software Ltd. and Sherston Publishing Group, United Kingdom. As per assessee, it was earlier managed by employee Directors. Such employee Directors had not worked in a bonafide manner but had given false information to parent company in UK, regarding the income-tax dues and persisted with their dubious methods even when a high value client called "Mfuse" was lost. As per assessee, when it came to the knowledge of the parent company that various dubious methods were being used by the employee Directors, such Directors were changed. The change was effected in September, 2012 and a new management team took over. Only thereafter it came to the knowledge of the parent company that there were delay in filing appeals for the impugned assessment years. Appeals though belated, were filed on 18.10.2012, immediately, when the matter came to their knowledge. In support of the above contention, assessee has filed a letter dated 29.5.2013 from its parent company and also certain other records which do substantiate assessee's contentions in the affidavit filed seeking condonation of delay.
3. Learned D.R. strongly opposed the condonation of delay. According to him, change in management was not a reason for filing the appeal with a delay of 208 days.
3 I.T.A. Nos. 1866 & 1867/Mds/12
4. We have perused the petition for condonation and also heard the contentions of the parties. Assessee, in our opinion, has filed sufficient evidence to show that its employee Directors had misled its parent company in United Kingdom regarding it working as well as tax liabilities. The said Directors had projected huge tax liabilities exceeding GBP of 1,50,000/-. Due to such employee Directors, who were not working in the best interest of the firm, assessee was obviously unable to file the appeals in time. In our opinion, the reasons cited are justified. The delay is condoned and appeals are admitted.
5. Appeal for assessment year 2004-05 is taken up first for disposal. Assessee has raised four grounds of which, Ground No.1 is general needing no adjudication.
6. Vide its ground No.2, grievance raised by the assessee is that a disallowance of preliminary expenditure of 34,40,902/- made by the Assessing Officer, was confirmed by the CIT(Appeals).
7. Facts apropos are that assessee, engaged in development of computer software for educational purposes, had filed its return for impugned assessment year declaring a loss of ` 3,07,805/-. During 4 I.T.A. Nos. 1866 & 1867/Mds/12 the course of assessment proceedings, it was noted by the Assessing Officer that assessee had incurred expenditure of ` 1,03,22,709/- towards initial setting up and training of personnel for a new unit in Trivandrum. One-third of such amount was written off by the assessee during the relevant previous year. As per the A.O., there was no concept of deferred revenue expenditure under the Income- tax Act. In his opinion, pre-operative expenditure could not be claimed as revenue outgo. In this view of the matter, he disallowed the claim.
8. Assessee's appeal before CIT(Appeals) was not successful.
9. Now before us, learned A.R. submitted that the amount by its very nature was a revenue outgo. According to learned A.R., it comprised of salary, rent, recruitment expenditure and office maintenance expenditure. Relying on the decision of Hon'ble Delhi High Court in the case of Jay Engineering Works Ltd. v. CIT (311 ITR
405), learned A.R. submitted that the Branch at Trivandrum was proposed for doing the same line of business. This was not in the nature of a pre-operative expenditure. As per learned A.R., the new unit at Trivandrum was also managed from common funds. Assessee was already running a unit at Chennai and this was a new 5 I.T.A. Nos. 1866 & 1867/Mds/12 unit being set up in Trivandrum for expansion of very same line of business.
10. Per contra, learned D.R. strongly supported the order of CIT(Appeals).
11. We have perused the orders and heard the rival submissions. Ld. CIT(Appeals) has noted in his order that the sum of ` 34,40,902/- written off by the assessee during the relevant previous year comprised of salary, rent, recruitment expenses and office maintenance expenses. This finding has not been rebutted by the Revenue. There can be no doubt that these were in the nature of revenue outgo. Admittedly, business which was being set up by the assessee at Trivandrum was only an expansion of its existing line of business. At both place, assessee was only developing software for educational purposes. Once expenditure was of revenue nature and was incurred for expanding existing line of business, in our view, it could have been allowed under Section 37 of the Act. No doubt, assessee's claim was only for one-third of total outgo. However, for this reason alone, a disallowance could not have been made. We are of the opinion that such disallowance was not warranted. Under the circumstances, the said disallowance is deleted. 6 I.T.A. Nos. 1866 & 1867/Mds/12
12. Ground No.2 of the assessee is allowed.
13. Vide its ground No.3, grievance raised by the assessee is that Gratuity payment of ` 2,56,659/- to M/s LIC was disallowed on the ground that such Gratuity fund was not approved.
14. Facts apropos are that assessee had paid premium to LIC towards Group Gratuity Fund. As per the A.O., only payment effected to approved Gratuity Fund could be allowed under Section 36(1)(v) of Income-tax Act, 1961 (in short 'the Act'). Here the payments were effected to LIC for a fund which was not having approval of CIT/CCIT. For this reason, relying on the decision of Hon'ble jurisdictional High Court in the case of CIT v. Coimbatore Premier Corporation (P) Ltd. (246 ITR 626), A.O. disallowed the claim of the assessee.
