SHRI ARIHANT TRADERS,MUMBAI vs. PR CIT 20, MUMBAI

08/09/2016 सुनवाई क� तार�ख / Date of Hearing : 21/09/2016 आदेश क� तार�ख /Date of Order: आदेश / O R D E R Per Ashwani Taneja (Accountant Member): This appeal has been filed by the Assessee against order of Ld. Commissioner of Income Tax -20 Mumbai, {(in short ‘CIT’}, passed u/s 263 dated 30.03.2015 for A.Y. 2010-11 on the following grounds: “Being aggrieved by the order passed under section 263 by the Principal Commissioner of Income-tax - 20, this appeal petition is submitted on the following grounds which may considered without prejudice to one another:-

2 Arihant Traders 1.On the facts and circumstances of the case and in law the learned Principal CIT erred in setting aside the assessment order passed by the Assessing Officer holding that the order passed by AO is not only erroneous but also prejudicial to the interest of the revenue as much as the allowance of depreciation of Rs. 59,55,717/- on computers is allowed by the AO while computing the total income without making proper application of mind and without raising specific query or discussion on the pre-requisite factors such as use for business during the financial year, details of trial runs, commencement of business itself etc. 2.On the facts and circumstances of the case and in law the learned Principal CIT erred in directing the AO to disallow the claim of depreciation on computers of Rs. 59,55,717/- by stating that since the business itself did not commence nor operated in F.Y. 2009-10, the entire expenditure that would have been incurred in setting up of business would have to be treated as pre-operative or pre- commencement expenditure & has to be capitalized and although computers were installed with software, the system was not in the real sense ready for use since no evidences were submitted for necessary training and online trial runs.

3. The appellant company craves leave to add, to amend, alter I delete and / or modify the above grounds of appeal on or before the final date of hearing

