M/S. SYNERGY LOG-IN SYSTEMS LTD, MUMBAI v. THE ITO 7(2)(4),

ITA 6066/MUM/2007 | 2004-2005
Pronouncement Date: 22-07-2011 | Result: Partly Allowed

Appeal Details

RSA Number 606619914 RSA 2007
Assessee PAN AAGCS2008H
Bench Mumbai
Appeal Number ITA 6066/MUM/2007
Duration Of Justice 3 year(s) 9 month(s) 25 day(s)
Appellant M/S. SYNERGY LOG-IN SYSTEMS LTD, MUMBAI
Respondent THE ITO 7(2)(4),
Appeal Type Income Tax Appeal
Pronouncement Date 22-07-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted C
Tribunal Order Date 22-07-2011
Date Of Final Hearing 23-06-2011
Next Hearing Date 23-06-2011
Assessment Year 2004-2005
Appeal Filed On 27-09-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL 'C' BENCH MUMBAI BEFORE SHRI R.V. EASWAR PRESIDENT AND SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER ITA NO. 6066/MUM/2007 (ASSESSMENT YEAR: 2004-05) M/S. SYNERGY LOG-IN SYSTEMS LTD. INCOME TAX OFFICER - 7(2)(1) MITTAL COURT 102/112 C WING MUMBAI 10TH FLOOR 224 NARIMAN POINT VS. MUMBAI 400021 PAN - AAGCS 2008 H APPELLANT RESPONDENT APPELLANT BY: SHRI J. PRABHAKAR RESPONDENT BY: SHRI SATBIR SINGH O R D E R PER B. RAMAKOTAIAH A.M. ASSESSEES APPEAL FOR A.Y. 2004-05 IS DIRECTED AGAI NST THE ORDER OF THE CIT(A) VII MUMBAI DATED 19.07.2007. 2. ASSESSEE HAS RAISED THE FOLLOWING FOUR GROUNDS ON V ARIOUS ISSUES WHEREAS GROUND NOS. 5 & 6 ARE GENERAL IN NATURE: 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) IS NOT JUSTIFIED IN SUSTAINING DISALLOWANCE OF RS.40 000/- DUE FROM IDBI BANK UNDER BAD DEBTS WITHOUT CONSIDERING THE N ATURE OF CLAIM THAT IN CASE IT IS NOT STRICTLY A BAD DEBT TH EN AS A LOSS INCIDENTAL TO CARRYING ON THE BUSINESS UNDER SECTIO N 28 OF THE ACT. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IS NOT JUSTIFIED IN OBSERVING THAT AMOUNTS DUE FROM IDBI B ANK SHOULD BE CLAIMED BY FILING A REVISED RETURN. 3. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IS NOT JUSTIFIED IN DISALLOWING THE FOLLOWING EXPENSES AS CAPITAL IN NATURE AND GIVING ENDURING BENEFIT TO THE ASSESSEE. A) PROFESSIONAL FEES FOR CAPITAL REDUCTION RS. 1 25 000 B) PROFESSIONAL FEE FOR AUDIT OF SECURITY RS. 8 7 2 800 (ERNST ARCHITECTURE SOFTWARE BUSINESS & YOUNG) C) PROFESSIONAL FEE FOR CAPITAL RESTRUCTURING RS. 2 42 500 D) PROFESSIONAL FEES FOR WEBSITE DESIGN RS. 41 200 ----------------------- RS.12 81 500 -------------------- ITA NO. 6066/MUM/2007 M/S. SYNERGY LOG-IN SYSTEMS LTD. 2 4. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO DISCUSS OR ADUMBRATE AS TO IN WHAT MANNER THE ABOVE EXPENDITURE IS CAPITAL IN NATURE OR FOR THAT MATTER IT RESULTS IN ENDURING BENEFIT TO THE ASSESSEE. 