Ita/700/2009 Of The Commissioner Of Income Tax v. M/S Hma Data Systems P Ltd

1 IN THE HIGH COURT OF KARNATAKA, BENGALURU|DATED THIS THE 26 DAY OF JUNE, 20109_ PRESENT THR HON'BLE MR. JUSTICK MOHAN M SHANTANAGOUDAR ANT) THR HON’BLE MR. JUSTICK ARAVIND KUMAR. ITA NO.700/2009C/WITA NO. 684/2009 ITA NO.700/2009 BETWEEN: 1.THERE COMMISSIONER OF INCOME TAX C.R. BUILDING QUEENS ROAD,BANGALORE.BANGALORE. |THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-11(4)QUEENS ROAD,BANGALORE._ APPBLLANTSQUEENS ROAD,BANGALORE._ APPBLLANTS (BY SRI. K.V. ARAVIND, STANDING COUNSEL) AND: M/S HMA DATA SYSTEMS PVT. LTD.,G-O1, RIO GRANADE, 2 NO.7/3, BRUNTON ROAD,BANGALORE-560 OO1. ~ RESPONDENT. (BY SRI A. SHANKAR AND SRI M LAVA, ADVOCATES) ITA 700/2009 IS FILED UNDER SECTION 260A OF)INCOME TAX ACT, 1961, PRAYING TO FORMULATE THESUBSTANTIAL QUESTIONS OF LAW STATED THEREIN ANDALLOW THE APPEAL AND SEI ASIDE THE ORDER PASSEDBY THE ITAT, BANGALORE IN ITA NO.1194/BNG/2009,DATED 29.05.2009 AND CONFIRM THE ORDER OF THEAPPBLLATKR COMMISSIONBR CONFIRMING THR ORDERPASSHKHD BY THR DEBEPUTY COMMISSIONBR OF [NCTAX, CIRCLE-11(4), BANGALORE. | ITA NO. 684/2009 BETWEEN: M/S HMA DATA SYSTEMS P.LTD.,REP. BY [ITS MANAGING DIRECTORSRI. HARISH K.MURTHYG-O1, RIO GRANADE,NO.7/3, BRUNTON ROAD, BANGALORE-560 OO1._ APPELLANT (BY SRI A. SHANKAR AND SRI. M LAVA, ADVOCATES) AND: THR DEPUTY COMMISSIONEROF INCOME TAX,CIRCLE-11(4)QUEENS ROAD,BANGALORE-560 OO1.RESPONDENT (BY SRI. K.V. ARAVIND, STANDING COUNSEL) ITA 6384/2009 IS FILED UNDER SECTION 260A OFINCOME TAX ACT, 1961, PRAYING TO FORMULATE THESUBSTANTIAL QUESTIONS OF LAW STATED THEREIN ANDALLOW THR APPBAL AND SBT ASIDE THR ORDER PASSEDBY THE ITAT, BANGALORE IN ITA NO.11954/BNG/2009,DATED 29.05.2009. THESE APPEALS BEING HEARD AND RESERVED,|COMING ON FOR PRONOUNCEMENT OF JUDGMENT THISDAY,ARAVIND KUMAR J.,DBLIVBRED THR FOLLOWING: JUDGMENT These two appeals have been preferred by theRevenue and the assessee respectively being aggrieved|by the order passed by Income Tax Appellate Tribunal,Bangalore Bench in ITA No.11594/Bang/2009 dated29.05.2009 whereunder the Tribunal has held: *A+income earned on the sale of 50,000equity shares of M/s.Diebold HMA Pvt.Ltd., was liable to be brought to taxunder the head “Capital gains” and notas “income from business” as held bythe assessing officer; 4. *AA+ travelexpenditure,professional charges andotherCXPCTISCGinconnection with sale of said shares hadnexus to such sale; and *AAA+ amount paid towards legal charges inrespect of such sale was allowed by theCIT(A) was correct. ? _This Court has admitted both the appeals on24.09.2010 and 27.10.2009 respectively to consider the.following substantial questions of law: 1.ITA 7700/2009 *A+“Whether the Appellate Authorities|were correct in holding that the|income of Rs.21,55,47,800/- earned|on the sale of 50,000 equity shares|of M/s.Diebold HMA P. Ltd., was|liable to be brought to tax under the)head “capital gains” and not “income|from business” as held by _ thAssessing|Officerdespitetheassessee increasing the profit and)were correct in holding that the|income of Rs.21,55,47,800/- earned|on the sale of 50,000 equity shares|of M/s.Diebold HMA P. Ltd., was|liable to be brought to tax under the)head “capital gains” and not “income|from business” as held by _ thAssessing|Officerdespitetheassessee increasing the profit and) loss account in respect of the value|ot the shares for each assessment|year from the date of purchase 1.e.,|assessment year 1992-93? 1.ITA 7700/2009 *A+“Whether the Appellate Authorities|were correct in holding that the|income of Rs.21,55,47,800/- earned|on the sale of 50,000 equity shares|of M/s.Diebold HMA P. Ltd., was|liable to be brought to tax under the)head “capital gains” and not “income|from business” as held by _ thAssessing|Officerdespitetheassessee increasing the profit and)were correct in holding that the|income of Rs.21,55,47,800/- earned|on the sale of 50,000 equity shares|of M/s.Diebold HMA P. Ltd., was|liable to be brought to tax under the)head “capital gains” and not “income|from business” as held by _ thAssessing|Officerdespitetheassessee increasing the profit and) loss account in respect of the value|ot the shares for each assessment|year from the date of purchase 1.e.,|assessment