15. Ld. CIT(Appeals) upheld the order of the A.O.
16. Now before us, learned A.R., strongly assailing the orders of authorities below, submitted that assessee had filed before CIT(Appeals) an application for approval of Gratuity scheme on 12.4.2002. According to her, the said application was still to be 7 I.T.A. Nos. 1866 & 1867/Mds/12 disposed of. Without disposing of such application, lower authorities fell in error in holding that approval for the Gratuity Fund was not sought or obtained by the assessee. Reliance was placed on the decision of Hon'ble Apex Court in the case of CIT v. Textool Co. Ltd. [2009 STPL(Web) 176 SC].
17. Per contra, learned D.R. strongly supported the order of CIT(Appeals).
18. We have perused the orders and heard the rival submissions. There is no dispute that premium towards Gratuity Fund was paid by the assessee to LIC and the Gratuity Fund created by LIC by virtue of such payments, was not having the approval of CIT/CCIT under Section 36(1)(v) of the Act. Nevertheless, it is also a fact that assessee had filed an application before CIT for such approval on 12.4.2002. No doubt, in the case of Coimbatore Premier Corporation (P) Ltd. (supra), Hon'ble jurisdictional High Court had held that in the absence of approval of the fund by Chief CIT or CIT, or in other words, unless there was strict compliance to Section 40A(7), an assessee could not claim for relief any amount or payment of premium to M/s LIC for any Group Gratuity Scheme. In our opinion, decision of Hon'ble Apex Court in the case of Textool Co. Ltd. 8 I.T.A. Nos. 1866 & 1867/Mds/12 (supra), relied on by the learned A.R., does not change the scenario any way. In the said case before Hon'ble Apex Court, the payments, which were made to LIC under a Group Gratuity Scheme, was finally made over to a Gratuity Fund, which was approved by CIT. Hon'ble Apex Court held at para 6 of its judgment dated 9.9.2009, as under:-
"6. Having considered the matter in the light of the background facts, we are of the opinion that there is no merit in the appeal. True that a fiscal statute is to be construed strictly and nothing should be added or subtracted to the language employed in the Section, yet a strict construction of a provision does not Rule out the application of the principles of reasonable construction to give effect to the purpose and intention of any particular provision of the Act. (See: Shri Sajjan Mills Ltd. vs. Commissioner of Income Tax, M.P. & Anr. (1985) 156 ITR 585). From a bare reading of Section 36(1)(v) of the Act, it is manifest that the real intention behind the provision is that the employer should not have any control over the funds of the irrevocable trust created exclusively for the benefit of the employees. In the instant case, it is evident from the findings recorded by the Commissioner and affirmed by the Tribunal that the assessee had absolutely no control over the fund created by the LIC for the benefit of the employees of the assessee and further all the contribution made by the assessee in the said fund ultimately came back to the Textool Employees Gratuity Fund, approved by the Commissioner with effect from the following previous year. Thus, the conditions stipulated in Section 36(1)(v) of the Act were satisfied. Having regard to the facts found by the Commissioner and affirmed by the Tribunal, no fault can be found with the opinion expressed by the High Court, warranting our interference."
It is clear that the conditions mentioned in Section 36(1)(v) was held to be satisfied since the funds ultimately came back to a Gratuity 9 I.T.A. Nos. 1866 & 1867/Mds/12 Fund had the approval of the Commissioner. Here, the fate of the application of the assessee for approval is not known. We are, therefore, of the opinion that the matter requires a revisit by the Assessing Officer. If the assessee is able to produce the approval for Gratuity scheme, no doubt, it can claim deduction under Section 36(1)(v) of the Act and will not be fettered by constraints placed under Section 40A(7) of the Act. We, therefore, set aside the orders of authorities below and remit this issue back to the file of the A.O. for his consideration in accordance with law.
19. Ground No.3 of the assessee is allowed for statistical purposes.
20. Vide its ground No.4, grievance raised by the assessee is that the CIT(Appeals) confirmed disallowance of deduction claimed by it under Section 10B of the Act, with respect to its unit functioning at Trivandrum.
21. Facts apropos are that assessee had claimed a deduction of ` 73,28,076/- under Section 10B of the Act, in respect of its unit at Trivandrum. Its other unit in Chennai had a loss of ` 3,88,972/-. For the receipts of sale proceeds in convertible foreign exchange, assessee was able to file Foreign Inward Remittance Certificates 10 I.T.A. Nos. 1866 & 1867/Mds/12 (FIRC in short) only for a sum of ` 52,74,300/-, against total sale proceeds of ` 4,92,05,590/-. As per the A.O., assessee being unable to produce evidence for receipt of convertible foreign exchange, it was not eligible for claiming deduction under Section 10B of the Act. The claim was disallowed.
22. Before the CIT(Appeals), assessee claimed that it had FIRC for the claim of ` 4,92,05,590/- received as export proceeds. Such certificates, it seems, were for the first time produced before CIT(Appeals). Ld. CIT(Appeals) sought a remand report from Assessing Officer. Assessing Officer, after verifying the FIRC produced by the assessee, found that a sum of ` 4,04,75,670/- received in foreign currency was well supported. However, according to him, relevant export invoices carrying the adjustment for the amounts received could be produced by the assessee only for ` 3,32,01,350/-. Ld. CIT(Appeals), based on such remand report of the A.O., held that assessee was eligible for such claim to the extent of ` 4,04,75,670/-.
23. Now before us, learned A.R. submitted that at the point of time when the proceedings before CIT(Appeals) were in progress, assessee was having FIRC only for sum of ` 4,04,75,670/-. 11 I.T.A. Nos. 1866 & 1867/Mds/12 However, according to her, thereafter assessee had received FIRC for the balance amount also and therefore, it would be unfair if the claim for deduction was disallowed.
24. Per contra, learned D.R. supported the order of CIT(Appeals).
25. We have perused the orders and heard the rival submissions. There is no dispute that assessee had produced FIRC for receipt of sale proceeds in foreign currency to the extent of ` 4,04,75,670/-. Disallowance of the claim was made for the sole reason that assessee was unable to file FIRC in support of the total export proceeds of ` 4,92,05,590/-. Observation of the A.O. that assessee should have set off the loss of its unit in Chennai against the profits of its unit in Trivandrum before claiming deduction under Section 10B is, in our opinion, not justified in view of the decision of Hon'ble Karnataka High Court in the case of CIT v. Yokogawa India Ltd. (341 ITR 385). Further, in our opinion, if the assessee is able to produce FIRC for whole of the receipts on account of export proceeds, it will be unfair to deny the claim made by it under Section 10B of the Act. In the fitness of the things, we are of the opinion that the matter requires a fresh look by the Assessing Officer. We set aside the orders of authorities below and remit the issue back to the file of the 12 I.T.A. Nos. 1866 & 1867/Mds/12 A.O. for fresh consideration. If the assessee is able to produce FIRC in support of export proceeds realized by it, then such claim has to be allowed.
26. Ground No.4 of the assessee is allowed for statistical purposes.
27. Now we take up appeal of the assessee for assessment year 2005-06.
28. Ground No.1 is general needing no adjudication.
29. When Ground No.2 was taken up, learned A.R. submitted that she was not pressing such ground. Hence this ground is dismissed as not pressed.
30. Vide its ground No.3, assessee assails disallowance of Gratuity payment made by the A.O. and confirmed by the CIT(Appeals) for want of approval.
31. Similar issue has been dealt by us in assessee's appeal for assessment year 2004-05 at para 18 above. Similar directions are being given here also.
13 I.T.A. Nos. 1866 & 1867/Mds/12
32. Vide its ground No.4, grievance raised by the assessee is that depreciation of ` 57,986/- claimed by it was not allowed.
33. Facts apropos are that assessee's claim for depreciation on certain fixed assets was disallowed for assessment years 2001-02 to 2004-05 for a reason that it had failed to produce relevant bills. For the impugned assessment year also, the claim of depreciation on such assets was not allowed.
34. Assessee's appeal before CIT(Appeals) was not successful.
35. Now before us, learned A.R. submitted that if an opportunity was given, assessee would be able to produce bills to the assets which were added.
36. Per contra, learned D.R. supported the order of CIT(Appeals).
37. We have perused the orders and heard the rival submissions. It is clear from the assessment order that assessee was unable to file any evidence in support of acquisition of fixed assets during previous years relevant to assessment years 2001-02 to 2004-05. Disallowance of claim of depreciation for the impugned assessment year has been done only with respect to the written down value of 14 I.T.A. Nos. 1866 & 1867/Mds/12 those assets on which assessee could not produce bills for acquisition in the earlier years. We also find that in its appeal for 2004-05, assessee has not raised any ground on such disallowance. We are of the opinion that having not assailed such disallowance in the earlier year, assessee cannot now turn back and say that disallowance for impugned assessment year was unjustified. We, therefore, find no reason to interfere.
39. Ground No.4 of the assessee is dismissed.
40. To summarize the result, appeal of the assessee for assessment year 2004-05 is allowed pro tanto, whereas, its appeal for assessment year 2005-06 is partly allowed.
Order was pronounced in the Court on Thursday, the 13th of June, 2013, at Chennai.
sd/- sd/-
(Challa Nagendra Prasad) (Abraham P. George)
Judicial Member Accountant Member
Chennai,
Dated the 13th June, 2013.
Kri.
Copy to: Appellant/Respondent/CIT(A)-VI, Chennai/
CIT-III, Chennai/D.R./Guard file