Income Tax Appellate Tribunal - AhmedabadJupiter Corporate Services Ltd.,, ... vs Department Of Income Tax on 24 July, 2009IN THE INCOME_TAX APPELLATE TRIBUNAL "B" BENCH,
                              AHMEDABAD

          BEFORE SHRI T.K.SHARMA AND SHRI D.C.AGRAWAL



                         ITA No.1187/Ahd/2005
                      (Assessment Year : 2001-02)
The ACIT, Cir-4, Ahmedabad.     Vs Jupiter Corporate Services Ltd.,
                                    Ambuja Tower, Opp: Memnagar
                                    Fire Station, P.O. Navjivan,
                                    Ahmedabad.

           (Appellant)                          (Respondent)

                   Appellant by : Shri D,S,Chaudhary, D.R.
                Respondent by : Shri Tushar Hemani, A.R.

                             (आदे श)/ORDER
                                   )/

PER AGRAWAL, AM:This is an appeal filed by the Revenue raising following grounds:1.     The Ld. CIT(A) has erred in law and on facts of the case in
            deleting addition of Rs.3847939/- made by the A.O. on
            account of capitalization of expenditure related to site and
            portal development.2.     The Ld. CIT(A) has erred in law and on facts of the case in
            deleting addition of Rs.8342846/- made by way of
            disallowance of interest expenses for making advances to one
            of the directors without appreciating the fact that so far as
            relevant assessment year is concerned the interest liability of
            assessee has gone up due to such advance.3. The Ld. CIT(A) has erred in law and on facts of the case in
        deleting the addition made by way of disallowance of interest u/s
        14A of the Act disregarding the fact that the assessee failed to
        substantiate that only interest free funds had been used for
        making investment in shares/mutual funds and therefore, A.O.
        was justified in considering the funds as mixed.22.    The facts of the case are that assessee company is engaged in the
business of corporate consultancy, financing, software development and
share transfer agency. The first issue relates to deleting an addition of
Rs.38,47,939/- being the expenditure relating to lease rent charges,
traveling, stationery, professional charges, advertisement and port
development charges. During the assessment proceedings, the Assessing
Officer found that assessee (JCS) had entered into an agreement with
Vishwa Gujarati Sangh (VGS in short) for development of the site on their
behalf for which these expenses were incurred. The Assessing Officer did
not accept the claim of the assessee that it is a revenue expenditure but
held it to be the capital expenditure for the following reasons:1.    The assessee has acquired enduring advantage by developing
            site and acquiring exclusive rights for the connection of lease
            lines and related expenses.2.    Acquiring access to lease lines, domain names are right of
            enduring nature.3.    Expenditure incurred on portal development is an asset of
            enduring nature4.    The lease line charges, interest, secured fees, and domain
            name    charges    etc.   are   paid   as   per   pre-determined
            agreement. No TDS has been deducted on the payments so
            made.3.    Before the ld. CIT(A) it was submitted that revenue generated from
the use of website was to be divided in the ratio of 70% with the
assessee company and 30% with VGS as per clause 5 of the agreement
between JCS and VGS Ownership of the website rested with VGS and
right over technical know-how     vested with the assessee company. The
ld. CIT(A) decided in favour of the assessee on the ground that ownership
of the portal did not vest with the assessee and expenditure was incurred3by the assessee for earning revenue from members who would visit the
site. According to him, the expenditure was incurred for making the
website functional and for promoting and enrolling new members. Against
this, the ld. D.R. submitted that the asset so created was to be divided
between the assessee and VGS in the sense that right over technical
know-how would vest with the assessee, therefore, a part of the
expenditure certainly would be capital. Against this, the ld. A.R.
submitted that the expenditure incurred on development of portal is
Revenue expenditure as held in DCIT v. Core Health Care Ltd. (2009) 308
ITR 263 (Guj.) wherein it is held that nature of advantage has to be
considered in a commercial sense and role of enduring benefit will not be
a conclusive test and could not be applied blindly. He submitted that
assessee is already in the business of development of software and
development of portal is nothing but a software used by various persons
