M/s. DCIT Rg. - 3(1), MUMBAI v. THE BOSTON CONSULTING GROUP (I) P. LTD., MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH: MUMBAI BEFORE SHRI PRAMOD KUMAR ACCOUNTANT MEMBER AND SMT ASHA VIJAY RAGHAVAN JUDICIAL MEMBER ITA NO 7067/MUM/2008 (ASSESSMENT YEAR: 2002-03) DCIT CIRCLE 3(1) ROOM NO.607 6TH FLOOR AAYAKAR BHAVAN MUMBAI -400 020 VS M/S THE BOSTON CONSULTING GROUP (INDIA) PVT LTD 14TH FLOOR NARIMAN BHAVAN 227 NARIMAN POINT MUMBAI -400 021 PAN: AABCB 3524 G APPELLANT RESPONDENT APPELLANT BY: MS VANDANA SAGAR RESPONDENT BY: MR DHANESH BAFNA & MS SHITAL BANDEKAR ORDER PER PRAMOD KUMAR 1. BY WAY OF THIS APPEAL REVENUE HAS RAISED THE FO LLOWING GRIEVANCE AGAINST CIT (A)S ORDER DATED 26TH SEPTEMBER 2008 FOR THE ASSE SSMENT YEAR 2002-03 :- ON THE FACTS AND IN THE CIRCUMSTANCES OF CASE AND IN LAW THE LD CIT (A) ERRED IN DELETING PENALTY LEVIED BY AO U/S 271( 1)(C) AMOUNTING TO RS 4 76 238/-. 2. TO ADJUDICATE ON THIS GRIEVANCE ONLY A FEW RELE VANT MATERIAL FACTS NEED TO BE TAKEN NOTE OF. THE ASSESSEE IS ENGAGED IN CONSULTA NCY BUSINESS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NO TED THAT THE ASSESSEE HAS CLAIMED DEDUCTIONS IN RESPECT OF EXPENDITURE OF RS 11 28 993 TOWARDS COMPUTER SOFTWARE. THE ASSESSING OFFICER WAS OF THE VIEW TH AT EXPENDITURE ON SOFTWARE IS A CAPITAL EXPENDITURE AND HE ACCORDINGLY DISALLOWE D THE DEDUCTION. HE HOWEVER ALLOWED DEPRECIATION ON SOFTWARE @ 25%. THE ASSESS ING OFFICER FURTHER NOTED THAT THE EXPENDITURE ON REIMBURSEMENT OF MEAL EXPENSES T O EMPLOYEES MAY HAVE AN ELEMENT OF PERSONAL EXPENDITURE. HE ACCORDINGLY DISALLOWED 20% OF THE SAID ITA 7067/M/2008 M/S THE BOSTON CONSULTING GROUP (INDIA) PVT LTD 2 EXPENDITURE WHICH WORKED OUT TO RS 6 67 254 AS NO N BUSINESS EXPENDITURE. THE DISALLOWANCES THUS MADE BY THE ASSESSING OFFICER WE RE ACCEPTED BY THE ASSESSEE AND WERE NOT CARRIED IN APPEAL. 3. THE MATTER HOWEVER DID NOT REST THERE. THE AS SESSEE WAS ALSO SUBJECTED TO PENALTY PROCEEDINGS U/S 271(1)(C) FOR DEEMED CONCEA LMENT OF INCOME. THE ASSESSING OFFICER WAS OF THE VIEW THAT ASSESSEE CON CEALED INCOME BY MAKING WRONG CLAIM OF DEDUCTION FOR SOFTWARE EXPENSES AND FOR C LAIMING THE DEDUCTION OF NON BUSINESS EXPENDITURE PENALTY EQUIVALENT TO 100% OF TAX THUS SOUGHT TO BE EVADED WAS IMPOSED ON THE ASSESSEE. AGGRIEVED ASSESSEE C ARRIED THE MATTER IN APPEAL BEFORE CIT (A) WHO DELETED THE PENALTY AND OBSERVED AS FOLLOWS :- IT IS SUBMITTED THAT THE TREATMENT OF SOFTWARE LIC ENCE AS CAPITAL EXPENDITURE INSTEAD OF AS REVENUE EXPENDITURE HAS NOT BEEN LITI GATED IN QUANTUM PROCEEDINGS BY THE ASSESSEE ON ACCOUNT OF THE FACT THAT ON AND FROM THE VERY NEXT YEAR VIZ AY 2003-04 THE DEPRECIATION AT 60% I S ALLOWABLE RESULTING IN VIRTUAL WRITE OFF IN A SPAN OF 2 TO 3 YEARS. WITH REGARD TO SUSTAINED DISALLOWANCE OF 10% OF HOT EL EXPENSES IT IS SUBMITTED THAT WHILE AN APPEAL WAS FILED TO THE HON BLE TRIBUNAL THE SAME WAS WITHDRAWN ON ACCOUNT OF SMALLNESS OF REVENUE INVOLV ED AS ALSO THE FACT