DIRECTi INTERNET SOLUTIONS P.LTD, MUMBAI v. ACIT 5(1), MUMBAI

ITA 1778/MUM/2013 | 2009-2010
Pronouncement Date: 30-09-2016 | Result: Allowed

Appeal Details

RSA Number 177819914 RSA 2013
Assessee PAN AACCG4058M
Bench Mumbai
Appeal Number ITA 1778/MUM/2013
Duration Of Justice 3 year(s) 6 month(s) 25 day(s)
Appellant DIRECTi INTERNET SOLUTIONS P.LTD, MUMBAI
Respondent ACIT 5(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 30-09-2016
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted D
Tribunal Order Date 30-09-2016
Date Of Final Hearing 08-04-2015
Next Hearing Date 08-04-2015
Assessment Year 2009-2010
Appeal Filed On 05-03-2013
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH M UMBAI BEFORE SHRI B. R. BASKARAN AM AND SHRI PAWAN SINGH JM ./I.T.A. NO. 1778/MUM/2013 ( / ASSESSMENT YEAR: 2009-10) DIRECTI INTERNET SOLUTIONS PVT. LTD. 102 OSIA FRIENDSHIP GAOTHAN LANE NO.4 OFF: J.P. ROAD OPP. RAM MANDIR ANDHERI (W) MUMBAI-400058 / VS. ACIT-5(1) MUMBAI ./ ./PAN/GIR NO. AACCG4058M ( /APPELLANT ) : ( / RESPONDENT ) ./I.T.A. NO. 5150/MUM/2014 ( / ASSESSMENT YEAR: 2010-11) DIRECTI INTERNET SOLUTIONS PVT. LTD. THE REGENCY CHS LTD. OFFICE NO.11 & 12 NEXT TO NANDI CINEMA NATIONAL LIBRARY ROAD BANDRA (W) MUMBAI-400050. / VS. DCIT-5(1) MUMBAI ./ ./PAN/GIR NO. AACCG4058M ( /APPELLANT ) : ( / RESPONDENT ) / APPELLANT BY : SHRI FEROZE ANDHYARUJINA -AR / RESPONDENT BY : SHRI NITIN WAGHMODE (DR) / DATE OF HEARING : 12.07.2016 / DATE OF PRONOUNCEMENT : 30.09.2016 / O R D E R PER PAWAN SINGH JM: 1. THESE TWO APPEALS ARE FILED BY ASSESSEE AGAINST THE ORDER OF CIT(APPEALS) -9 MUMBAI DATED 10.01.2013 AND 28.04.2014 FOR ASSESSME NT YEARS (AYS) 2009-10 & 2010-11 RESPECTIVELY. IN BOTH THE APPEAL ASSESSEE HAS RAISED COMMON GROUNDS OF APPEAL; HENCE BOTH THE APPEALS WERE CLUBBED HEARD TOGETHER AND ARE DECIDED BY I .T.A. NOS.1778/M/2013 & 5150/M/2014 DIRECTI INTERNET SOL UTIONS P. LTD. 2 COMMON ORDER. BASICALLY THE ASSESSEE HAS RAISED ON LY TWO GROUNDS WHICH ARE AS UNDER: (1) DISALLOWANCE U/S. 14A R.W.RULE 8D OF THE ACT. (2) DISALLOWANCE OF SOFTWARE USAGE CHARGES. ITA NO. 1778/MUM/2013- AY-2009-10 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FILED RETURN OF INCOME FOR RELEVANT ASSESSMENT YEAR (AY) ON 22.09.2009 DECLARING TOTAL INCOME OF RS. NIL. THE RETURN OF INCOME CAME UNDER SCRUTINY. THE ASSESSMENT UNDER U/S 143( 3) WAS FRAMED VIDE ORDER DATED 13.02.2011. WHILE FRAMING THE ASSESSMEN T THE AO MADE THE DISALLOWANCE U/S. 14A OF RS. 19 43 486/-. THE ASSES SEE CLAIMED SOFTWARE USES CHARGES OF RS. 14 56 292/-. THE AO HOLD THAT THE PA YMENTS WERE MADE ON ACCOUNT OF SOFTWARE DEVELOPMENT WHICH IS CAPITAL IN NATURE. TH US DEPRECIATION @ 60% WAS ALLOWED AND ACCORDINGLY. RS. 5 82 517/- WAS DISALLO WED. AGGRIEVED BY THE ORDER OF AO THE ASSESSEE FILED APPEAL BEFORE THE CIT(A). TH E CIT(A) CONFIRMED BOTH THE DISALLOWANCE IN THE IMPUGNED ORDER. THUS THE PRESE NT APPEAL IS FILED BEFORE US. IN ITA NO. 5150/MUM/2014 AY-2010- 11. THE ASSESSEE FILED RETURN OF INCOME ON 30.09.2010 DECLARING TOTAL INCOME OF RS. 98 69 335/ -. THE ASSESSMENT CAME UNDER SCRUTINY AND WHILE FRAMING THE ASSESSMENT THE AO D ISALLOWED A SUM OF RS.10 52 335/- U/S. 14A. THE ASSESSEE CLAIMED SOFTW ARE USES CHARGES OF RS.13 83 762/-. THE AO ALLOWED DEPRECIATION @ 60% A ND RS. 5 53 505/- WAS DISALLOWED IN THE ASSESSMENT ORDER. THE ASSESSEE CA RRIED THAT MATTER IN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA) WHEREIN BOTH T HE DISALLOWANCE WAS CONFIRMED. HENCE THE PRESENT APPEAL IS FILED BEFORE US. 3. WE HAVE HEARD LD AR OF THE ASSESSEE AND LD DR FOR THE REVENUE AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE LD AR OF THE ASSE SSEE ARGUED THAT PROVISIONS OF SECTION 14A ARE NOT APPLICABLE TO THE ASSESSEE-COMP ANY AS NO EXPENSES ARE DEBITED TO THE P&L A/C OF THE COMPANY. THE ASSESSEE HAS NOT I NCURRED ANY EXPENDITURE IN RELATION TO INVESTMENT IN TAX EXEMPT SECURITIES. TH E ENTIRE INVESTMENT HAS BEEN MADE OUT OF ASSESSEES OWN FUND CONSISTING OF SHARE CAPI TAL INTEREST FREE RESERVES AND CREDIT BALANCE. THE AO MADE THE DISALLOWANCE OF RS . 10 52 355/- U/S. 14A R.W. RULE 8D WITHOUT GIVING ANY FINDING THAT ANY EXPENSES WER E INCURRED IN RELATION TO EARNING I .T.A. NOS.1778/M/2013 & 5150/M/2014 DIRECTI INTERNET SOL UTIONS P. LTD. 3 OF EXEMPT INCOME. THE LD. AR OF THE ASSESSEE FURTHE R RELIED UPON THE DECISION OF RAJSHREE PRODUCTION PVT. LTD. (TS-570 ITAT 2013 MU M) KALYAN STEEL LTD. VS. ACIT (ITA NO. 1733/PN/2011) CIT VS. GUJARAT STATE FERTILIZERS & CHEMICALS LTD. (2013) 85 CCH 226 (GUJHC) SHOPPER STOP LTD. VS. AC IT ACIT VS. MIDCAPS LTD. DECISION OF INDORE TRIBUNAL. ON THE OTHER HAND LD. DR FOR THE REVENUE STRONGLY SUPPORTED THE ORDER OF AUTHORITIES BELOW. 4. WE HAVE CONSIDERED THE RIVAL CONTENTION OF THE PART IES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE AO WHILE MAKING THE ASSESS MENT OBSERVED THAT THE ASSESSEE DERIVED DIVIDEND INCOME OF RS. 2 30 94 862/- WHICH IS CLAIMED AS EXEMPT INCOME THE ASSESSEE HAS PAID INTEREST OF LOAN OF RS. 3 92 930/ - ON INTEREST. THE ASSESSEE HAS NOT ALLOCATED ANY EXPENSES FOR EARNING EXEMPT INCOME T HUS THE PROVISION OF SECTION 14A COMES INTO PLAY AND WORKED OUT THE DISALLOWANCE IN ACCORDANCE WITH RULE 8D OF INCOME-TAX RULES 1962 AND CALCULATED THE DISALLOWA NCE OF RS. 19 43 486/-. BEFORE THE FIRST APPELLATE AUTHORITY (FAA) THE ASSESSEE S UBMITTED THAT THE ENTIRE INVESTMENT HAVE BEEN MADE OUT OF ASSESSEES OWN FUND AS FAR AS INTEREST OF RS. 3 92 930/- WHICH WAS PAID TO KARNATAKA BANK LTD. ON TERM LOAN OF RS . 