3. The brief background of the impugned proceedings is that in this case original assessment order was passed by the AO u/s 143(3) dated 15.03.2013 by assessing total income of the assessee at loss of Rs.10,34,831/- as against loss from business declared by the assessee in its return for 3 Arihant Traders Rs.12,57,308/-. Subsequently, Ld. CIT issued show cause notice u/s 263 to the assessee on the ground that the AO had allowed depreciation on the computers purchased by the assessee during the year without verifying actual installation and usages of computers and without verifying the fact with the assessee has not commenced business during the year. The assessee submitted detailed reply to the Ld. CIT explaining inter alia that complete details and documentary evidences were submitted to the AO which were duly verified by him wherein all the facts relating to setting up of the business of the assessee as well as installation and usage of computers were duly explained and after verification of the same only and due application of mind, the AO not only allowed the depreciation upon computers but allowed other business expenses also and assessed the income of the assessee under the head ‘income from business’. But, Ld. CIT was not satisfied with the submissions of the assessee and he revised the order of u/s 263 and also directed the AO to disallow the depreciation claimed by the assessee on the amount of computers purchased during the year. But, other expenses allowed by the AO under the head business were not disputed by the Ld. CIT. 3.1. Being aggrieved, the assessee filed an appeal before the Tribunal wherein the order of the CIT has been contested on its maintainability with regard to the assumption of the jurisdiction u/s 263 as well as allowbility of depreciation on computers which has been directed to be disallowed by the Ld. CIT. During the course of hearing, though Ld. Counsel made 4 Arihant Traders arguments on both the aspects, but it was also requested that if depreciation is found to be allowable as per law and facts of the case, then jurisdictional aspect of maintainability of order u/s 263 need not be gone into. 3.2. On the merits of the claim of depreciation, detailed arguments have been made. Ld. Counsel took us through various documentary evidences in the paper book to show that business of assessee had been undoubtedly ‘set up’ during the year, which is also evident from the fact that AO had made certain disallowances and finally computed income of the assessee under the head ‘income from business’. The action of AO in computing income under the head business and making certain disallowance has not been disturbed or doubted by the Ld. CIT. Thus, setting up of business is duly established by the own action of the AO which remained unchallenged by the Ld. CIT. In addition to that, on facts also it was shown to us that assessee was committed to make sale of lottery tickets from the 1st April 2010 and therefore, before the said date assessee had made all requisite arrangements to do business. Immediately after the agreement was entered with the Punjab Government, premises were hired, staff was employed, retailers were appointed and computers were installed in ready to go mode and all other required infrastructure was properly installed in proper working mode. Under these circumstances, it could be clearly said that business of the assessee was duly set up. Reliance was placed in this regard on the judgment of Hon’ble Delhi High Court in the case of CIT vs. Hughes Escorts Communications Ltd. 311 ITR 253 (Delhi) for the proposition 5 Arihant Traders that expenses are allowable immediately after setting up of the business, even if business is not yet actually commenced. With regard to use of the computers, it was submitted that from evidences available on the record, it is evident that all the computers were duly installed at the premises of the Retailers and required software was also installed in the computers. These computers were used for the purpose of lottery business. No contradictory material has been brought by the CIT on record to doubt these evidences. The AO had examined these evidences as per his understanding and in the absence of any doubt arising in the given circumstances and in the absence of any other contradictory material, the AO had accepted these evidences and allowed depreciation on the computers. It was submitted that once the computers were installed and were in position to give output on plug and play basis, then it can be said that computers were used for the purpose of business of the assessee. Reliance was placed in this regard on the decisions of the Chandigarh Bench of the Tribunal in the case of Turbo Scaffolding Pvt. Ltd. vs ACIT in dated 21.01.2016. It was also submitted that once the assessee had provided the computers to its Retail Distributors for the purpose of doing business by them which was ultimately meant for the business of the assessee, then as far assessee is concerned computers can be deemed to be put to use when these were handed over by the assessee to the Retail Distributors for the purpose of business. Ld. Counsel drew parity between the facts of this case with the facts of leasing business where the assets are deemed to be 6 Arihant Traders put to use as soon as the Lessor hands over the assets to the Lessee. Reliance in this regard was placed on the following judgments: (i) CIT v. Kotak Mahindra Finance Ltd. 317 ITR 236 (Bom) (ii) CIT v. Reetu Finlease Pvt. Ltd. 286 ITR 652 (Del) 3.3. Per contra, Ld. CIT-DR vehemently opposed in detail all the arguments of Ld. Counsel. It was submitted that the assessee was permitted to make first sale of its lottery tickets on 01.04.2010 and therefore, it could not be said that the assessee commenced its business during the year under consideration. Since the first sale was not possible before 01.04.2010, therefore, assessee could not have commenced its business during the year under consideration at all. It was further submitted that unless the assessee brings on record, the evidences with regard to actual date of usages of the computers, the depreciation on the same cannot be allowed under the law. With regard to the evidences shown by the Ld. Counsel, it was submitted by the Ld. CIT-DR that none of these evidences conclusively proved about the installation of computers and usages of the same, and in any case since first sale had taken place one 01.04.2010, therefore, these computers could not have been used in the year under consideration. It was further submitted that AO had not examined these evidences properly and therefore Ld. CIT had rightly disallowed the depreciation claimed on computers. 3.4. In reply, the Ld. Counsel submitted that all the evidences were examined by the AO and there was no doubt about the fact that computers were provided to the Retail Distributors 7 Arihant Traders and these were duly installed as per the evidences brought on record and no such material has been brought on record by the CIT which could raise any suspicion with regard to these evidences. Thus, valid claim of the assessee could not have been disallowed merely on the basis of doubts and suspicions created in the air by the Ld. CIT.