THAT IN LATER YEARS THE ENTIRE DISALLOWANCE WAS WHOLLY DEL ETED. IT IS FURTHER SUBMITTED THAT THE CLAIM OF SOFTWARE EXPENSES AS REVENUE EXPENSES IS SUPPORTED BY JUDICIAL PRONOUNCEMENTS NO TABLY OF THE CHENNAI HIGH COURT IN THE CASE OF CIT VS SOUTHERN ROADWAYS (304 ITR 84) WHEREIN IT HAS BEEN HELD THAT EXPENSES INCURRED ON INSTALLATION OF SOFTWARE PACKAGES IN THE PRESENT COMPUTER WORLD ENABLES THE ASSESSEE TO CARR Y ON ITS BUSINESS OPERATIONS EFFECTIVELY EFFICIENTLY AND SMOOTHLY AN D HENCE CONSIDERING THE FACTS THAT SUCH SOFTWARE DOES NOT WORK ON A STAND A LONE BASIS EXPENDITURE ON SOFTWARE DOES NOT BRING INTO EXISTENCE AN ASSET OF ENDURING BENEFIT AND HENCE IS TO BE HELD AS REVENUE EXPENDITURE. A COPY OF TH IS REPORTED DECISION HAS BEEN PLACED ON MY RECORD AT PAPER BOOK PAGES 225 TO 233. AS REGARDS DISALLOWANCE OF HOTEL EXPENSES IT IS SUBMITTED AS THE APPELLANT IS A LIMITED COMPANY NO EXPENDITURE CAN BE HELD TO BE OF A PERS ONAL NATURE INCURRED BY STAFF AND THEREFORE NON-LITIGATION OF THIS QUANTUM ADDITION ON ACCOUNT OF SMALLNESS OF REVENUE SHOULD NOT BE HELD TO BE AGAIN ST THE ASSESSEE IN PENALTY PROCEEDINGS THE ASSESSEE WITH CONTUMACIOUS CONDUCT. THE APPELLANT HAS ALSO PRESSED INTO SERVICE VARIOUS DECISIONS OF THE SUPREME COURT AND HIGH COURTS IN ITS DETAILED SUBMISSIONS D ATED SEPTEMBER 26 2008. THE GRIEVANCE OF THE ASSESSEE CAN BE REDRESSED ON A SIMPLE PHENOMENON VIZ. WHERE TWO VIEWS ARE POSSIBLE WHILE TAX CAN BE RECO VERED A PENALTY CANNOT BE ITA 7067/M/2008 M/S THE BOSTON CONSULTING GROUP (INDIA) PVT LTD 3 IMPOSED ON AN ASSESSEE FOR ADOPTING ONE OF THE POSS IBLE VIEWS WITH WHICH AN ASSESSING OFFICER MAY DISAGREE. THIS PHENOMENON TO DAY IS AN ACCEPTED POSITION AND IS SUPPORTED BY A CATENA OF DECISIONS. I HAVE THEREFORE NO HESITATION IN DELETING THE PE NALTY OF RS 4 02 751 IMPOSED ON TREATMENT OF COMPUTER SOFTWARE EXPENSES AS CAPIT AL EXPENDITURE ENTITLED TO DEPRECIATION INSTEAD OF AS REVENUE EXPENDITURE IN T HE QUANTUM ASSESSMENT AND I ALSO DELETE PENALTY OF RS 73 487 IMPOSED FOR ADHOC DISALLOWANCE OF 10% OF HOTEL EXPENDITURE. 4. REVENUE IS AGGRIEVED OF THE RELIEF SO GIVEN BY T HE CIT (A) AND IS IN APPEAL BEFORE US. 5. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING PE RUSED THE MATERIAL ON RECORD WE ARE NOT INCLINED TO INTERFERE IN THE MATTER. AS LEARNED COUNSEL FOR THE ASSESSEE RIGHTLY POINTS OUT THERE ARE A NUMBER OF DECISIONS OF CO-ORDINATE BENCHES HOLDING THAT EXPENSES ON PURCHASE OF SOFTWARE ARE ELIGIBLE FOR DEDUCTION AS REVENUE EXPENDITURE SUCH AS IN THE CASES OF GE CAPITAL SER VICES LTD VS DCIT (106 TTJ 65) SUMITOMO CORP INDIA LTD VS ACIT (1 SOT 91) TIL LTD VS ACIT (16 SOT 33) IBM INDIA LTD VS ACIT (108 TTJ 531) AND BANK OF PUNJAB LTD VS JCIT (91 TTJ 422). HONBLE MADRAS HIGH COURT HAS IN THE CASE OF CIT V S SOUTHERN ROADWAYS LTD (304 ITR 84) HAS HELD THAT THE PAYMENT FOR .. APPLICAT ION SOFTWARE THOUGH THERE IS AN ENDURING BENEFIT DOES NOT RESULT IN ACQUISITION OF CAPITAL ASSET AND IT MERELY