3. GROUND NOS. 1 & 2 PERTAINS TO THE ISSUE OF SUSTAINI NG THE DISALLOWANCE OF ` 40 000/- NOT RECEIVABLE FROM IDBI BANK. THE A.O. HA S DISALLOWED AN AMOUNT OF ` 94 180/- CLAIMED TOWARDS BAD DEBT. THE CIT(A) AFTER CONSIDERING THE EXPLANATION AND DETAILS FURNI SHED BY ASSESSEE DELETED THE ADDITION EXCEPT AN AMOUNT OF ` 40 000/- CLAIMED TOWARDS IDBI BANK. IT WAS POINTED OUT THAT THIS AMOUNT REPRESENTS FINAL B ILL FOR IMPLEMENTATION OF SOFTWARE DURING THE YEAR ENDING MARCH 2003 WHICH WA S WRONGLY ACCOUNTED FOR THAT YEAR TWICE I.E. ` 40 000/- ACCOUNTED TWICE ADMITTING AS ` 80 000/- INCOME FOR THAT YEAR. SINCE THIS MISTAKE WAS NOTICE D DURING THE YEAR ASSESSEE HAD WRITTEN OFF THE BALANCE NON-RECEIVABLE /UNCLAIMED AMOUNT AS BAD DEBT. THE CIT(A) CONFIRMED THE DISALLOWANCE MAD E BY AO HOLDING THAT THE AMOUNT CAN NOT BE ALLOWED AS BAD DEBT. 4. IT WAS THE SUBMISSION THAT THERE WAS A MISTAKE IN A CCOUNTING FOR THE INCOME WITH HIGHER AMOUNT AND SINCE THE ASSESSEE NO TICED THE MISTAKE IN THIS YEAR THE UNRECEIVABLE AMOUNT OF ` 40 000/- WHICH CAN NOT BE CLAIMED FROM IDBI WAS WRITTEN OFF AND SO THE WRITING OFF OF THIS SATISFIES THE CONDITIONS FOR ALLOWANCE OF THE AMOUNT AS BAD DEBT UNDER SECTION 36(1)(VII). ALTERNATIVELY IT WAS CLAIMED THAT THE AMOUNT CAN BE ALLOWED AS LOSS TO THE ASSESSEE. THE DR REITERATED THE STAND OF AO SUPPORT ED BY CIT(A). 5. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE ARE OF T HE OPINION THAT THE CLAIM OF ` 40 000/- AS BAD DEBT/LOSS IS AN ALLOWABLE AMOUNT. O BVIOUSLY AN AMOUNT OF ` 40 000/- ONLY CAN BE CLAIMED FROM IDBI. THE BALANCE ` 40 000/- CAN NOT BE RECOVERED FROM IDBI AS SUCH THE CLAIM C ANNOT BE MADE ON THE IDBI. SINCE THE INCOME WAS ACCOUNTED FOR AND BROUGH T TO TAX IN EARLIER YEAR WE SEE NO REASON TO DISALLOW THE ABOVE AMOUNT. THE CONDITIONS SPECIFIED UNDER SECTION 36(2) HAVE BEEN SATISFIED AND ASSESSE E HAS WRITTEN OFF THE AMOUNT. THEREFORE THE A.O. IS DIRECTED TO DELETE TH E DISALLOWANCE OF ` 40 000/- MADE. GROUNDS ARE CONSIDERED ALLOWED. 6. GROUND NO. 3 HAS VARIOUS SUB-ISSUES. 3(A) AND (C) R EPRESENTS FEES PAID FOR CAPITAL REDUCTION TOTALLING TO ` 3 67 500/-. IT WAS THE CONTENTION ITA NO. 6066/MUM/2007 M/S. SYNERGY LOG-IN SYSTEMS LTD. 3 OF THE REVENUE THAT THE AMOUNT IS CAPITAL EXPENDITU RE AND CANNOT BE ALLOWED AS REVENUE EXPENDITURE WHEREAS THE ASSESSEE S CONTENTION WAS THAT CAPITAL REDUCTION WAS PERMITTED UNDER THE COMP ANIES ACT AND SINCE ASSESSEE HAD RESTRUCTURED THE BUSINESS FOR BETTER P RESENTATION OF FINANCIAL STATEMENTS THE AMOUNT IS ALLOWABLE EXPEND ITURE. IT WAS SUBMITTED THAT THE TOTAL SHARE CAPITAL OF THE ASSES SEE COMPANY PRIOR TO CAPITAL REDUCTION STOOD AT ` 16 29 28 000/- WITH A SHARE PREMIUM ACCOUNT OF ` 18 31 89 311/-. DUE TO THE CAPITAL RESTRUCTURING T HE SHARE CAPITAL WAS REDUCED BY WRITING OFF THE ACCUMULATED LOSSES AND OUTSTANDING ACCOUNTS SO AS TO MAKE THE BALANCE SHE ET LOOK HEALTHY AND ALSO ENABLE THE ASSESSEE COMPANY TO CARRY ON ITS BU SINESS ACTIVITY MORE EFFICIENTLY BY REDUCING THE DEBT BURDEN WHICH WOULD BE OTHERWISE PAYABLE BY THE COMPANY WITH THE DEPLETED FINANCIAL POSITION. THE CAPITAL REDUCTION RESULTED IN THE WRITE OFF OF ` 9 77 56 800/- FROM THE SHARE CAPITAL ACCOUNT AND A FURTHER SUM OF ` 11 96 89 311/- IN SHARE PREMIUM ACCOUNT IN ADDITION TO REDUCTION OF GENERAL RESERVE BY ` 12 84 291/-. AS A RESULT OF THE ABOVE RESTRUCTURING THE SHARE CAPI TAL GOT REDUCED FROM ` 16.29 CRORES TO ` 6.52 CRORES WITH THE REDUCTION IN THE SHARE PREMIUM ACCOUNT FROM ` 18.32 CRORES TO ` 6.35 CRORES. IN THE NET RESULT THE SHAREHOLDERS CLAIM IN RESPECT OF EVERY 100 SHARES I N THE SHARE CAPITAL GOT REDUCED TO 40 SHARES. 7. WE HAVE CONSIDERED THE ISSUE. THE CAPITAL REDUCTION IS PERMITTED BY THE COMPANYS ACT. ASSESSEE TRIED TO ADJUST THE CAP ITAL TO PRESENT A BETTER PICTURE NOT ONLY TO THE SHAREHOLDERS BUT ALSO TO OT HERS BY ADJUSTING THE LOSSES TOWARDS SHARE CAPITAL. AS STATED BY THE ASSE SSEE THE CAPITAL REDUCTION RESULTED IN REDUCING THE SHARE CAPITAL AND RESERVES THEREBY THE SHAREHOLDERS HAD FOREGONE THE VALUE OF THE SHARES. WE ARE OF THE OPINION THAT THIS CAPITAL REDUCTION IS FOR THE BENEFIT OF T HE COMPANY IN LONG RUN AND CANNOT BE TREATED AS REVENUE EXPENDITURE. IT IS ONL Y FOR BETTER PRESENTATION OF THE FINANCIAL STATEMENTS ASSESSEE HAS UNDERTAKEN THE EXPENDITURE. THE RESULT WAS THAT SHARE CAPITAL GOT REDUCED. THE HON BLE SUPREME COURT IN THE CASE OF PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORA TION LTD 225 ITR 792(SC) HELD THAT THE EXPENDITURE WHICH COULD COVER INCREASE IN CAPITAL RESULTING IN EXPANSION OF CAPITAL BASE OF THE COMPA NY WHILE INCIDENTALLY ITA NO. 6066/MUM/2007 M/S. SYNERGY LOG-IN SYSTEMS LTD. 4 HELPING THE BUSINESS IN PROFIT MAKING WAS CAPITAL IN NATURE AND CAN NOT BE ALLOWED U/S 37(1). SINCE THE EXERCISE OF CAPITAL RE DUCTION IS SIMILAR IN NATURE TO CAPITAL INCREASE THE PRINCIPLES ESTABLIS HED BY THE ABOVE JUDGEMENT WILL EQUALLY APPLY TO THE ASSESSEE CASE. WE ARE OF THE OPINION THAT THE EXPENDITURE IS IN THE CAPITAL FIELD AND CANNOT BE ALLOWED AS REVENUE EXPENDITURE. THEREFORE WE UPHOLD THE ORDERS OF THE A.O. AND THE CIT(A) ON THIS ISSUE. THESE GROUNDS ARE REJECTED. 8. GROUND NO. 3(B) PERTAINS TO THE PROFESSIONAL FEES F OR AUDIT OF THE SECURITY ARCHITECTURE IN SOFTWARE BUSINESS. THE AMO UNT PAID WAS ` 8 72 800/-. THE SAME WAS DISALLOWED HOLDING THAT IT GIVES ENDURING BENEFIT TO THE ASSESSEE THEREFORE CAPITAL IN NATURE. IT WAS THE SUBMISSION THAT SOFTWARE WAS BEING SUPPLIED TO VARIOUS BANKS IN MAH ARASHTRA AND OTHER PLACES AND THE ROBUSTNESS OF THE SOFTWARE AS REGARD S ITS SECURITY FEATURES AND WITH REFERENCE TO PREVENTION OF FRAUD THEFT ET C. HAD TO BE TESTED AND CERTIFIED BY AUDIT THEREOF WHICH WAS CONDUCTED BY M /S. ERNST & YOUNG. SINCE THIS CERTIFICATE IS MUST FOR IMPLEMENTATION O F ASSESSEES SOFTWARE SUPPLIED TO THE BANKS THE EXPENDITURE IS REVENUE IN NATURE. 9. THE LEARNED D.R. ARGUED THAT THE EXPENDITURE IS CAP ITAL IN NATURE. 10. CONSIDERING THE NATURE OF THE EXPENDITURE AND BUSIN ESS OF SOFTWARE DEVELOPMENT AND IMPLEMENTATION THEREOF BY THE ASSES SEE WE ARE OF THE OPINION THAT THE AUDIT FEES PAID FOR EXAMINING THE SECURITY ARCHITECTURE IS REVENUE IN NATURE. UNLESS THE SOFTWARE IS CERTIFIED TO BE OF PROPER NATURE THE SAME CANNOT BE IMPLEMENTED IN VARIOUS BANKS. THIS I S A SORT OF MANUFACTURING COST IN THE COURSE OF SOFTWARE DEVELO PMENT. THEREFORE WE ARE OF THE OPINION THAT THE EXPENDITURE IS REVENUE IN N ATURE. THE A.O. IS DIRECTED TO ALLOW THE AMOUNT AS REVENUE EXPENDITURE. 