visiting the site. The assessee did not get any ownership right over the
portal, therefore, it could not be held to be a capital expenditure.4.    We have heard the rival submissions and perused the material on
record. The undisputed facts are that the assessee is already in the
business of development of software and portals sites and earning
revenue therefrom. In the present case, the assessee has incurred
expenditure on lease rental, traveling, stationery, professional charges,
advertisements etc. for developing portal, right over which is transferred
to VGS as per agreement with them and in lieu thereof 70% of revenue
would come to coffers of the assessee. Once, the assessee is in the
business of developing software and portals then development of the
portal for VGS would only be an extension or a part of the existing
business of the assessee. Therefore, expenditure incurred thereon would
only be of revenue in nature. The Hon'ble Supreme Court in the case of
DCIT v. Alkali Chemicals Ltd. (2008) 299 ITR 85(SC) held that where4expenditure is incurred for the extension of its business activities, it
would be allowable u/s 37(1).Similar view was held by the Hon'ble Delhi
High Court inCIT v. Usha Iron and Ferro Metal Corporation(2008) 296
ITR 14)(Del.).The Hon'ble Supreme Court in Veecunsees v. CIT (1996)
220 ITR 185 (SC) held that expenditure incurred in connection with the
existing business would be revenue expenditure. In that case, loan was
obtained for running a cinema theatre though assessee was in the
business of jewellery. It was held that it was a composite business and,
therefore, interest paid on such loan would be allowable.The Hon'ble
Supreme Court inCIT v. Madras Auto Services Pvt. Ltd.(1998) 233 ITR
468 laid down general principles in determining whether a part of
expenditure is capital or revenue in nature. It is held that an expenditure
would be revenue in nature if it is incurred for initiation of the business or
extension of business or for a replacement of equipment. An expenditure
would be capital if it is incurred once for all with a view to bring into
existence an asset for an advantage for enduring benefit of the trade and
further to see whether expenditure was incurred as a part of the fixed
capital or as part of circulating capital. It is clear in the present case that
assessee has not acquired any asset and expenditure was incurred in
connection with the business of the assessee which resulted in revenue
gain from the members who visited the site owned by VGS. Under these
circumstances, expenditure incurred by the assessee could not be said to
be capital in nature.Similar view was held by the Tribunal in Polyplex
Corpn. Ltd. v. ITO (2009) 176 Taxman 56 (MAG) where it is held that
expenditure incurred for development of website to promote various
business activities of the assessee and for display of its information,
products etc., are allowable as revenue expenditure.As a result, this ground of revenue is rejected.5.    The second issue is the liability of interest payment to the director.5The facts are that the Assessing Officer found during the course of
assessment proceedings that a sum of Rs. 2.5 crores was reflected as a
cost of office building purchased as on 31.3.2000. But in a subsequent
year the company classified the office building amount as "loans and
advances" and added back the depreciation claimed on the office building.
On the change of the stand, the assessee explained that a sum of Rs.2.5
crores was given by an earlier company, namely, M/s Juipter Infosoft Ltd.
for acquiring the use of premises at building Sakar-II for business
purposes. This advance was given by Jupiter Infosoft Ltd. when it was not
amalgamated with the assessee company. After amalgamation, the claim
of depreciation which continued to be passed on to the assessee company
was claimed but error was rectified by filing the revised return. Thus an
error had crept in classifying the sum of Rs.2.5 crores as an asset which
is now re-classified as "loans and advances". The Assessing Officer,
however, did not agree with this explanation and held that assessee
company has made advances to one of the directors of the company by
camouflaging it as a security deposit. The company has paid huge
interest on its borrowings to the extent of Rs.83,42,846/-. He also held
that re-classification of fixed assets into "advances" is done with malafide
intention to evade payment of tax. The ld. CIT(A) allowed the claim on
the ground that expenditure of Rs.2.5 crore was incurred out of share
capital raised by Jupiter Infosoft Ltd. and it had no element of cost.6.    We have heard the ld. D.R. and ld. A.R. In our considered view,
there is no case for interference in the order of the ld. CIT(A). The
reasons are that the investment in the property Sakar II was done by
Jupiter Infosoft Ltd. prior to amalgamation and was out of funds raised in
public issue by that company. Later, this company merged with the
assessee resulting in transfer of asset to the present company, Even
though re-classification from "asset" to "loans and advances" may not be6free from doubt but the fact that the investment into the property is
clearly out of interest free funds being the share capital raised by earlier
company. Therefore, question of disallowing interest paid by the present
company does not arise. There is neither any evidence nor any suspicion
that interest bearing funds of the present company have been invested in
interest free advances to the director. Even otherwise, amalgamation of
earlier company with the present company is clearly a business deal and
there is a clear business connection in respect of outstanding amount
against the director. Following the decision of the Hon'ble Supreme Court
inS.A. Builder Ltd. v. CIT(2007) 288 ITR 01 (SC), the interest paid by
the assessee could not be disallowed.As a result, we dismiss the ground of revenue.7.    The last issue is regarding disallowance of interest u/s 14A in
respect of investment in shares/mutual funds yielding dividend income
which is exempt. The facts of the case are that the Assessing Officer
noted that assessee company earned dividend income of Rs.15,23,873/-
and had made investment in shares and securities at Rs.3,55,36,730/-.
The Assessing Officer disallowed proportionate payment of interest at
Rs.13,81,377/- holding that payment of interest in respect of earning
exempted income would be disallowed. It was submitted to the ld. CIT(A)
that investment in shares was made out of share capital and reserves of
M/s GABTL which was engaged in the business of share trading. Prior to
amalgamation neither the GABTL nor the assessee company was engaged
in the business of sale and purchase of the shares. The ld. CIT(A) deleted
the addition by holding that assessee had sufficient interest free funds of
Rs.15.75 crores, therefore, investment into share business amounting to
Rs.3.5 crores could be out of such interest free funds.8.    We have heard the ld. D.R. and ld. A.R. In our considered view,7revenue should have taken a consistent view. The assessee has been
declaring dividend income in earlier year also and no such disallowance
has been made. Rule 8D which provides method for determining amount
of expenditure in relation to income not includible in taxable income is
effective from 24.3.2008. But in the decision of Special Bench inITO v.
Capital Management Pvt. Ltd.(2009) 312 ITR (A.T.) 001, I.T.A.T. Mumbai
Special Bench it is held that this amendment is procedural in nature and
hence   retrospective   and,   therefore,   would   be   applicable   to   past
assessment years also.    Further, this decision would be applicable to a
case where assessee fails to establish a direct nexus between investment
into exempted income and interest free capital available with the
assessee. If it is established that in some earlier years investment in
purchase in shares and securities was made out of interest free funds
available with the assessee and that investment continued to exist in
subsequent years in which dividend income became exempt due to
changes in law then interest paid by the assessee in such subsequent
years on borrowed funds utilized apparently elsewhere for the purposes
of business may not be presumed to have been partly invested in
purchasing or retaining shares and, therefore, a part of the interest
payment would not be disallowable by invoking provisions of sec. 14A.
However, the CIT(A) has made his own calculation and sustained an
addition of Rs.28,678/- against which assessee seems to be not in
appeal. But, legally no case is made out to bring the case u/s 14A as
according to the facts available on record investment in shares was done
by M/s GABTL, a company which later on merged with the assessee
company and investments were taken over by the present assessee.8Therefore, we do not find any justification in the ground raised by
the Revenue. It is accordingly rejected.9.    As a result, appeal filed by the Revenue is dismissed.
The order was pronounced in the open court on 24.7.2009.Sd/-                                Sd/-
            (T.K.SHARMA)                       (D.C.AGRAWAL)
          JUDICIAL MEMBER                   ACCOUNTANT MEMBER

AHMEDABAD, DATED:24.7.2009
PSP*
Copy to:
(1) The assessee
(2)   The Assessing Officer
(3)   The CIT(A) concerned,
(4)   The CIT, concerned,
(5)   The DR, ITAT, Ahmedabad,
(6)   Guard File.


                                    BY ORDER


                    ASSTT. REGISTRAR/ DEPUTY REGISTRAR
                               ITAT, AHMEDABAD BENCHES
                                           AHMEDABAD.