ACIT CIRCLE-26(2), NEW DELHI vs. VIHAAN NETWORKS PVT LTD, NEW DELHI

ITA No. 4064/Del/2019 ACIT vs. Vihaan Networks Pvt. Ltd. CO No. 137/Del/2019 Vihan Networks Pvt. Ltd. vs. ACIT

“1. That the learned Commissioner of Income Tax (Appeals) has grossly erred both in law and on facts in upholding the deprecation disallowance of Rs. 55,21,000/- without appreciating the fact that the same was utilized for the business purpose only. 1.1 That the learned Commissioner of Income Tax (Appeals) has grossly erred both in law and on facts in upholding the deprecation disallowance on the invalid consideration that the appellant failed to provide the evidence of installation of assets and put to use of it. 2. That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that no sufficient opportunity to the appellant has been provided which violates the principles of natural justice and proceedings were void-ab-initio and therefore need to be quashed. It is therefore, prayed that action sustained by Commissioner of Income Tax (Appeals) may kindly be held to be incorrect and cross-objection of the assessee company be allowed.”

ITA No. 4064/Del/2019 ACIT vs. Vihaan Networks Pvt. Ltd. CO No. 137/Del/2019 Vihan Networks Pvt. Ltd. vs. ACIT

The Ld. AO discussed this issue in para 1 at pages 1 to 3 of the order. He found that in the computation of income the assessee deducted a sum of Rs. 2,90,04,000/- as Expenses related to Trial Sales. Explanation and justification therefor was sought with documentary evidence. The assessee submitted party-wise details of Trial Sales made during the year amounting to Rs. 3,37,56,931/- and stated that expenses of Rs. 290 crores were incurred in relation thereto including therein material cost, manpower directs, travel and project related cost etc. It was further submitted that actual profit on Trial Sale after deduction of expenditure has been declared in the computation. The Ld. AO looked into the details of expenses relating to Trial Sales and noticed that it was inclusive of project cost related to Orange Ivory Coast (Africa). However, he disallowed the entire claim for want of documentary evidence with the observation that the claim does not appear to be legally bonafide.

ITA No. 4064/Del/2019 ACIT vs. Vihaan Networks Pvt. Ltd. CO No. 137/Del/2019 Vihan Networks Pvt. Ltd. vs. ACIT

7.1 During appellate proceedings the assessee made detailed submission, the gist of which is summarised by the Ld. CIT(A) in para 5.1.2 of the order at pages 12-13. The assessee filed additional evidence dated 09.01.2017 on which the Ld. CIT(A) obtained remand report which is reproduced in para 5.2 of the order. The rejoinder of the assessee finds place in para 5.3 at pages 15-18 of the order. The Ld. CIT(A) recorded his findings in para 5.5 to 5.7 at pages 20-21 of the order as under:-

“5.5 Therefore the limited issue to be decided is whether the expenditure in relation to trial sales claimed by appellant in computation of income is justified as per facts of the case or not. It is also seen that on the similar facts and circumstances in the assessment proceedings for A.Y.2010-11 which were concluded u/s 143(3) by an order dated 26.03.2014. The claim of trial sales and related expenses was accepted and no adverse inference was drawn by revenue. The appellant has during the assessment proceedings, submitted most of the purchase bills amounting to Rs.1.72 Crores but the expenses relating to manpower, travelling etc. have been apportioned on proportionate basis as they form part of common expenses account relating to the expenses incurred during the development period, and sale of product for which commercial production has been commenced for the first time in the year. 5.6 Based on the above facts and circumstances of the case and the submission of the appellant and finding in the remand report, it emerges that there was no reason for the Assessing Officer to doubt the claim of expenses in relation to trial sales for which the details were submitted and make a blanket disallowance of the expenditure relating to trial sale and on the other hand consider the revenue from trial sale only in the computation of taxable income. 5.7 The expenditure relating to material purchased for which invoices amounting to Rs. 1.72 Crores were given during the assessment proceedings, the AO has also not given credit for. If the Assessing Officer had any doubt regarding the expenses incurred of project of Ivory Coast he could have issued a show cause notice for the same or could have called for further clarification on the matter or at the best disallowed only that expenditure. Further, there is no adverse finding to the effect that the sales and expenditure were made out of the books. It is also not the case that the AO has rejected books of accounts.

ITA No. 4064/Del/2019 ACIT vs. Vihaan Networks Pvt. Ltd. CO No. 137/Del/2019 Vihan Networks Pvt. Ltd. vs. ACIT

5.7 In the light of the above deliberation, it is however clear that the trial sale as well as expenditure relating to that are disclosed separately in the books of accounts in several places including notes of accounts thereto which are duly audited by a reputed audit firm. The said practice is being followed consistently since the previous years and accepted by the departments and hence a different view can't be taken in a current year before the appellant has again filed the details relating to trial sales and expenses along with copy of bills and apportionment of manpower, travelling, lodging and boarding expenses. In view of the above, I am inclined to hold that the Assessing Officer is not justified in disallowing the expenses relating to trial sales and therefore the said disallowance is deleted. Appellant succeeds in these grounds.”