year 1992-93? *AA+Whether the Appellate Authorities|were correct in not taking into|consideration|thefact|that.theASSESSEEhadclaimedtravelexpenditure, professional charges and other expenses in connection|with sale of M/s.Diebold HMA PP.Ltd., shares and especially when the|assessee had no other business|income|duringthecurrent|assessment year?were correct in not taking into|consideration|thefact|that.theASSESSEEhadclaimedtravelexpenditure, professional charges and other expenses in connection|with sale of M/s.Diebold HMA PP.Ltd., shares and especially when the|assessee had no other business|income|duringthecurrent|assessment year? *AAA+Whether the sum of Rs.24,93,800/-|paid to M/s.Amarchand Mangaldas|towards legal charges in respect of|sale of M/s.Diebold HMA P. Ltd.,|shares is llable to be deducted from|the sale value when computing|capital gains tax when the actualpayment accrued and was paid in|the earlier assessment year 2003-04|and allowing the claim during the|Current,assessment|YCalrwoulddistort the profits of the current|year?”paid to M/s.Amarchand Mangaldas|towards legal charges in respect of|sale of M/s.Diebold HMA P. Ltd.,|shares is llable to be deducted from|the sale value when computing|capital gains tax when the actualpayment accrued and was paid in|the earlier assessment year 2003-04|and allowing the claim during the|Current,assessment|YCalrwoulddistort the profits of the current|year?” 2.ITA 684/2009: *A+“Whether the Tribunal was justified|in law in holding that the appellant, 6| is not entitled to the deduction on|account of technical support charges|on the facts and circumstance of the|case? *AA+Whether the Tribunal was justified in|lawdisallowing|theexpenditure relating to Travel by the executive for|the purpose of business on the facts|and circumstance ot the case?lawdisallowing|theexpenditure relating to Travel by the executive for|the purpose of business on the facts|and circumstance ot the case? *AAA+Whether the Tribunal was justified in|holding that accrual of income is the|precondition for allowing expenditureon the tacts and circumstances otfthe case?”holding that accrual of income is the|precondition for allowing expenditureon the tacts and circumstances otfthe case?” 3. Facts in brief which has led to filing of these| appeals are as under: Assessee is a _ private limited companyengaged in the development of software as well as|manufacture and sale of equipments and maintenance.For the assessment year 2004-05 return of income|came to be filed declaring its total income at|V3,/0,66,090/-. The assessing officer after issuingnotice under section 143(2) after selecting the return for| *AAA+Whether the Tribunal was justified in|holding that accrual of income is the|precondition for allowing expenditureon the tacts and circumstances otfthe case?”holding that accrual of income is the|precondition for allowing expenditureon the tacts and circumstances otfthe case?” 3. Facts in brief which has led to filing of these| appeals are as under: Assessee is a _ private limited companyengaged in the development of software as well as|manufacture and sale of equipments and maintenance.For the assessment year 2004-05 return of income|came to be filed declaring its total income at|V3,/0,66,090/-. The assessing officer after issuingnotice under section 143(2) after selecting the return for| scrutiny has proceeded to frame the assessment order|under Section 143(3) by order dated 22.12.2006,|whereunder disallowances to the tune ofV2,607,85,610/-was made. During the previous year relevant to the|assessment year, assessee sold 090,000 shares ofM/s.Diebold HMA Pvt. Ltd., said to have been acquired|by it during the year 1992-93 for a total consideration ofV21,99,47,800/- and declared a long term capital gainot “20,91,66,634/- in its return of income. However,the assessee was denied the benefit of long term capital|gain arising from such sale of shares on the ground thatthe assessee had been debiting its profit and loss|account with decrease or increase in the value otfinvestments and as such it should be treated as incomefrom business’. It was also noticed by the assessing|officer that professional charges of=1,19,09,768/-.debited to profit and loss account is to be disallowed to an extent oft=24,93,800/- on the ground that such| professional charges related to sale of shares and the|payment relating to this expenditure had been made in|the year 2002-03 but accounted to in the assessment|year 2004-05. Hence, assessing officer came to a|conclusion that payment was made outside the books ofaccounts and accordingly disallowed the claim for|deduction|TO|theexten.|indicatedhereinabove.However, CIT (A) held such payment had been reflected|as advance (pre-paid professional-charges) in that year|and it cannot be allowed while computing business|income, but it has to be allowed in computing the long|term capital gains, since assessee had incurred|expenditure in sale of Diebold HMA shares and sameis |to be allowed in computing long term capital gains as|claimed by assessee and his finding came to be affirmedby Tribunal. Further, assessing officer also disallowed a|sum otf“a18,55,/56/- claimed by the assessee as.expenditure relating to abroad travel by the company’s| Managing Director and his wife on the ground that therewas no business activity justifying their foreign travel|for business purposes. A sum of“a94,74,184/- claimedby the appellant as technical support charges’ paid|towards promotion of products and services in North|America was also disallowed on the ground that the|agreement relating to this activity had not been put intopractice which came to be affirmed by CIT (A) and|Tribunal. 4Thus, revenue being aggrieved by the order)of the Tribunal which affirmed the finding of CIT{(A)insofar as treating the receipt of the amount by the|assessee insofar as sale of shares as ‘capital asset’ and|allowance of the legal fee paid by the assessee as|professional fee to be allowed while computing the long|term capital gains as claimed by the assessee which|finding has been affirmed by the Tribunal has been| questioned by the revenue in ITA No./700/2009. The)assessee being aggrieved by the finding of the assessing|officer who disallowed the expenditure relating to|foreign travel by the Managing Director and his wife anddisallowing the amount paid by the assessee as|technical support charges’ to professionals on the|sround that such activity had not been put into practicecame to be affirmed both by the CIT (A) as well as|Tribunal and as such, the assessee has preferred ITA|No.684/2009. | 5Wehaveheard thelearnedadvocates appearing for the parties and perused the orders passedby the Tribunal, CIT(A) and the assessing officer. | questioned by the revenue in ITA No./700/2009. The)assessee being aggrieved by the finding of the assessing|officer who disallowed the expenditure relating to|foreign travel by the Managing Director and his wife anddisallowing the amount paid by the assessee as|technical support charges’ to professionals on the|sround that such activity had not been put into practicecame to be affirmed both by the CIT (A) as well as|Tribunal and as such, the assessee has preferred ITA|No.684/2009. | 5Wehaveheard thelearnedadvocates appearing for the parties and perused the orders passedby the Tribunal, CIT(A) and the assessing officer. | 6.It is the contention of Sri K.V.Aravind,|learned Advocate appearing for the revenue that the|appellate authorities committed an error in holding that|income earned by the assessee on sale of 50,000 equity| shares to be brought under the head “Capital Gains”|and not “Income from Business” though assessee had|increased the profit and loss account in respect of the|value of shares for each assessment year from the date|of purchase of shares namely, from 1992-93. He would)also contend that the amount paid towards legal)charges was liable to be deducted from the sale value.when computing capital gains tax when the actual|paymentaccruedandWaspaidintheearlierassessment year 2003-04 and allowing the claim during|current assessment year would distort the profits of thecurrent year and contends non-consideration of this)aspect by the appellate authorities have resulted in)erroneous order being passed. Hence, he prays for)answering the substantial questions of law in favour of)the revenue. 