10 Arihant Traders 4.3. The above decision has been followed on many occasions by various courts of the country in large number of decisions. Hon’ble Delhi High Court has also taken a similar view, following aforesaid decision explaining it further in detail in its judgment in the case of CIT v. L.G. Electronic (India) Ltd. 282 ITR 545 (Delhi) and CIT v. Hughes Escorts Communications Ltd. (Delhi)(supra). It is further noted by us that no contrary judgment or any contrary view was brought to our notice by Ld. CIT-DR. Thus, well accepted position of law as emerges before us is that business expenses are allowable while computing income under the head income from business and profession w.e.f. the date of setting-up of the business, even while the actual commencement of business has not yet taken place. 4.4. Now, turning back to the facts of the case, we need to find whether the business of the assessee was set-up during the year under consideration, so as to enable it to claim depreciation on the amount of computers purchased and claimed to be used during the year under consideration. 4.5. The brief background of the business of the assessee is that during the year the assessee had set up lottery business after entering into an agreement with the Punjab Government, as has also been stated by the Ld. CIT himself in first para of his order. Documents and evidences submitted before the AO as well as Ld. CIT show that assessee had entered into an agreement dated 15.01.2010 with the Government of Punjab to become Sole Selling Agent of the Government of Punjab for doing lottery business. As per clause 5 of the said agreement, 11 Arihant Traders the assessee was permitted to hold the first draw in respect of weekly lottery schemes on 01.04.2010. Thus, under these circumstances, the assessee started making all requisite arrangements so as to enable it to issue first draw of lottery on 01.04.2010. It was shown to us with the help of certain evidences that assessee had paid requisite ‘deposit amount’ to the Director, Punjab State Lottery (Government of Punjab) amounting to Rs.6.7 crores. It also furnished Bank Guarantee for which it had paid bank charges which were debited in the Income & Expenditure A/c amounting to Rs.11.20 lakhs. It was shown to us that requisite staff was employed and other expenses on set up of the office were incurred. The Retail Distributors were appointed. Our attention was also drawn upon the invoices issued by the Punjab State Lottery Department dated 28.03.2010 and 29.03.2010 showing purchase of lottery tickets by the assessee from Punjab State Lottery Department. The assessee also purchased computers and installed them at the premise of its Retail Distributors for enabling online sale of lottery tickets and helping in operation of lottery business. 4.6. During the course of assessment proceedings, the AO asked from assessee various queries in this regard from time to time. The AO issued its notice u/s 142(1) dated 13.09.2012 asking the assessee to produce details of lottery business with all details of the transactions till date and also asked the assessee to produce with regard to claim of depreciation, nature of assets and date put to use and allowability of the same viz-a-viz commencement of the business during the year.

12 Arihant Traders The assessee furnished its detailed reply vide its letter dated 10.10.2012 wherein it gave details on the nature of business activity and setting-up and commencement of business. It was explained that the assessee entered into lottery business after applying for and winning the Tender to run and operate lotteries form the State Government of Punjab. The lotteries were online lotteries (i.e. paper less) which were operated and run through computer terminals. Since the assessee was the Sole Distributer, it set-up a network of Retail Distributers for the lottery tickets and for this purpose assessee was required to provide to its Retail Distributers, against security deposit amount, computer terminals along with other accessories for selling lottery tickets online. Accordingly, the assessee purchased computers from well established hardware companies and provided the same to the Retail Distributors for selling online lottery tickets of the assessee. It also got installed required software into these computers. Since the online sale was scheduled to take place w.e.f. on 01.10.2010 therefore, assessee made all requisite arrangements and also conducted trial runs before 31.03.2010 so that these computers may function properly for selling the lottery tickets online. The assessee also furnished copy of ledger accounts to the AO showing proper details of purchasing of computers from M/s HCL Infos system Ltd., M/s Posiflex Technology (India) Pvt. Ltd. and M/s Redington (India) Ltd. As per ledger accounts, entire amount had been paid by cheques/other banking channels and no transaction was done in cash. Our attention was also drawn upon the certificate issued by M/s 13 Arihant Traders Skill Lotto Solutions Pvt. Ltd., software providers, certifying that the said company had installed software on all the 2300 computers located at the respective premises of various Retail Distributors of the assessee company. The relevant part of the certificate reads as under: “Date: April 16th, 2010 WHOMSOEVER IT MAY CONCERN This is to state that we, Skill Lotto Solutions Private Limited having registered office at No.11, Ponnappa Lane, Triplicane, Chennai-600005 have installed Mylott software for operating online lottery trade on 2,300 computers of various retailers of Shri Arihant Traders for the business of operating online lottery tickets of Punjab State Government through their authorized distributors Shri Arihant Traders. The Mylott software was installed on computers of various clients of Shri Arihant Traders on various dates between 25.03.2010 to 31.03.2010 by our authorized personal as detailed below: 1. Prakash Prajapati 2. Ashok Singh Rajput For Skill Lotto Solutions Private Limited Sd/- Authorized Signatory 4.7. All these facts and evidences were put by the assessee before the AO. There was no material available at the assessment stage creating any doubt about authenticity of these evidences, Even before Ld. CIT, these evidences were submitted by the assessee and Ld. CIT also could not bring any contrary material on record to doubt these evidences. He did harbor some suspicion but without any cogent basis which according to us cannot be made the basis for rejecting the valid claim of the assessee. One cannot ignore the sound judicious principles while examining validity of claims of assessee.