7.2 The only grievance of the Revenue is that the Ld. CIT(A) did not appreciate the detailed finding of the Ld AO and the fact that the assessee did not furnish all bills/vouchers pertaining to the expenditure.

7.3 In our opinion the grievance of the Revenue is not based on any solid foundation. Is this not a fact that in the immediately preceding assessment year 2010-11 similar claim has been accepted vide order of assessment dated 26.03.2014 under section 143(3) of the Act? Without bringing on record anything new and adverse to take a different view in the subsequent year is against the Rule of consistency.

7.4 The Ld. CIT(A) has found that invoices amounting to Rs. 1.72 crores were produced before the Ld. AO during the assessment proceedings. That too has been ignored and no credit even therefor has been allowed by the Ld. AO. Books of account have been maintained which are duly audited. It is also not a case of rejection of books of account. There is nothing on record to show that the claim of the assessee is not legally bonafide as alleged by the Ld. AO.

7.5 The impugned disallowance is not justified at all. The Ld. CIT(A) has deleted the disallowance after having allowed opportunity to the Ld. AO. We decline to interfere and reject this ground. 6

ITA No. 4064/Del/2019 ACIT vs. Vihaan Networks Pvt. Ltd. CO No. 137/Del/2019 Vihan Networks Pvt. Ltd. vs. ACIT

8.1 The Ld. AO did not accept the explanation and made the impugned disallowance for want of supporting documentary evidence.

8.2 Before the Ld. CIT(A) the assessee submitted that the fact that the amount has been disallowed is already on the record of Department in the ITR of the previous years as well as disclosed in the tax audit report of current year. Details thereof were submitted. Page 23 of Ld. CIT(A)’s order refers. It was claimed that the assessee paid the leave encashment during the year and upto the date of filing the return. Reliance was placed on the decision in Euro RSCG Advertising (P) Ltd. vs. ACIT (2012) 23 taxmann.com 187 (Mumbai).

8.3 The Ld. CIT(A) deleted the disallowance recording his findings in para 6.2 at page 25 of the order as under:-

“6.2 I have considered the facts of the case, submission of the appellant ans supportings filed in paper book. Based on the above facts and circumstances of the case as there was adequate disclosure in the tax audit report and as details of individuals payments were provided to the Assessing Officer from where it is noted that the payment were made before the filing of Income Tax Return. Further Section 43B clause (f) allows an any sum payable by the assessee as an employer in lieu of any leaves to the credit of his employee. Hence any such expenses allowable on payment basis.

ITA No. 4064/Del/2019 ACIT vs. Vihaan Networks Pvt. Ltd. CO No. 137/Del/2019 Vihan Networks Pvt. Ltd. vs. ACIT

Since the appellant fulfils the conditions laid therein, hence the disallowance is unwarranted and therefore the same needs to be deleted. Appellant succeeds in this grounds.”

8.4 The grievance of the Revenue before the Tribunal is that the Ld. CIT(A) did not appreciate that payments pertained to earlier years and the assessee did not establish that these payments were disallowed in earlier assessment years.

8.5 In our view, had the Ld. AO referred to the Departmental records of earlier years, the facts could have easily been verified. This was not done. Before the Ld. CIT(A) details have been furnished. Nothing averse has been pointed out. The finding of the Ld. CIT(A) is in consonance with the decision of the Hon’ble Supreme Court in UOI vs. Exide Industries Ltd. (2020) 425 ITR 1 SC wherein the Hon’ble Supreme Court observed that with the application of clause (f) of section 43B, the eligibility for deduction arises in the previous year in which the payment is actually made and not that in which provision was made in that regard, irrespective of the system of accounting followed by the assessee. We, therefore, reject this ground being devoid of any merit.

9.1 It was submitted by the assessee that the Ld. AO overlooked the reply filed on 14.03.2014 stating therein that the assessee had made investments in shares of its foreign subsidiary companies, the dividend income from which is not exempt. Decision of ITAT Ahmedabad in Suzlon Energy Limited vs. DCIT (2013) 32 taxmann.com 349 was relied upon before Ld. CIT(A) in this regard.

ITA No. 4064/Del/2019 ACIT vs. Vihaan Networks Pvt. Ltd. CO No. 137/Del/2019 Vihan Networks Pvt. Ltd. vs. ACIT

9.2 The Ld. CIT(A) recorded his findings in para 8.2 to 8.6 at pages 29-32 of the order. He found that during the year the assessee has not claimed any exempt income. He observed that dividend income arising from shares of foreign subsidiary companies is taxable under section 115BBD of the Act. The Ld. CIT(A) extensively quoted from the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT (2015) 378 ITR 33 (Del) and CIT vs. Holcim India (P) Ltd.(2015) 57 taxmann.com 28 (Delhi) wherein it is held that section 14A will not apply if no exempt income is received or receivable during the relevant previous year. Relying on decisions (supra) the Ld. CIT(A) deleted the disallowance under section 14A r.w. Rule 8D.

