IN THE ITAT DELHI BENCH ‘F’
Income-tax Officer, Ward 15(4), New Delhi
RSG Media (P.) Ltd.
IT APPEAL NO. 2018 (DELHI) OF 2010
[ASSESSMENT YEAR 2006-07]
JULY 20, 2012
T.S. Kapoor, Accountant Member
This is an appeal filed by revenue against the order of CIT(A) dated 01-02-2010. The grounds of appeal are as under :-
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 371402/- made by the A.O. on account of disallowance of depreciation claimed by the assessee on renovation of the property at 1st Floor, Tower-B, Millennium Plaza Tower, Sector-27, Sushant Lok, Gurgaon.
2. The Ld. CIT(A) failed to appreciate that the capital expenditure incurred in respect of a premises that were taken on lease after the end of the previous year are not eligible for depreciation, as the assessee did not hold lease or other rights of occupancy in the P.Y. as required by explanation to section 32 of the I.T. Act.
3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs. 2,82,172/- of expenditure on account traveling of Mr. Mukesh Sehgal without considering the fact that the expenditure.
As argued by the assessee before the CIT(A), Shri Mukesh Sehgal has traveled to India in order to complete formalities to obtain permission/approval for setting up 100% EOU was granted on 03-01-2006, 16-01-2006 & 27-01-2006.
Before the date of obtaining the approval and before even taking the possession of the premises from which business of 100% EOU was to be carried out on the business of 100% EOU cannot be said to be set up.
4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred n directing the A.O. to allow exemption u/s 10B on the profits derived for the period 01-02-2006 to 31-03-2006 without even discussing three reasons for disallowing the deduction mentioned by the A.O in para 13 of the Assessment Order.
5. The appellant craves to be allowed to add, delete or amend any other grounds of appeal.
2. The brief facts of the case are that assessee filed its return of income on 27-011-2006 declaring an income of Rs. 3,45,010/-. The case of the assessee was selected for scrutiny. During assessment proceedings the AO noted that assessee company has described its business activities as engaged in software development. He further noted that during the year under consideration, the assessee has claimed his declared income exempt u/s 10B of the Act.
The AO also observed the following:-
(1) that the assessee had claimed to have spent an amount of Rs. 75 lacs on building and had claimed depreciation on it.
(2) that there was an expenditure of Rs. 5,64,344/- which was incurred by Ms. Radhika Sehgal and Mr. Mukesh Sehgal who were neither the employees of the company nor the director of the company.
(3) that assessee has outsourced the development of software to M/s I.Q. Resources Pvt. Ltd. Instead of developing or manufacturing itself.
3. The AO also wanted to know the genuineness of exports made by company and also wanted to know whether the unit was eligible for deduction u/s 10B or not. Therefore, the assessee was required to submit certain documents/explanations in support of its claim. After having received documents/informations, confirmations from assessee, the AO held that the unit was not eligible for deduction u/s 10B because of the following reasons and also made the following disallowances:
♦ The assessee company has not produced or manufactured the software on its own rather got developed it from M/s I.Q. Resources Pvt. Ltd.
♦ The assessee company has failed to comply with the requirement of filing Audit Report with form 56G.
♦ The assessee company failed to produce the attested copy of the bills raised from STPI and Customs authority, copy of Softex forms, copy of STPI registration for which software development it was registered and details of software developed by it.
(1) Miscellaneous receipts of Rs. 20,000/-
4. During course of assessment proceedings, the assessee company was asked to explain as to how miscellaneous receipts of Rs. 20,000/- were exempt u/s 10B. As per AO, the assessee did not submit any explanation in this regard and, therefore, he added back the amount of Rs. 20,000/- to the income of assessee.
(2) Depreciation on renovation
5. The AO noted that assessee has purchased fixed assets amounting of Rs. 2,46,43,297/- and out of the said amount a sum of Rs. 74, 28,022/- was incurred by the assessee on the renovation of property on 1st Floor, Tower B, Millenium Plaza, Sector-27, Sushant Lok I, Gurgaon. The AO noted that said property was neither owned by assessee nor any lease deed was there. When confronted, the assessee submitted that agreement for lease was entered into on 11- 08-2007. The AO disallowed the depreciation on this amount on the basis that assessee was neither the owner of building nor having any tenancy right upto 31-03-2006.
(3) Traveling expenses
6. The AO noted that a sum of Rs. 5,64,344/- has been incurred on treaveling by Ms. Radhika Sehgal and Mr. Mukesh Sehgal, who were neither employees nor directors in the said company. On being confronted, the assessee vide letter dated 19-12-2008 pleaded that the said expenses were incurred by the assessee, in connection with various formalities linked to the premises taken by the assessee company to set up its office. The AO disallowed the amount of traveling expenses on the basis that assessee had failed to furnish any documentary evidence to substantiate its claim and held that the expenses were shame and bogus and hence they were added back to the income of assessee.
7. Aggrieved the assessee filed appeal before CIT(A) and submitted the following submissions in respect of various additions :-
(1) Miscellaneous receipts
8. The Ld. AR submitted that Rs. 1,80,000 was spent by the appellant company as infrastructure expenses on four software engineers employed with the appellant company for developing software for RSG Systems Inc., USA in the business premises of IQ Resources Ltd. RSG Systems Inc. reimbursed Rs. 2,00,000/- to the appellant company. The difference Rs. 20,000/- has been shown as miscellaneous receipts. The Ld. AR further submitted that since the excess credit is on account of software development, it is eligible for deduction u/s 10B.
9. The Ld. CIT(A) upheld the disallowance of Rs. 20,000/- on the ground that the miscellaneous receipts are not part of profit on account of software development.
10. The Ld. AR argued before CIT(A) that appellant had clarified during assessment proceedings that it had not claimed depreciation on building but on the capital expenditure incurred on civil and interior works and furniture in the said premises and he further argued that the expenditure was incurred in the premises from which the appellant company was doing business from January 2006. In support, the Ld. AR submitted license dated 27-01-2006 issued by Central and excise Department, Gurgaon showing the premises as Private Bonded Warehouse of assessee and also certificate of STPI dated 16-01-2006 and green card issued to the appellant company for the period 16-01-2006 to 15-01-2007 which had shown the said building as address of the assessee.
11. The Ld. AR further argued that there is no requirement in law that for claiming depreciation on interior works and furniture, the premises should be owned by the appellant company or leased out to the appellant company. In this respect, she submitted that even prior to execution of lease agreement the unit was STP unit. In support STP unit certificate dated 16-01-2006 was submitted. The Ld. AR further raised additional ground of appeal for claiming the entire expenditure of Rs. 74,28,022/- incurred on the interior and civil works as a revenue expenditure u/s 37 of the Income Tax Act on the basis that it was incurred wholly and exclusively for the business of the appellant company.
12. The Ld. CIT(A), however rejected the additional ground on the basis that these were after thoughts and claim was not made by the appellant in the return of income or during assessment proceedings or as part of original grounds of appeal. However, he allowed the depreciation on the amount of Rs. 74,28,022.
13. The relevant portion of CIT(A) order is reproduced below:
“Even if the lease agreement had not been made during the previous year under consideration, that alone cannot be the reason for denying depreciation due to the appellant company on the capital work done in the said premises as long as the work was required with a view to carrying out the business of the company and the business of the company was actually carried out in the said premises w.e.f. January 2006, a fact which has not been disputed by the AO. The depreciation admissible at 50% of 10% of Rs. 74,28,022/- which works out to Rs. 3,71,402/- as claimed by the appellant is, therefore, allowed.”
(2) Travelling expenses
14. The Ld. AR argued before CIT(A) that amount of expenditure of Rs. 5,64,344/- was incurred by the appellant company on the traveling expenses of Ms. Radhika Sehgal and Mr. Mukesh Sehgal and further submitted that Ms. Radhika Sehgal is the owner of the premises in which appellant company has been running its STP units which was formally leased to the applicant company w.e.f. 01-04-2007. The Ld. AR argued the traveling expenses of Ms. Radhika Sehgal was incurred in order to take possession of premises from her. As regards, traveling expenses of Mr. Mukesh Sehgal, the Ld. AR argued that these were incurred because he was director in the company and he had come to India to oversee the software business of the appellant company particularly in respect of approval that had to be taken under Software Technology Park Scheme.
15. After hearing submissions of Ld. AR, Ld. CIT(A) held that expenditure relating to Ms/ Radhika Sehgal cannot be allowed as deduction to the appellant company as she was only the owner of the premises and as the land lady, the expenses of her travel to India needed to be borne by her and not by appellant company which is the prospective tenant of the said property. However, in respect of expenditure incurred by Mr. Mukesh Sehgal, who was the director of the company. The Ld. CIT(A) held that it was legitimate business expenditure and in view of the above, he allowed 50% of expenditure of Rs. 5,64,344/- and confirmed the remaining addition of Rs. 2,82,177/-.
(3) Exemption u/s 10B
(i) The Ld. AR submitted before CIT(A) that the assessee company was given approval on 03-01-2006 for setting up the 100 % EOU unit under STP for the development/manufacture and export of computer software.
(ii) That that the appellant company has been issued certificate by STPI on 16-01-2006 certifying that assessee is establishing STP unit at Millennium Plaza, 1st Floor, Tower B, Sector-27, Gurgaon.
(iii) That the STP unit was licensed as Private Bonded Warehouse for payment of customs duties vide license dated 27-01-2006.
(iv) That the appellant had entered into an agreement with RSG Systems Inc., USA for supply of software and technology services in regard with terms and conditions stipulated in agreement dated 02-05-2007. In consideration for services, the appellant company raised monthly invoices to RSG Systems Inc., USA to meet its export obligations. The computer software exported till 31-01-2006 was developed at I.Q. Resources Limited and after the appellant was registered as STP unit, the software exports were developed and carried out from this unit only.
(v) The Ld. AR also submitted that each lot of export made by assessee was less than US 25000 dollar and therefore these invoices were not required to be authenticated by STPI.
(vi) That it is only because the appellant company has satisfied all conditions under the STPI scheme that approval granted was renewed year after year and last approval was valid till 15-01-2008.
(vii) That for claiming deduction u/s 10B, it was not necessary that development/manufacture should be carried out in STP unit itself. Reliance was placed upon the judgment of ITO v. Techdrive India (P.) Ltd.  25 SOT 152 (Delhi) wherein it was held that u/s 10B, it was not required that assessee company should own plant & machinery or equipment and manufacture or produce computer software on same.
(viii) That the requirement u/s 10B is only that the units should be registered with STPI and there should be export sale and in the instant case, the appellant company had satisfied both these conditions.
(ix) That CBDT circular no.-I, dated 06-01-2005, the deduction u/s 10B is to be restricted to the profit derived from the export of software and after the date of the approval of the undertaking which was on 03-01-2006 in the instant case.
(x) That under e-filing of return, the hard copy of audit report cannot be filed and therefore objection of AO is not valid. The audit report in the prescribed form was filed during assessment proceedings.
16. The Ld. CIT(A) after hearing the submissions of Ld. AR held that the assessee was eligible for deduction u/s 10B of the Act. The relevant portion of Ld. CIT(A order is reproduced below:-
“I have carefully considered the assessment order and the submissions made by the Ld. AR on this issue. As per the facts mentioned above, the appellant company was given approval as an STPI unit on 03-01-2006 and has carried out the business of development/manufacture and export of computer software/IT enabled services from 01-02-2006. Therefore, based on the CBDT circular no.1/2005 dated 06-01-2005 and the details filed by the appellant which were also filed at the assessment stage, the appellant company qualified as an eligible unit for exemption u/s 10B w.e.f. 01-02-2006. In this regard, the Ld. AR had filed profit and loss account for two periods, viz. 01-04-2005 to 31-01-2006 and 01-02-2006 to 31-03-2006 before the AO at the assessment stage, copies of which are also filed during the appellate proceedings. As per this, the appellant has shown to have made a net loss of Rs. 47,62,847/- during the period 01-04-2005 to 31-01-2006 and a net profit of Rs. 77,23,779/- during the period from 01-02-2006 to 31-03-2006. I find that these figures of profit have been worked out without deducting the depreciation as per I.T. Act, which needs to be done to arrive at the correct figure of profit. The AO is, therefore, directed to carefully verify the said computation with regard to their accuracy and authenticity and allow exemption u/s 10B on the profits, if any derived for the period 01-02-2006 to 31-03-2006 as per law. The exemption u/s 10B, if any, to be allowed after the above verification by the AO, cannot in any case exceed Rs. 3,45,010/- which was the original claim of the assessee as per the return of income and grounds of appeal.
17. Aggrieved the assessee has filed appeal before us.
Ground No. 1 & 2:
18. The Ld DR, at the outset, argued that assessee was neither owner of property nor any tenancy rights were available with the assessee as the lease agreement was executed only after the close of previous year i.e. 31st March, 2006 and therefore the assessee was not eligible for depreciation.
19. On the other hand, Ld AR argued that explanation1 to section 32 clearly states that where the business or profession of the assessee is carried out from a building not owned by it but it holds lease or other right of occupancy, the depreciation on any renovation or interior work can be claimed. He further submitted that property belongs to family members of one of the directors so there was oral understanding between them and therefore renovation was started before execution of the lease deed.
20. In his rejoinder, the Ld Dr submitted that no document of right to occupancy was filed before the Ld Assessing Officer.
21. We have heard the rival submissions of both the parties and have gone through the material available on record. From the facts of the case, we find that Mrs. Radhika Sehgal, the land lady and Mr. Mukesh Sehgal director of the company traveled together to India. In fact, as per argument of Ld AR that they are close relatives. Therefore, it can be said that there was oral understanding between them for lease of the above building. Moreover, the various licenses issued by various authorities like Customs Department STPI had given licenses with the same property as its address. Moreover, business was also started from the same premises before 31st March, 2006. Therefore, we do not see any reason to interfere in the order of Ld CIT(A).
22. In view of the above, ground No. 1 & 2 of appeals are decided in favour of the assessee.
23. The Ld DR argued that travel expenses were incurred before setting up of 100% EOU. Moreover, the assessee did not produce any documentary evidence to show that expenses were incurred wholly and exclusively for the company and therefore the Assessing Officer had rightly made the addition.
24. Ld AR, on the other hand, argued that expenses were incurred in connection with completion of various formalities which were required for execution of business plans of the assessee and moreover, Mr. Mukesh Sehgal was a director of the company and he was one of the persons who could have completed formalities and therefore he pleaded that expenditure were genuine business expenditure and was incurred wholly and exclusively for the purpose of business of assessee.
25. We have heard the rival submissions of both the parties and have gone through the material available on record. We find that Mr. Mukesh Shegal was one of the first director of the company and he had traveled to India for completion of various formalities for getting various approvals. As per Memorandum & Articles of Association there are three first directors and one of the directors is a lady director and rest of two are made directors including Mr. Mukesh Sehgal. Generally, in a company minimum two directors are required for holding Board meeting to consider and arrive at various decisions. Therefore, there is every possibility that traveling expenses incurred by assessee on the travel of its director were to enable him to attend Board meetings and to file various documents before various authorities. Therefore, we hold that traveling expenses incurred by Mr. Mukesh Sehgal were genuine business expenditure of the company. In view of the above, we do not see any reason to interfere in the order of Ld CIT(A).
26. In view of the above, the ground No. 3 is decided in favour of the assessee.
Ground No. 4:
27. The Ld DR argued that the Assessing Officer had rightly disallowed the exemption u/s 10B of the Act as the assessee had not filed prescribed audit report and had got software developed from outside. He further argued that assessee had not filed certified copies of invoices.
28. On the other hand, Ld AR argued that assessee is entitled to exemption u/s 10B of the Act from the previous year in which the undertaking begins to manufacture or produce computer software. He further argued that assessee had claimed exemption only for the period from which its registration was done under STPI Scheme. He further argued that prescribed audit report was not filed because the return was filed electronically. However, the same was filed during assessment proceedings. Regarding filing of certified copies of invoices, ld AR argued that up to 25000 US$ there was no requirement of certification and in the case of assessee each invoice was less than 25000 US$.
29. We have heard the rival submissions of both the parties and have gone through the material available on record. We find that assessee had claimed exemption for the profits only from 1.2.2006 to 31.3.2006 and all the conditions for availment of exemption u/s 10B of the Act were complied. Therefore, we do not see any reason to interfere in the order of Ld CIT(A). Ground No. 4 is also decided in favour of assessee.
30. In the above, the appeal filed by the revenue is dismissed.
31. Order pronounced in the open court on the 20th day of July, 2012.