11. GROUND NO. 3(D) PERTAINS TO THE FEES PAID FOR WEBSI TE DESIGN OF ` 41 200/-. THIS AMOUNT WAS ALSO DISALLOWED STATING T HAT IT IS CAPITAL NATURE. 12. WE HAVE CONSIDERED THE RIVAL ARGUMENTS. IN OUR VIEW THIS EXPENDITURE AS TO HOW THE DESIGNING OF THE CORPORATE WEBSITE FO R PROJECTION OF ASSESSEES BUSINESS WAS MERELY AN ADVERTISEMENT TOOL IN THE IN TERNET WORLD. SIMILAR ISSUE WAS CONSIDERED BY THE HON'BLE DELHI HIGH COUR T IN THE CASE OF CIT VS. ITA NO. 6066/MUM/2007 M/S. SYNERGY LOG-IN SYSTEMS LTD. 5 INDIAN VISIT.COM P. LTD. (2008) 219 CTR 603 (DEL) W HEREIN IT WAS HELD AS UNDER: - JUST BECAUSE A PARTICULAR EXPENDITURE MAY RESULT IN AN ENDURING BENEFIT WOULD NOT MAKE SUCH AN EXPENDITURE OF A CAP ITAL NATURE. WHAT IS TO BE SEEN IS WHAT IS THE REAL INTENT AND P URPOSE OF THE EXPENDITURE AND AS TO WHETHER THERE IS ANY ACCRETIO N TO THE FIXED CAPITAL OF THE ASSESSEE. IN THE CASE OF EXPENDITURE ON A WEBSITE THERE IS NO CHANGE IN THE FIXED CAPITAL OF THE ASSE SSEE. ALTHOUGH THE WEBSITE MAY PROVIDE AN ENDURING BENEFIT TO AN ASSES SEE THE INTENT AND PURPOSE BEHIND DEVELOPMENT OF A WEBSITE IS NOT TO CREATE AN ASSET BUT ONLY TO PROVIDE A MEANS FOR DISSEMINATING THE INFORMATION ABOUT THE ASSESSEE. THE SAME COULD VERY WELL HAVE B EEN ACHIEVED AND INDEED IN THE PAST IT WAS ACHIEVED BY PRINTI NG TRAVEL BROCHURES AND OTHER PUBLISHED MATERIALS AND PAMPHLE TS. THE ADVANCE OF TECHNOLOGY AND THE WIDE SPREAD USE OF TH E INTERNET HAS PROVIDED A VERY POWERFUL MEDIUM TO COMPANIES TO PUB LICIZE THEIR ACTIVITIES TO A LARGER SPECTRUM OF PEOPLE AT A MUCH LOWER COST. WEBSITES ENABLE COMPANIES TO DO WHAT THE PRINTED BR OCHURES DID BUT IN A MUCH MORE EFFICIENT MANNER AS WELL AS IN A MUCH SHORTER PERIOD OF TIME AND COVERING A MUCH LARGE SET OF PEO PLE WORLDWIDE. THE TRIBUNAL HAS CORRECTLY APPRECIATED THE FACTS AS WELL AS THE LAW ON THE SUBJECT AND HAS COME TO THE CONCLUSION THAT THE EXPENDITURE ON THE WEBSITE WAS OF A REVENUE NATURE AND NOT OF A CAPITAL NATURE. NO SUBSTANTIAL QUESTION OF LAW ARISES FOR CONSIDERA TION. RESPECTUALLY FOLLOWING THE ABOVE DECISION WE ARE O F THE OPINION THAT THE EXPENDITURE IS REVENUE IN NATURE BEING FOR ADVERTIS MENT PURPOSES. THEREFORE THE AO IS DIRECTED TO ALLOW THE EXPENDITU RE AS REVENUE EXPENDITURE. THIS GROUND IS ALLOWED 13. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON 22ND JULY 201 1. SD/- SD/- (R.V. EASWAR) (B. RAMAKOTAIAH) PRESIDENT ACCOUNTANT MEMBER MUMBAI DATED: 22 ND JULY 2011 ITA NO. 6066/MUM/2007 M/S. SYNERGY LOG-IN SYSTEMS LTD. 6 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) VII MUMBAI 4. THE CIT VII MUMBAI CITY 5. THE DR C BENCH ITAT MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI N.P.