9.3 In our considered opinion, reliance of Revenue on CBDT Circular No. 5/2014 and decision of ITAT Amritsar in Lally Motors India Pvt. Ltd. vs. PCIT (ITA No. 218(Asr) 2017 is of no help to it. The Ld. CIT(A) has recorded finding of fact that the assessee has not claimed any exempt income and therefore impugned disallowance is not called for. Agreeing with the finding of the Ld. CIT(A), this ground is also dismissed.

The Ld. AO made the impugned disallowance recording the following observations in para 5 of the assessment order.

“5. From the perusal of the Profit and Loss Account, it was observed that the Assessee has Claimed expenditure on account of Advertisement Rs. 66,27,000/-. The assessee was scald upon to justify its claim of expenditure alongwith documentary evidence vide notice dated 09.07.2013. The Assessee vide its submission dated 18.12.2013 has furnished the details of Advertisement expense. From the perusal of the details submitted by the Assessee Company, it was observed that the Assessee has incurred a sum of Rs. 60,53,836/- on account of Exhibition expenses. The Assessee was once again called upon to justify its claim From the perusal of the nature of the expenses incurred by the Assessee Company it has been observed that will give enduring benefit to the Assessee 9

ITA No. 4064/Del/2019 ACIT vs. Vihaan Networks Pvt. Ltd. CO No. 137/Del/2019 Vihan Networks Pvt. Ltd. vs. ACIT

Company therefore the same will be considered as capital expenditure and shall be disallowed under section 37(1). Further the Assessee has admitted that the Assessee was involved in the First phase of the business of designing and development of hi-tech telecom infrastructure related products which may be commercially exploit in the subsequent year and accordingly the company has deferred major part of expenditure incurred during the year. Therefore the expenses incurred on account of exhibition will give benefit for 4 to 5 years to the Assessee. Keeping this in view the above and following the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation, the expenditure is amortized over period of 5 years and therefore, deduction of only 1/5th amount is provided in this year. Accordingly, only deduction of Rs. 13,25,400/- is allowed and remaining amount Rs. 53,01,600/- is hereby disallowed.”

10.1 The Ld. CIT(A) deleted the disallowance by observing and recording his finding in para 9.2 of his order:

“9.2 I have considered the facts of the case, submission of the appellant and documents so filed in this regard. It is noted from the submission of the appellant and accompanying documents provided before the Assessing Officer that out of the total expenditure on account exhibition of 60.50 lakhs, the major amount relates to a single party i.e. M/S Insta Exhibitions Pvt. Ltd for Rs. 54.22 Lakhs which was paid subject to TDS of 10% and related to the stall charges of participation of company in 3GSM exhibition at Barcelona, Spain which is held every year. Out of the balance amount 4.02 Lakhs was paid to Rural Cellular Association as participation fees in the 19th Annual Convection Innovation Expo organized in USA and amount of Rs 1.66 Lakhs relate towards hotel accommodation and travel etc. and amount of Rs.60,000 relates to payment to Digital Empowerment Foundation which for advertisement. None of the expenses above would provide any enduring benefit to the appellant as the payments for the exhibition charges are in recurring nature and done every year for participation and other payments relating to hotel accommodation are in respect of the participation of the fest while the amount paid as advertisement is to an exempt organization is claimed by the appellant. In the factual matrix of these grounds, I am of the considered view that none of the payments would provide any long term benefit to the appellant. Therefore, the expenditure cannot be held to be of capital in nature. Thus, the Assessing officer was unjustified on the facts of the case that the expenses would provided enduring benefit to the appellant company. Accordingly, the impugned disallowance is directed to be deleted. Appellant succeeds in this grounds.”

ITA No. 4064/Del/2019 ACIT vs. Vihaan Networks Pvt. Ltd. CO No. 137/Del/2019 Vihan Networks Pvt. Ltd. vs. ACIT

10.2 The grievance of the Revenue is baseless. We do not find any reason to deviate from the above findings of the Ld. CIT(A) in the absence of any adverse material brought on record by the Revenue. This ground is also rejected.

ITA No. 4064/Del/2019 ACIT vs. Vihaan Networks Pvt. Ltd. CO No. 137/Del/2019 Vihan Networks Pvt. Ltd. vs. ACIT

Order pronounced in the open court on 8th February, 2024.

sd/- sd/- (M BALAGANESH) (ASTHA CHANDRA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 08/02/2024 Veena Copy forwarded to - 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi Date of dictation Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other Member Date on which the approved draft comes to the Sr. PS/PS Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr. PS/PS Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order