14 Arihant Traders 4.8. Thus, the factual situation that merges before us about setting-up of business is that assessee had put up entire infrastructure in place and was in a ‘ready to go’ position before 31-3-2010. Under these circumstances, and in view of the legal position discussed above, it can be unhesitatingly said that the assessee had ‘set-up’ its business during the year under consideration. Therefore, assessee was very much entitled to claim depreciation on the computers purchased by assessee and installed on the respective premises of the Retail Distributors meant for online sale of lottery tickets of the assessee. As far as allegation of absence of actual user of the computers by the assessee is concerned, we differ with the views of the Ld. CIT as well as Ld. CIT-DR on this aspect for various reasons. First of all, the evidences show that the assessee had purchased the computers and had installed them on the premises of the Retail Distributors and also installed requisite software to make them operational for online sale of lottery tickets. It was also stated that trial runs were also conducted and computers were made ready to use on plug and play basis. In fact, the entire success of the assessee’s lottery business was dependent upon the operational efficiency of the computers from 1st April 2010. In absence of the same, entire business would have collapsed causing huge financial loss to the assessee. Thus, it was in assessee’s own interest to keep the computers ready for use with effect from the morning of 01.04.2010. Under these circumstances, it was not justified on the part of Ld. CIT to make doubts and suspicion about installation and working of 15 Arihant Traders the computers by 31.03.2010 that too without any contrary material in his possession. In our view, the role of income tax authorities is certainly not to reject the claims of the assessee by following an approach of hair splitting and creating unnecessary and baseless doubts. Unless a claim is found to be bogus, then same should not generally be rejected so long as it is made in accordance with law. By creating unnecessary litigation, the faith of taxpayers is eroded. In the case before us, even in the worst case, presumably, if we accept the allegation of Ld. CIT as correct, the impugned claim of depreciation if not allowed in this year, even then it will be allowable in the next year when admittedly sale of lottery tickets had taken place. In this regard we are reminded of a recent judgment of Hon’ble Supreme Court in the case of CIT v. Excel Industries Ltd. 358 ITR 295 to deal with such situations, wherein their lordships inter-alia observed as under: “.....32. Thirdly, the real question concerning us is the year in which the assessee is required to pay tax. There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect.

16 Arihant Traders There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers......” 4.9. Apart from the above, it has been contended that since the assessee had handed over the computers to its Retail Distributors for online sale of lottery tickets of the assessee, therefore as far as assessee is concerned, the moment these computers were handed over to the Retail Distributors by the assessee, it amounts to user of the computers in assessee’s hands. We are inclined to accept this argument also in view of peculiar facts of this case. The assessee had supplied these computers to its Retail Distributors and also got installed therein requisite software and also carried out trial runs. There may be some debate or discussion on the date of actual user by these Retail Distributors but as far as assessee is concerned, these can be deemed to be put to use the moment these computers and their software were provided by the assessee to its Retail Distributors for online sale of lottery tickets. Our view find support from the judgment of Hon’ble Bombay High Court in the case of CIT v. Kotak Mahindra Finance Ltd.(supra) as well as Judgment of Hon’ble Delhi High Court in the case of CIT v. Reetu Finlease Pvt. Ltd.(supra). 4.10. Thus, from the above discussion it becomes clear that the assessee had set-up its business during the year under consideration and had also put to use the computers on which depreciation has been claimed on proportionate basis for using 17 Arihant Traders the same for less than 180 days and therefore, the claim of the assessee was valid in the eyes of law and facts of this case and therefore, same was rightly allowed by the Ld. AO after examining all the facts in this regard and the same was wrongly denied by the Ld. CIT and therefore his action is reversed. The claim of depreciation is directed to be allowed. Since, we have allowed the claim on merits, the other issue with regard to jurisdictional validity of impugned order passed u/s 263 becomes academic and therefore, we are not going into the same at this stage.

Order pronounced in the open court on 21st September, 2016.