500 LAKHS TAKEN FROM IT ON 30 TH MAY 2008 ON THE SAME DATE IT WAS UTILIZED BY ADVA NCING LOAN TO M/S HARMONY INVESTMENTS & PROPERTIES OF INTEREST WHICH IS SHOWN AS INCOME IN P&L ACCOUNT HENCE THIS INTEREST PAYMENT CANNOT BE CONSIDERED W HILE COMPUTING THE DISALLOWANCE U/S 14A. IT WAS FURTHER SUBMITTED THAT DISALLOWANCE MADE BY AO IS HIGHLY EXCESSIVE AS THE SAME AMOUNTS TO 8.42% OF THE TOTAL EXEMPT IN COME. THE SAME MAY BE REDUCED TO 1% OF DIVIDEND EARNED. THE CIT(A) CONCLUDED THA T ASSESSEE COULD NOT ESTABLISH THE NEXUS BETWEEN THE ENTIRE CAPITAL BEING INVESTED IN SECURITIES. IT WAS IMPOSSIBLE TO BELIEVE THAT OUT OF MIXED (HOTCHPOTCH) PROPOSED FU NDS THE ENTIRE CAPITAL WOULD HAVE GIVEN INTO INVESTMENT IN SHARE WITHOUT A PART GOING TO THE BUSINESS. IT WAS FURTHER CONCLUDED THAT IT IS NOT POSSIBLE THAT ENTIRE INCOM E WOULD HAVE BEEN INVESTED IN SHARE AND DEBENTURES AND SHARE APPLICATION MONEY SPECIALL Y WHEN THE ASSESSEE NOT CATEGORIZED AS TO HOW SUCH SUM HAD BEEN INVESTED IN BUSINESS. THE ASSESSEES CASE IS COVERED BY SUB-SECTIONS (2) & (3) OF SECTION 14A OF THE ACT AS THE ASSESSEE IS CLAIMING THAT NO EXPENDITURE HAS BEEN INCURRED BY I T IN RELATION TO THE EXEMPT INCOME. WE HAVE SEEN THAT AS PER THE BALANCE SHEET INVEST MENT REFLECTED IN AS ON 31.03.2010 I .T.A. NOS.1778/M/2013 & 5150/M/2014 DIRECTI INTERNET SOL UTIONS P. LTD. 4 WAS OF RS. 29 98 21 124/-. FURTHER AS PER THE BAL ANCE SHEET FOR AY 2009-10 THE TOTAL INVESTMENT OF THE ASSESSEE AS ON 31.03.2010 WAS RS. 29 98 21 124/- AND THE ASSESSEE WAS HAVING RESERVE AND SURPLUS AMOUNT OF RS. 1 48 6 0 50 942/-. THE ASSESSEE HAS SECURED LOAN OF RS. 3 70 00 000/-. THE ASSESSEE-COM PANY HAS OWN SUFFICIENT FUND. WE HAVE NOTICED THAT BEFORE MAKING DISALLOW ANCE THE AO NOT MADE ANY ENQUIRY ABOUT THE NATURE OF INVESTMENT AS IF IT WAS STRATEG IC OR THE INVESTMENT WERE MADE IN EARLIER YEARS AND THE MANNER IN WHICH EXEMPT INCOME WAS DERIVED AND CREDITED TO THE ACCOUNT OF ASSESSEE. SIMILARLY NO SUCH EXERCISE WAS MADE BY LD. CIT(A). THE POWER OF LD CIT(A) IS CO-TERMINUS WITH AO. THE DISALLOWAN CE MADE BY AO AND SUSTAINED BY LD CIT(A) IS NOT IN ACCORDANCE WITH THE PROCEDUR E PRESCRIBED U/S 14A R.W.S. RULE 8D. THERE IS NO FINDING THAT ASSESSEE HAS SUFFICIE NT FUND AVAILABLE WITH HIM OR NOT. HENCE WE DEEM IT APPROPRIATE TO RESTORE THIS GROUN D OF APPEAL TO THE FILE OF AO TO PASS ORDER AFRESH. THE AO SHALL MADE NECESSARY ENQU IRY ABOUT THE SYSTEMATIC/STRATEGIC INVESTMENT AND THE MANNER IN W HICH EXEMPT INCOME WAS EARNED AND CREDITED TO THE ACCOUNT OF ASSESSEE. THE AO SHA LL GRANT ADEQUATE OPPORTUNITY TO ASSESSEE TO SUBMIT ITS DETAILS WITH REGARD TO EARNI NG OF EXEMPT INCOME. HENCE THIS GROUND OF APPEAL IS ALLOWED FOR STATISTICAL PURPOSE . 5. SECOND GROUND OF APPEAL RAISED IN THE PRESENT APPEA L IS THAT THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF SOFTWARE USAGES CHAR GES. THE LD. AR OF THE ASSESSEE ARGUED THAT SOFTWARE USES CHARGES ARE REVENUE IN NA TURE. THE SOFTWARE USES CHARGES ARE NOT ENDURING IN NATURE AND THEY ARE FUL LY ALLOWABLE AND RELIED UPON THE DECISION OF THOMAS COOK (I) LTD. VS. DCIT ITAT MU MBAI IN ITA NO. 9353 & 9354/MUM/1992 REPORTED IN 15 SOT 392. THE LD. DR F OR REVENUE SUPPORTED THE ORDERS OF AUTHORITIES BELOW. 6. WE HAVE CONSIDERED THE RIVAL CONTENTION OF THE PART IES AND PERUSED THE ORDERS OF AUTHORITIES BELOW. WHILE MAKING ASSESSMENT THE AO OBSERVED THAT ASSESSEE-COMPANY CLAIMED SOFTWARE USES CHARGES OF RS. 14 56 292/- WH ICH WAS PAID ON ACCOUNT OF SOFTWARE USES CHARGES. THE AO CONCLUDED IT AS CAPIT AL IN NATURE AND ALLOWED ONLY 60% DEPRECIATION THUS RS. 5 82 517/- WAS DISALLOWE D. THE CIT(A) WHILE CONSIDERING THIS GROUND CONCLUDED THAT THE AO HAS GIVEN CONSEQU ENTIAL EFFECT ON THE DEPRECIATION IN THE SPECIFIC YEAR IN ACCORDANCE WITH PROVISION O F THE ACT AND ON THE WRITTEN DOWN I .T.A. NOS.1778/M/2013 & 5150/M/2014 DIRECTI INTERNET SOL UTIONS P. LTD. 5 VALUE OF THE PREVIOUS YEAR MENTIONED SOFTWARE CAPIT ALIZED BY HIM ON THE BASIS OF DEPRECIATION ALLOWED @ 60% IN AY 2006-07. FOR ASCERTAINING AS TO WHETHER THE EXPENDITURE OF COMPUTER SOFTWARE GIVES ENDURING BENEFIT TO ASSESSEE THE DURATION OF TIME FOR WHICH ASSESSEE REQUIRED RIGHT TO USE THE SOFTWARE BECOME RELEVANT HAVING REGARD TO T HE FACT THAT SOFTWARE BECOMES OBSOLETE WITH TECHNOLOGICAL INNOVATION AND ADVANCEM ENT WITHIN A SHORT SPAN OF TIME IT WOULD BE SAID THAT WHERE THE LIFE OF COMPUTER SO FTWARE IS SHORTER (LESS THAN 2 YEARS) IT MAY BE TREATED AS REVENUE EXPENDITURE. IN THOMAS COOK (INDIA) LTD VS DCIT (SUPRA) THE COO RDINATE BENCH OF TRIBUNAL HELD THAT EXPENSES INCURRED ON UP-GRADATION OF SOFTWARE DO NOT RESULT INTO ACQUISITION OF ANY ASSET NOR ACQUISITION OF ENDURING BENEFITS AS S OFTWARE BECOME OBSOLETE VERY QUICKLY. THUS FOLLOWING THE ORDER OF COORDINATE BE NCH THIS GROUND OF APPEAL IS ALLOWED. ITA NO. 5150/MUM/2014 7. THE ASSESSEE HAS RAISED IDENTICAL GROUNDS OF APPEAL . GROUND NO.1 RAISED IN ITA NO. 1778/MUM/2013 IS RESTORED TO THE FILE OF AO; HENCE THE GROUND NO. 1 IN THE PRESENT APPEAL IS ALSO RESTORED TO THE FILE OF AO. THE GROU ND NO.2 IN THIS APPEAL IS ALSO IDENTICAL WITH THE GROUND NO.2 IN ITA NO. 1778/MUM/ 2013. HENCE THE GROUND NO.2 RAISED IN THE PRESENT APPEAL IS ALSO ALLOWED. IN THE RESULT BOTH THE APPEAL OF THE A SSESSEE IS ALLOWED. ORDER ANNOUNCED IN THE OPEN COU RT ON 30 TH DAY OF SEPTEMBER 2 016. SD/- SD/- (B. R. BASKARAN) (PAWAN SI NGH) ! / ACCOUNTANT MEMBER '# ! / JUDICIAL MEMBER MUMBAI; # DATED :30.09.2016 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. ' ( ) / THE CIT(A) 4. ' / CIT - CONCERNED 5. * * / DR ITAT MUMBAI 6. + / GUARD FILE / BY ORDER / (DY./ASSTT. REGISTRAR)