ENHANCES THE PRODUCTIVITY OR EFFICIENCY AND HENCE HAS TO BE TREATED AS REVENUE EXPENDITURE. IT COULD NOT BE THEREFORE SAID THA T MERELY BECAUSE ASSESSEE HAS MADE A CLAIM FOR DEDUCTION OF EXPENSES ON SOFTWARE PURCHASE AND HAS NOT CHALLENGED IN APPEAL ASSESSING OFFICERS ACTION OF DECLINING THIS DEDUCTION THE ASSESSEE CAN BE DEEMED TO HAVE CONCEALED HIS INCOME . WE DO NOT THINK IT WAS A FIT CASE FOR IMPOSING PENALTY ON THAT QUANTUM DISALLOWA NCE. SIMILARLY AS FAR AS ADHOC DISALLOWANCE OF EXPENSES FOR PERSONAL ELEMENT IS CO NCERNED WE HAVE NOTED THAT THE LEGALITY OF QUANTUM DISALLOWANCE ITSELF IS NOT BEYO ND DOUBT INASMUCH AS A VIEW IS INDEED POSSIBLE THAT THE ASSESSEE BEING AN ARTIFICI AL JUDICIAL PERSON ANY DISALLOWANCE FOR PERSONAL EXPENSES IS NOT POSSIBLE. THE NATURE OF DISALLOWANCE THEREFORE IS SUCH THAT THIS DISALLOWANCE PER SE EVEN IF ACCEPTED BY THE ASSESSEE CANNOT BE A SOU ND ITA 7067/M/2008 M/S THE BOSTON CONSULTING GROUP (INDIA) PVT LTD 4 BASIS FOR IMPOSITION OF PENALTY. MERELY BECAUSE TH E ASSESSEE HAS ALLOWED THE MATTER TO ATTAIN FINALITY AND NOT CHALLENGED THE SAME IN A PPEAL IT CANNOT BE INFERRED THAT ASSESSEE WAS AT FAULT. THERE CAN BE SEVERAL REASON S ENTIRELY UNRELATED TO THE MERITS OF RELATED ADDITIONS AS WELL FOR NOT FILING AN APP EAL AND ACCEPTING THE DISALLOWANCE. THEREFORE ACCEPTING A DISALLOWANCE PER SE CANNOT BE USED AGAINST THE ASSESSEE AS WAS DONE BY THE ASSESSING OFFICER IN THIS CASE CAN NOT BE REASON ENOUGH TO IMPOSE PENALTY IN RESPECT OF THAT QUANTUM DISALLOWANCE. T HE EXPLANATION GIVEN BY THE ASSESSEE OUGHT TO HAVE BEEN ACCEPTED ON THE FACTS O F THE PRESENT CASE. THE ASSESSEE HAS NOT CHALLENGED THE QUANTUM ADDITIONS O N ACCOUNT OF SMALLNESS OF AMOUNT BUT THE NATURE OF ADDITIONS IS SUCH THAT NON E OF THESE ADDITIONS IN OUR CONSIDERED VIEW NEED TO BE VISITED WITH PENALTY U/ S 271(1)(C). IN VIEW OF THESE DISCUSSIONS WE ARE OF THE CONSIDERED VIEW THAT IT WAS INDEED NOT A FIT CASE FOR IMPOSITION OF PENALTY U/S 271(1)(C). LEARNED CIT ( A) RIGHTLY DELETED THE SAME. 6. FOR THE REASONS SET OUT ABOVE WE APPROVE THE CO NCLUSIONS ARRIVED AT BY THE CIT (A) AND DECLINE TO INTERFERE IN THE MATTER. 7. IN THE RESULT APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT TODAY ON THE 6 TH DAY OF JANUARY 2010. SD/- SD/- (ASHA VIJAY RAGHAVAN) JUDICIAL MEMBER (PRAMOD KUMAR) ACCOUNTANT MEMBER MUMBAI DATE: 6 TH JANUARY 2010 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A)-XXVII MUMBAI. 4) THE CIT CITY-3 MUMBAI. 5) THE D.R. I BENCH ITAT MUMBAI. BY ORDER / / TRUE COPY / / ASSTT. REGISTRAR CHAVAN* I.T.A.T. MUMBAI ITA 7067/M/2008 M/S THE BOSTON CONSULTING GROUP (INDIA) PVT LTD 5 SR.N. EPISODE OF AN ORDER DATE INITIALS CONCERNED 1 DRAFT DICTATED ON 01.01.10 SR.PS 2 DRAFT PLACED BEFORE AUTHOR 01.01.10 05.01.10 SR.PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.PS SR.PS 6 KEPT FOR PRONOUNCEMENT ON SR.PS 7 FILE SENT TO THE BENCH CLERK SR.PS 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER