In the present case, we are of the opinion that even if the websites had materialized, the expenditure could not have been viewed as capital expenditure because the website is put up for the purposes of day-to-day running of the business and even if one were to view that some enduring benefit is obtained by the assessee, the benefit cannot be said to accrue to the assessee in the capital field. A website is something where full information about the assessee’s business is given and it helps the assessee’s customers in dealing with it. A website constantly needs updating, otherwise it may become obsolete. It helps in the smooth and efficient running of the day-to-day business. The expenditure would have been allowable as revenue expenditure; as a corollary, when the website did not materialize, the amounts advanced to the companies who were engaged to develop the websites, when they became irrecoverable, can be written off and claimed as loss incidental to the business. The loss is thus allowable as business loss in terms of section 28 of the Act. We accordingly uphold the assessee’s alternative plea.
Deputy Commissioner of Income Tax Vs M/s Edelweiss Capital Ltd.
I T A No: 3971/Mum/2009 (Assessment Year: 2005- 06)
Income Tax Appellate Tribunal
O R D E R
R V EASWAR, PRESIDENT:
1. This is an appeal by the revenue and it relates to the assessment year 2005-06. The assessee is a company engaged in investment banking and dealing and investing in securities. The appeal arises out of the assessment made on 20th December 2007 under section 143(3) of the Income Tax Act, 1961.
2. The first ground is that the CIT(A) erred in deleting the addition of Rs. 27,97,170/- made on account of bad debts. The brief facts in this connection may be noted. In the Profit and Loss Account for the year, the assessee wrote off the bad debts. In the course of the assessment proceedings the assessee was asked to justify the claim. The assessee replied that since the net worth of the debtors was eroded because of huge losses, there was little chance of recovery and, therefore, the assessee decided to write off the debts. This explanation was not acceptable to the Assessing Officer. According to him, the assessee fell short of establishing the debts to have become bad. He was of the view that except the unilateral act of the assessee to write off the debts in its books of account, no case had been made out to regard the debts as irrecoverable. He therefore disallowed the same.
3. The assessee questioned the decision of the Assessing Officer before the CIT(A). In the course of the arguments before him the assessee submitted, inter alia, that the write off of the amount should be allowed as loss arising out of and incidental to the trade under section 28 / 29 of the Income Tax Act, 1961. This submission is seen noted in para 6(ii) of the order of the CIT(A). The assessee also cited the following judgments in support of its plea that the write off should be allowed as business loss: –
(1) CIT vs. S C Kothari (1971) 82 ITR 794 (SC)
(2) Cit VS. Anjani Kumar Co. Ltd. (2003) 259 ITR 114 (Raj) (3) Minda (HUF) Ltd. vs. JCIT (2006) 101 ITD 191 (Del)
These authorities are seen noted at page 6 of the impugned order. The CIT(A) thereafter discussed each and every debt aggregating to Rs. 27,97,1 70/- and held that in view of the judgment of the Hon’ble Bombay High Court in the case of Director of Income Tax (International Taxation) vs. Oman International Bank (2009) 313 ITR 128 (Bom), the bad debts written off in the case of Icleo.Com Limited (Rs. 22,21 ,800/-) and in respect of Indiaport.Com (Rs. 5,00,000/-) should be allowed as a deduction. The aggregate amount allowed comes to Rs. 27,21,800/-. The other bad debts aggregating to Rs. 75,370/- were however not allowed as the assessee failed to give any reason for writing off these debts.
4. The revenue has come in appeal questioning the decision of the CIT(A). There is a mistake in the ground. The amount of bad debts actually allowed by the CIT(A) was only Rs. 27,21 ,800/- as noted above. The ground should accordingly read that the CIT(A) erred in deleting the addition of Rs. 27,21 ,800/-. In respect of the balance of Rs. 75,370/-, consisting of three debts, the CIT(A) has actually confirmed the dis allowance. There is no appeal by the assessee.
