DCIT, CHENNAI vs. GI GAMES PRIVATE LIMITED, CHENNAI

आदेश /O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

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Further, UPS is not listed under the Block of Assets, “Energy Saving Equipments” specified in the Income Tax Rules. In view of this, the AO has not accepted assessee’s claim of depreciation @ 80% on UPS but allowed @ 15% and disallowed the balance amount. Further, the AO noticed that the assessee had shown huge amount Rs. 2,29,85,000/- as expenditure incurred in Congo and abroad and asked the assessee to explain the nature of this expenditure. The assessee vide letter dated 16.11.2010 furnished the break- up of the expenditure incurred in Congo and abroad and stated that the Congo project did not go through and had to be dropped. No revenue was :-3-: I.T.A. N0. 1157/Mds/2017 earned on this project. The assessee engaged an expert of online gaining/lottery technology from Thailand for the purpose of participating in trades in many countries. The assessee had participated in the tenders in Malaysia, Australia, Samoa, Malawi, South Africa, Uganda, Nigeria, Liberia and Senegal. Out of these tenders, the assessee got contact in Samoa and Malawi. However, both the contracts could not start due to failure of the customer to get necessary clearances from their Government. The AO observed that the expenditure incurred by the assessee was not wholly and exclusively for the assessee’s current business and was revenue in nature.

The AO further observed that the expenditure did not have any of the characteristics of the expenditure prescribed in sections 30 to 36 and the assessee had not earned any income during the year from the above foreign ventures. Hence the AO disallowed the assessee’s claim of expenditure of Rs. 2,29,85,000/- and added the same to the total income of the assessee.

Aggrieved, the assessee filed an appeal before the CIT(A).

3. The CIT(A) on the issue of disallowance on depreciation partly allowed the appeal. On the issue of disallowance on marketing expenses claimed at Rs. 2,29,85,000/-, the CIT(A) directed the AO to obtain the details from the assessee and examine the nature of existing business. If the AO finds that investment in Congo and other foreign countries are not new a fresh ventures, he must allow the expenses and if he finds that these

:-4-: I.T.A. N0. 1157/Mds/2017 ventures are new, altogether, a fresh venture then the disallowance will stand confirmed. Aggrieved, the Revenue filed this appeal, inter alia, with the following grounds of appeal:

“2.1 The CIT(A) erred in deleting the disallowance on excess depreciation claimed of Rs. 30,75,400/- on UPS and thereby erred in allowing depreciation @ 80% as against 15% allowed by the AO. 2.2 The CIT(A) erred in not appreciating that UPS cannot be part and parcel of computer and has not been listed under the block of assets ‘energy saving equipment’ specified in the IT Rules and hence the AO has rightly restricted the claim on depreciation on UPS to 15%.

3. The CIT(A) erred in holding that if the AO finds that investment in Congo are not new or fresh venture, he must allow the claim of marketing expenses of Rs. 2,29,85,000/- incurred in Congo when the assessee itself claimed that the Congo project did not go through and had to be dropped. 3.2 The CIT(A) erred in holding that assessee is eligible for claim of revenue expenses during the year even though business in Congo has not set up. 3.3 The CIT(A) erred in not appreciating the provisions of Sec. 3 of the IT Act as per which previous year beings only with set up of new business and hence all expenditure till such time has to be capitalized. Hence the AO had rightly held that the marketing expenses incurred by the assessee in Congo was not wholly and exclusively for the assessee’s current business and was not revenue in nature. 3.4 The CIT(A) failed to take note of the AO’s contention that the expenditure did not have any of the characteristics of the expenditure prescribed in sections 30 to 36 and the assessee had not earned any income during the year from the above foreign ventures.”

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4. The DR presented the case on the lines of the assessment order and on the grounds of appeal. None was present for the assessee.

5. We have considered the submissions made by the DR and gone through the record. With regard to the issue of disallowance of depreciation, the relevant portion of the CIT(A) order is extracted as under:

“5.2 During the course of appeal proceedings, the appellant's AR made the following submissions: "1. It was submitted to the learned assessing officer that Automatic Voltage controlled UPS is eligible for depreciation @80% as it is a power saving equipment and as per New Appendix I part A III (8) ix E (c) of Income Tax Rules the petitioner is entitled to claim depreciation at the rate of 80%. The petitioner supported his submission based on the judgment in the case of DCIT v. Surface Finishing Equipment as decided by the Hon'ble Tribunal Jodhpur bench in JP/ 1999.

2. It was submitted before the learned assessing officer that in various judicial pronouncements it was held that UPS, printer, scanner etc are part of the computer and a claim of depreciation at the rate of 60% is allowable. However, the learned assessing officer allowed only a general rate of 15%.