12| TSPer contra, Sri A.Shankar, learned Advocate|appearing on behalf of assessee would support the order|of the Tribunal insofar as it has rejected the claim of therevenue and he would contend that the authorities|erred in disallowing the traveling expenses incurred by|the assessee and merely because there was no businessactivity, per se would not indicate that there was no|business activity by the assessee. He would also|elaboratehissubmission|bycontendingthat.professional charges paid to H.M.A.8., an American|based company was on the basis of contract entered|into by the assessee with the said Firm to render|professional services in the form of market input and_other issues as detailed in the contract and accordingly,as per the contractual term, a sum of $1,00,000 was to be paid as upfront amount and accordingly, it was paid.Non-consideration of said plea of the assessee in this|perspective has resulted in great injustice to the| 10| assessee and hence, he prays for substantial questions|of law being answered in favour of the assessee as|formulated in ITA No.684/2009 and he would also pray|for dismissal of the appeal filed by the revenue. 8.RE:FIN DINGONSUBSTANTIAL|QUESTION OF LAW NO.(1) FORMULATED IN ITA)NO.700/2009. At the cost of repetition, it is noticed that assesseehad purchased 950,000/- shares of M/s.Diebold HMAPrivate Limited during the year 1992-93 and sold the|same during the previous year relevant to. theassessment year 2004-05 for a total consideration of=21,95,47,800/- and declared a long term capital gainot=20,91,66,634/- in its return of income. The|assessing Officer denied the benefit of long term capital|gains and held that it should be treated as ‘income frombusiness’. The CIT(A) has noticed that the balance|sheet along with its enclosures of the earlier 2-3 years, 8.RE:FIN DINGONSUBSTANTIAL|QUESTION OF LAW NO.(1) FORMULATED IN ITA)NO.700/2009. At the cost of repetition, it is noticed that assesseehad purchased 950,000/- shares of M/s.Diebold HMAPrivate Limited during the year 1992-93 and sold the|same during the previous year relevant to. theassessment year 2004-05 for a total consideration of=21,95,47,800/- and declared a long term capital gainot=20,91,66,634/- in its return of income. The|assessing Officer denied the benefit of long term capital|gains and held that it should be treated as ‘income frombusiness’. The CIT(A) has noticed that the balance|sheet along with its enclosures of the earlier 2-3 years, assessee has been showing the value of the shares of|Diebold HMA Private Limited at Rs.50,00,000/- and hasnever claimed diminution. It is also noticed by the CIT|(A) that claim for diminution/increase in valuation in|respect of other shares had not been allowed by the|assessing Officer and the assessee had accepted the|same. It has been held that observation made by the|assessing Officer to the effect “assessee has been in the|business of purchase and sale of investments year after|year and has been debiting the P & L A/c with increaseor decrease in the value of investments under the head|‘revaluation of investments’ , is far from the facts. In|that view of the matter, we are not inclined to accept thecontention ot the revenue and we are of the considered|view that the finding recorded by the CIT (A) which hassince been affirmed is a question of fact. Hence,|substantial question of law No.(1) is answered in the|affirmative. 15| OQ RE: SUBSTANTIAL QUESTION OF LAW)NO.(2) IN ITA No.700/2009 AND SUBSTANTIALQUESTIONS OF LAW NOS.(1) AND (2) IN ITANO.684/2009: The assessee had claimed a sum ot=33,86,284/-|as expenditure relating to travel abroad by the,company’s Managing Director (Sri Harish K Murthy) and)his wife (Smt.Asha Murthy). A sum of,=18,99,/96/-came to be disallowed by the assessing Officer on the)ground that there was no business activities in these)years and no explanation was forthcoming to establish|the nexus of travel to that of business purpose.Undisputedly, before the assessing Officer as well as.before the CIT(A), assessee could not substantiate the)claim by producing cogent evidence with regard to)expenditure incurred towards the Director’s foreign|travel to the extent of disallowance made by theassessing Officer. The assessee had not discharged the)burden cast on it by furnishing the details like the) business visa, at whose invitation the business trip washeld, proof of any meetings abroad and the details alike.In that