5. The revenue is in appeal. Its contention that these are not bad debts but are advances made to the two companies for the development of website and, therefore, they cannot be allowed as a bad debt under section 36(1)(vii) of the Act, is well founded. The judgment of the Hon’ble Bombay High Court cited supra relates to a claim of bad debt under the above section. The advances have not been taken into account in computing the assessee’s profits in any of the earlier years or in the relevant accounting year. The primary condition laid down in section 36(2)(i) not having been satisfied, the CIT(A) is not correct in allowing the amount as bad debt on the ground that the assessee has written off the amount in the Profit and Loss Account.
6. The argument of the learned representative for the assessee, however, is that the amount was allowable as business loss under section 28 of the Act and, therefore, the ultimate decision of the CIT(A) should be sustained on the basis of Rule 27 of the ITAT Rules, 1963. Though the assessee is entitled to rely on this Rule, there is no decision of the CIT(A) with respect to the assessee’s alternative submission before him that the write off should be allowed as business loss, though such an alternative plea appears to have been taken before him vide para 6(ii) of his order. The question is whether in the absence of any decision on this alternative plea by the CIT(A), the benefit of Rule 27 can be extended to the assessee. The learned representative for the assessee cited before us the judgment of the Delhi High Court in the case of CIT vs. Edward Keventer (Successors) P. Ltd. (1980) 123 ITR 200 (Del), in which it was held that in such a situation Rule 27 would apply. Reliance is also placed on the judgment of the Hon’ble Bombay High Court in CIT vs. Gilbert & Barker Manufacturing Co., USA (1978) 111 ITR 529 (Bom). In these judgments it has been held that the subject-matter of an appeal should be understood not in a narrow and unrealistic manner but should be so comprehended as to encompass the entire controversy between the parties which is to be adjudicated upon by the Tribunal. The Hon’ble Justice S Ranganathan, speaking for the Delhi High Court observed that:
“But in a case where there are inter-connected grounds of appeal and they have impact on the same subject-matter, the scope of the appeal should be broadly considered in the correct perspective. While the appellant should not be made to suffer and be deprived of the benefit given to him by the lower authority where the other side has not appealed, equally the procedural rules should not be interpreted or applied so as to confer on an appellant a relief to which he cannot be entitled if the points decided in his favour on the same matter by the lower court are also considered as requested by the respondent.”
In the judgment of the Hon’ble Bombay High Court it was held that the Tribunal has the discretion to allow any party to an appeal, whether appellant or respondent, to raise a new point or new contention provided two conditions are satisfied, namely, (i) no new facts are required to be brought on record for disposing of such new point; and (ii) an opportunity is given to the other side to meet the point. In Hukumchand Mills Ltd. vs. CIT (1967) 63 ITR 232 (SC) the Supreme Court held that Rule 27 of the ITAT Rules is not exhaustive of the powers of the Tribunal and is merely procedural in character and does not in any way circumscribe or control the powers of the Tribunal which are couched in widest possible terms under section 254(1) of the Act. It was held that the word “thereon” appearing in the sub-section limits the jurisdiction of the Tribunal to the subject-matter of the appeal. The words “pass such orders thereon as it thinks fit” include all the powers (except possibly the power of enhancement) which are conferred on the first appellate authority under section 250. The subject-matter of the appeal, as noted by Hon’ble Justice Ranganathan in the judgment of the Delhi High Court cited supra is different from the grounds of appeal taken before the Tribunal. In the present case the subject-matter of the appeal is the allowance of the claim for deduction of the amount of Rs. 22,21 ,800/-. It is therefore open to the assessee, as respondent, to support the ultimate decision of the CIT(A) though on a different ground, namely, that it should be allowed properly as business loss. Rule 27 thus cannot come in the way of the assessee putting forth its claim, in the department’s appeal, that the amount should be deducted as business loss. In the light of these judgments, the assessee must be permitted to defend the order of the CIT(A) also on the ground that the amounts written off represented business loss under section 28 / 29 of the Act.