:-6-: I.T.A. N0. 1157/Mds/2017 of the computer and is entitled for a depreciation of 60% as applicable to computers.

of the assessee relates to the issue of depreciation on UPS: The assessee has claimed depreciation on UPS @ 60% treating the same as part of computer. On the other hand, the Assessing Officer has considered the UPS at par with Plant & Machinery and restricted the depreciation to 15%. It has been repeatedly held in various decisions of the Tribunal that depreciation @ 60% has to be provided on UPS treating it to be the part of computer. This issue has been decided by the Tribunal in the case of Haworth. (India) Pvt. Ltd., 131 ITD 215 (Delhi) and Macawber Engg. Systems {India} (P). Ltd.,

19. ITR (Trib.} {Mum) 302 wherein it has been held that UPS is an integral part of the computer. This view has been consistently followed by the Tribunal in various other appeals. Accordingly, this ground of appeal of the assessee is allowed and the assessee is entitled to claim depreciation @ 60% on UPS."

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5.3.2 The AR also relied on the decision of the Delhi High Court in the case of CIT vs Orient Ceramics & India Ltd., in of 2011 dated 20.0l.2011 wherein it is held in para 13, as under: "The assessee had claimed depreciation on UPS @ 60% whereas the AO had allowed it @ 25% and on this basis, disallowance of 1,470 was made. The issue now stands covered by the judgement of this court in the case of CIT vs. BSES Yamuna Powers Ltd. (in ITA No. 1267 decided on 31.08.2010) wherein it was held that the depreciation @60% on such items shall be allowed." 5.3.3 Respectfully following the above jurisdictional ITAT judgement and the Delhi High Court judgement, UPS is considered as integral part of the computer and depreciation is allowed at 60% as against 80% claimed by the appellant.”

From the assessment order and the CIT(A) order as extracted, supra, it is not clear as to how and where the impugned UPS is/are used or utilised in the assessee’s line of business. In the absence of such findings, it is not possible to decide whether the UPS is/are an integral part of computer(s) or any other equipment(s) etc. Hence, this issue is remitted back to the AO. The AO shall examine as to where the UPS is/are installed, which equipment(s) is/are connected, to it/them and then decide the issue in accordance with law. To this extent, the revenue’s grounds are treated as allowed.

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“6.3 Decision: I have considered the AO's observation under para 6.1 and the assessee's submission under para 6.2. The jurisdictional Madras High Court in the case of Southern Petrochemical Industries Corporation Ltd., 2015 (7) TMI 483, held that: "The main parameters that are necessary for the expense to be treated as revenue expenditure is where expenses are incurred in areas which supplement the existing business and is not a fresh or new venture and agreement relates to revenue and the said activity is for the purposes of improving the operations of the existing business, its efficiency and profitability from the area of day-to-day business of the appellant's established enterprise's, expenses be treated as revenue and not capital. In the case on hand, a careful reading of the order of the Tribunal and the facts as narrated, it is clear that there is absolutely no jurisdiction for the Department to hold that there was a new line of business on which there occurred a loss. The parameters enunciated in the decision in Suhrid Geigy Ltd. case (1995 (12) TMI 25 - Gujarat High Court) is squarely attracted to the facts of the present case, justifying the loss of the assessee as a business loss, as admittedly, the assessee is in the business of marketing bulk drugs, formulations; etc., and one of its ventures has ended in a loss and that loss is attributable to business and it cannot be deemed to be a new enterprise and a capital expenditure. Thus the order passed by the Tribunal requires no interference. - Decided in favour of the assessee." 6.3.2 In view of the jurisdictional Madras High Court decision above, I am of the view that as long as the assessee did not invest in a fresh or new venture and the expenses incurred are in the areas supplementing the existing business, the assessee is entitled to claim the loss arising out of such expenses incurred. ln the assessment order the nature of business is stated to be providing information technology support services and back

:-9-: I.T.A. N0. 1157/Mds/2017 office support services. Vide assessee's letter dated 16.11.2010 reproduced in the assessment order, it is mentioned that in Congo, the assessee had entered into Master Service Agreement for running online gaming and in Samoa and Malawi the assessee engaged an expert in online gaming/lottery technology from Thailand. It has to be ascertained whether the business ventures In online gaming are the new ventures or mere extension or continuation of already existing business. This fact: has not been examined by the AO. The assessee also not made out a case to establish that it is in the business of online gaming except taking position in law by citing decisions without giving facts. Therefore, the AO is directed to obtain the details from the assessee and examine the nature of existing business. If AO finds that investment in Congo and other foreign countries are not new or fresh ventures, he must allow the expenses and if he finds that these ventures are new, altogether a fresh venture, then the disallowance will stand confirmed. The appellant is directed to furnish details of nature of business and furnish any evidence in support as and when the AO calls for such details. For technical purposes the ground is treated as partly allowed.”

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Order pronounced on Wednesday, the 20th day of September, 2017 at Chennai.