view of the matter, the order of assessing Officer|as affirmed by the lower appellate authorities cannot befound fault with. In that view of the matter, we are of|the considered view that disallowance made by the|assessing Officer insofar as foreign travel expenditure isconcerned, requires to be affirmed by holding that the|appellate authorities were correct in affirming the|findings of the assessing Officer. | 10.The assessing Officer disallowed a sum of|=94,74,184/- claimed by the assessee as_ technicalSupport charges towards promotion of products and_services in North America on the ground that there wasno business activities and the agreement on which the|assessee based its claim was an agreement which was|not put into practice. This finding of the assessing| 10.The assessing Officer disallowed a sum of|=94,74,184/- claimed by the assessee as_ technicalSupport charges towards promotion of products and_services in North America on the ground that there wasno business activities and the agreement on which the|assessee based its claim was an agreement which was|not put into practice. This finding of the assessing| Officer came to be affirmed by CIT(A) as well as by the|Tribunal. The assessee made payment of $1,00,000 on|14.07.2003 and $1,06,000 on 02.12.2003 based on an|agreement dated 01.07.2003 contending interalia that|such payment was made as per Clause (6) of the|agreement and the recipient namely, HMAS was|required to render professional services in the form of|furnishing market input and other issues as detailed in|the contract. Undisputedly, assessee did not place any|material to show as to the actual implementation of the|contract and the report which the consultant HMAS hadto furnish to the assessee and as such, in the absence|of any commercial expediency of incurring such|expenditure, the disallowance was sustained by both|the appellate authorities. It cannot be gainsaid by the|assessee that even in the absence of any evidence, the|claim ought to have been allowed. The mere existence|of a technical agreement with HMAS was not sufficient| and there being no business activity in the year under|consideration, the burden was on the assessee to prove|the business expediency to claim expenditure. Hence,|all the authorities were justified in disallowing the claimor holding that the assessee is not entitled to the|deduction. Accordingly, the questions of law are|answered in the affirmative. | ll.RE:SUBSTANTIAL QUESTION OF LAWNO.(3) IN ITA NO.'700/2009 AND ITA NO.684/ 200 TheaSSCSSCEEalsoclaimed|expenditureotV1,19,09,768/- towards professional charges. Out ofthis, the assessing Officer disallowed the assessee’s|claim for deduction of payment of“24,93,800/- andSame was set aside by the CIT(A) on the ground that|there was misinterpretation by the assessing Officer inrespect of payment of professional fees to the legal|advisers and the assessee who had made the payment|in financial year 2002-03, it has been reflected as| advance (pre-paid professional charges). Hence, same|was ordered to be allowed in its entirety namely, to the|extent claimed by the assessee. 12.The Tribunal has rightly noticed that the.exercise undertaken by the assessee in the book is to|transfer the same from pre-paid professional charges to professional charges account and held that in the year|under consideration, expenditure took place and|accounted for in the books. Hence, the Tribunal found|that the allowance made by the CIT(A) was in|connection with the transfer of shares and hence, it is|to be computed in the income from the long term capitalgains and cannot be allowed while computing the|business income. The said finding of fact by the|authorities does not give rise to the substantial questionof law for being answered in favour of the assessee. Assuch, the same is answered in the affirmative. 13,For the reasons aforestated, we proceed to|pass the following: ORDER| (I)ITA No.700/2009 and ITA No.684/2009 are|hereby dismissed. (II)Order dated 29.05.2009 passed by Income Tax Appellate Tribunal, Bangalore Bench in| ITA No.11954/Bang/2009 is hereby affirmed. (IIT)The|substantialquestionsotlawaTe€answered as indicated hereinabove.answered as indicated hereinabove. (IV)No order as to costs. Sd/-| JUDGE Sd/-. JUDGE SBN/sp-