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Income Tax Appellate Tribunal, MUMBAI BENCH “F” MUMBAI
Before: SHRI C.N. PRASAD & SHRI N.K. PRADHAN
ORDER PER N.K. PRADHAN, A.M. This is an appeal filed by the assessee. The relevant assessment year is 2011-12. The appeal is directed against the order of the Commissioner of Income Tax-14, Mumbai [in short ‘CIT(A)’] and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).
The grounds of appeal filed by the assessee read as under :
(a) It is submitted that as per the facts and circumstances of the case, and in law, the assessment to be held bad and illegal as the same is framed in breach of principles of natural justice. (b) On the facts and in the circumstances of the case, the CIT (A) has erred in by disallowing the software expenses of the appellant in question. (c) The CIT(A) has erred and misinterpreted the line of reasoning provided by the appellant at the time of hearing. (d) The CIT(A) has erred in arriving at the judgement that the software expenses are of capital nature and that they provide enduring benefit to the assessee. (e) The CIT(A) has erred in treating revenue expenditure as capital expenditure for expenses which are of routine nature. (f) The CIT(A) has disregarded the decision of the Hon Delhi High Court which had been produced and which is in favour of the appellant. The case provides a roadmap for determining capital and revenue software expenditure and squarely covers the matter of the appellant. (g) The CIT(A) has erred in disregarding the evidence provided to prove that the software expenses incurred is in the nature of application software which is not of perpetual nature and is merely introduced to improve the productivity and improve communication and employee productivity. (h) The amount enhanced by CIT(A) is excessive and not in line with laws of natural justice.
Briefly stated, the facts of the case are that the assessee filed its return of income for the assessment year (AY) 2011-12 on 30.09.2011 Vaarad Ventures Rs.1,16,50,024/-. During the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee has debited software service expenses of Rs.22,01,193/- in its P&L account. In response to a query raised by the AO to explain with evidence as to how these expenses claimed have been incurred exclusively for the purpose of the business, the assessee filed a reply dated 22.01.2014 stating that :
“During the year Rs.20,01,193/- was paid as software expense to Edesh Services Ltd. for server maintenance/website software/service bills for software related bill.” As the assessee failed to explain as to how these expenses claimed have been incurred exclusively for the purpose of business and also as it failed to furnish any bills/vouchers, the AO disallowed the above expenses amounting to Rs.20,01,193/- and added it to the income of the assessee.
In appeal, the CIT(A) vide order dated 14.09.2017 enhanced the addition/disallowance made by the AO to Rs.24,26,600/- on the following reasons :
4.4 Ground no.4 of the appeal is in respect of disallowance of software expenses amounting to Rs.20,01,193/- which were disallowed by the AO because necessary bills and vouchers and other details were not furnished by the appellant before him. There is an error in the assessment order in mentioning the correct amount of expenditure. From the bills submitted by the appellant it is seen that the appellant paid Rs.12,13,300/- (Base price Rs.11,00,000/- and Service tax Rs.1,13,300/-) for Virtual Office Web Application software's Modules. My Company, My communication and My Vaarad Ventures Task and another amount of Rs.12,13,300/- (Base price Rs.11,00,000/- and Service tax Rs.1,13,300/-) for Virtual Office software's Modules. My Attendance, My Leave, My Payroll. Another expenditure of Rs.1,193/- was incurred towards website maintenance. Since the amount of Service tax was separately accounted for by the appellant, total amount of Rs.22,01,193/- was debited to the profit and loss account by the appellant under head 'software expenses'. If we examine the expenditure debited, we find that total amount of Rs.24,26,600/- has been incurred by the appellant for acquisition of new customized softwares. The customized software provides a benefit of enduring nature to the appellant, therefore, I'm of the opinion that the expenditure of Rs.24,26,600/- is required to be capitalized. Bills of the software are dated 31/03/2011 and there is no evidence that the software was put to use during the previous year under consideration, therefore, no depreciation is required to be allowed in the year under consideration. The AO is, however, directed to allow the expenditure of Rs.1,193 incurred by the appellant for maintenance of website. Accordingly, disallowance on account of capitalization of software expenses in enhanced to Rs.24,26,600/-.
Before us, the Ld. counsel for the assessee files an affidavit of the Director of the assessee-company stating that (i) there is an agreement between the appellant and E Desk Services Ltd. dated 04.06.2010, wherein the latter has agreed to provide the software services on yearly basis on charges which is levied at monthly basis, (ii) that agreement dated 04.06.2010 clearly establishes the nature of software and its date of ‘put to use’, (iii) that the said agreement was not called for by the Income Tax Authorities, even though on the invoices its reference was clearly mentioned, (iv) that copy of agreement dated 04.06.2010 and copies of two e-mail exchanged with the company’s employee dated 25.02.2011 and 09.04.2011 are proof that the software was in use by the Vaarad Ventures Tribunal. The Ld. counsel thus submits that the additional evidence is only supporting evidence for tax invoice submitted with the authorities for the clarity of the facts, which are already mentioned on the invoice itself. Further, it is stated by him that by admitting the new evidence, there is no loss to revenue but it would be in the interest of natural justice and fair trial. Finally, it is explained by him that the default of not filing the documents before the AO and CIT(A) was not deliberate or intentional, but was honest and beyond the control of the company.
On the other hand, the Ld. Departmental Representative (DR) submits that in response to the query raised by the AO vide order sheet entry dated 20.01.2014, the assessee failed to furnish any bills/vouchers along with its reply. Further, it is stated that the assessee could have filed those details before the CIT(A), which it failed. Therefore, the Ld. DR submits that the application of the assessee for admission of additional evidence at the stage of hearing before the Tribunal should not be entertained.
We have heard the rival submissions and perused the relevant materials on record. We are of the considered view that the copy of agreement between the assessee and E Desk Services Ltd. ; copy of e- mail exchange dated 09.04.2011 and 25.02.2011 and copy of invoices would address the issues in the instant appeal. We are of the considered view that the documents filed are quite relevant for deciding the issue Vaarad Ventures before us. Therefore, we admit the additional evidence filed by the assessee As held in the case of CIT v. Gani Bhai Wahab Bhai, (1998) 232 ITR 900, 903-04 (MP), there is no prohibition for taking additional evidence at the appellate stage, the only condition being that the respondent should not be prejudiced and should be given reasonable opportunity to rebut the additional evidence adduced by the appellant. Thus the interests of justice demand that where an additional evidence has been allowed to be adduced, the other side must be given an opportunity to explain or rebut such additional evidence. Therefore, we set aside the order of the CIT(A) and remit the matter to the file of the AO for the purpose of finding out the genuineness of these documents and their relevancy. We direct the assessee to file the relevant documents/evidence before the AO. Needless to say, the AO would give reasonable opportunity of being heard to the assessee before finalizing the order.