7. Turning to the question of business loss, we have carefully considered the facts and rival contentions. The submission of the department before us is that the amounts paid for development of websites cannot be allowed as business loss because if the websites had been successfully put up, the expenditure would have been clearly capital expenditure. It is submitted that the fact that the websites did not materialize and the idea was abandoned by the assessee cannot convert what would have been capital expenditure into business loss. The facts brought out at page 7 of the impugned order show that an amount of Rs. 50,00,000/- was paid during the period from October 2000 to July 2001 to M/s Icleo.Com Limited for the development of the website. Subsequently also several amounts were advanced and from the ledger account the total advance came to Rs. 22,21 ,800/-. The development of website did not materialize and ultimately the assessee abandoned the idea. The amount was written off in the accounts in January 2005 as bad debt, keeping in view the financial position of the above company. A Resolution of the Board of Directors was passed to write off the debt. The Profit and Loss Account, Balance Sheet and the Board Resolution were before the CIT(A). Similarly, in the case of India port.Com, the assessee had advanced Rs. 5,00,000/- in the year 2000 for the development of website. Ultimately the idea was abandoned but the assessee’s efforts to recover the money by sending several reminders did not yield any result. In this case also the Board considered the matter and taking into account the financial position of the above company, resolved to write off the advance. The orders of the income tax authorities thus show that all the facts which were necessary for the adjudication of the assessee’s claim that the amount should be allowed as business loss were before them. It was on those very facts that the assessee had unsuccessfully claimed for allowance of the amount as bad debt. On those very facts it had put forth the alternative claim before the CIT(A). Since the CIT(A) had allowed the claim as bad debt, he had no occasion to adjudicate upon the alternative claim of business loss. That however cannot preclude the assessee – respondent from contending before us, having regard to the judgments cited above, that even if the CIT(A) is wrong in allowing the claim as bad debt, his ultimate decision should be upheld on the ground that the amount represented business loss. As already noted, we have permitted the assessee – respondent to put forth this plea before us since no further facts are required to be found and the department was also given the opportunity of arguing the question of business loss.
8. On merits, the judgment of the Rajasthan High Court in the case of CIT vs. Anjani Kumar Co. Ltd. (supra) supports the assessee’s plea. In this case the assessee intended to acquire agricultural land to set up a boiler factory and made advances to the agriculturists for purchase of the land. The project did not materialize. The agriculturists however refused to refund the advances. The assessee filed the suit but lost it. The amounts were written off in its books of account and were claimed as revenue loss. The Rajasthan High Court held that in these circumstances no capital asset has been acquired and, therefore, irrecoverable advances were to be allowed as business loss. This judgment of the High Court has been applied by the Mumbai Bench of the Tribunal in its order dated 28th January 2010, in ITA No: 6847/Mum/2008, in the case of M/s Pik Pen Private Limited vs. ITO. There advances were made for the purchase of machinery, which was not supplied. The assessee wrote off the advances and claimed deduction as revenue expenditure, which claim was allowed by the Tribunal. In the present case, we are of the opinion that even if the websites had materialized, the expenditure could not have been viewed as capital expenditure because the website is put up for the purposes of day-to-day running of the business and even if one were to view that some enduring benefit is obtained by the assessee, the benefit cannot be said to accrue to the assessee in the capital field. A website is something where full information about the assessee’s business is given and it helps the assessee’s customers in dealing with it. A website constantly needs updating, otherwise it may become obsolete. It helps in the smooth and efficient running of the day-to-day business. The expenditure would have been allowable as revenue expenditure; as a corollary, when the website did not materialize, the amounts advanced to the companies who were engaged to develop the websites, when they became irrecoverable, can be written off and claimed as loss incidental to the business. The loss is thus allowable as business loss in terms of section 28 of the Act. We accordingly uphold the assessee’s alternative plea. In the result, the ultimate decision of the CIT(A) is upheld, though not as a valid claim of bad debt but on grounds of business loss. The appeal of the department is accordingly dismissed.
Order pronounced in the Open Court on 15th February 2011. Sd/-