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2015 (11) TMI 17 - ITAT MUMBAI

2015 (11) TMI 17 - ITAT MUMBAI - TMI - Nature of expenditure - Payment made to Citicorp Information Technology Services Limited(CITIL) for the purchase of processing contracts - Revenue v/s capital expenditure - Held that:- Assessee company vide assignment agreement effective from 01.08.1998, has acquired the service agreement entered into between CITI Bank and CITIL whereby all the liabilities, rights and obligation and interest in the aforestated agreement were acquired by the assessee company .....

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nder these agreements was acquired nor there is any slump sale happening in favour of the assessee company rather it is merely assignment of agreements in favour of the assessee company whereby the unexpired period revenue generated contracts are assigned in favour of the assessee company. The entire consideration of ₹ 85 lac is paid to acquire the unexpired portion of the service agreements which will generate revenue for the assessee company during the unexpired period of this service ag .....

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(A) is hereby deleted. - Decided in favour of assessee.

Disallowance of depreciation on cars given on lease - AO disallowed claim treating it to be in the nature of financing and not leasing transactions - Held that:- To claim depreciation, the asset should be owned by the assessee and it should be used for the purpose of business of the assessee. In this case, the assessee company is owning the asset i.e. cars till the same are sold to the associated concern/employees. The assessee c .....

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lessee on these leased cars and the CIT(A) has given finding of the fact that there was no basis for the assessing officer to conclude that the lessee’s have claimed depreciation on these leased assets i.e. cars. Hence in view of the above, we hold that assessee company has rightly claimed the depreciation on the leased assets i.e. cars and the disallowance of Depreciation of ₹ 3,00,52,049/- claimed by the assessee company on leased asset i.e. cars as disallowed by the assessing officer an .....

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the business of leasing and these cars have been given on lease in the normal course of business, hence, it is to be held that the assessee company has given these vehicles on lease and they are commercial vehicles entitled for depreciation @ 40% if purchased after 01.10.1998 but before 1st April 1999 and are put to use before the 1st day of April 1999 in accordance with the entry III (2) (iia) of part A of Appendix I applicable to the assessment years 1998-99 to 2002-03 as per definition of th .....

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60% ( In this year at the rate of 30% since the asset were used for less than 180 days) of ₹ 9,86,474 on the computers purchased of ₹ 32,88,246/- during the assessment year and given on lease and the disallowance of Depreciation on the leased computers as disallowed by the assessing officer and as confirmed by the CIT(A) is hereby deleted. See case of ICDS Ltd (2013 (1) TMI 344 - SUPREME COURT)

Depreciation on cars held for own use which were purchased after 1.10.1998 - .....

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ny is using the car for its own office purpose which is for the purpose of its business and hence the assessee company is entitled for higher depreciation @ 40% and the disallowance of excess depreciation of ₹ 64,708/- claimed by the assessee which was disallowed by the assessing officer and as upheld by the CIT(A) is hereby deleted. - Decided in favour of assessee.

Expenditure on repair and maintenance of the computers - Held that:- These expenses are to be fully allowed as the .....

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ets pending installation which the assessee duly replied that secured loan outstanding raised by the company are for working capital loan being cash credit, demand loan and packing credit loan raised from the bank and fixed assets pending capitalization has no correlation with the secured loan raised by the assessee company and interest of is paid on secured loan raised for working capital purposes. The assessing officer passed the assessment order u/s 143(3) of the Act after applying his mind t .....

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UDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER For The Assessee : Shri P.J. Paradiwalla & Shri Niraj Sheth For The Revenue : Shri Shrikant Namdeo ORDER Per Bench These three appeals by the assessee company and one appeal by the Revenue is directed against the separate orders of the Commissioner of Income Tax(Appeals)-20,Mumbai(Hereinafter called the CIT(A)) for assessment years 1999-2000, 2000-01, 2001-02 and 2002-03. Common grounds are raised by the assessee company in all the thre .....

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having failed to appreciate that these contracts were acquired in the ordinary course of business and therefore the expenses incurred are revenue nature allowable under section 37 of the Act. (2) The CIT(A) erred on facts and in law in disallowing depreciation of ₹ 30,052,849/- on cars given on lease , treating them to be in the nature of Assessed By Shri P.J. Paradiwalla & Shri Niraj Sheth Revenue By Shri Shrikant Namdeo Date of hearing 12.08.2015 Date of pronouncement 30.09.2015 fina .....

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a higher rate. (4) The CIT(A) erred on facts and in law in disallowing depreciation of ₹ 3,288,246/- on Computers given on lease, treating them to be in the nature of financial lease having failed to appreciate that the transactions undertaken by the appellants are in the nature of operating lease and thereby ought to have directed the AO to allow the depreciation thereon. (5) The CIT(A) ought to have held that depreciation @40% should be allowed on the cars purchased by your appellant aft .....

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the assessment u/s 143(3) read with Section 143(2) of Income Tax Act,1961 (Hereinafter called the Act ) in this case were framed against e-Serve International Limited (formerly knows as Citi Corp Securities & Investment Ltd), the name of the afore-stated company was later changed to TCS e-Serve Ltd, and finally TCS E Serve got merged with the Tata Consultancy Services Ltd. 3. Ground no. 1 relates to the expenditure of ₹ 23,80,000/- incurred by the assessee company for purchase of proce .....

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copy of assignment agreement effective from 1st August 1998 with the assessing officer. The assessing officer held that no where it is mentioned in the contract that the said amount is paid to CITIL for surrendering their processing division. The processing service division has entered into several contracts with its clients which were secured by CITIL in its ordinary course of business. The assessee company has also taken over rights and obligations under the contract. The assessing officer hel .....

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e company filed the first appeal with the CIT(A) and contended that since 1992, the assessee company is operating as Non Banking Financial Company (NBFC) . The assessee company submitted that due to downturn in NBFC business during the year ended 30.06.1998 and the defaults faced by the company in leasing business, the assessee company decided to reduce its dependence on volatile sources of revenue and complement the existing revenue streams with greater proportion of revenues of a stable and an .....

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custodial services and trade finance and such contracts were secured by the CITIL in the ordinary course of business. The rights and obligations in these contracts were taken over by the assessee company and ₹ 85 lacs was paid for the acquisition of the unexpired contracts, which were for the unexpired period of 25 months and hence the assessee company decided to amortized this cost over a period of 25 months being the balance of unexpired period of the contract. The assessee company subm .....

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ed revenue from these contracts as well as the assessee company is able to save various revenue costs like cost for canvassing new clients, advertising and marketing expenditure, cost of personnel etc. and also the assessee company is able to enhance the profit earning process. 6. The CIT(A) held that the assessee company has acquired the processing service division of CITIL and thus the expenditure was for the purpose of extension of business and hence income earning asset in the form of proces .....

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has acquired these contracts by assignment agreement effective from 01.08.1998 whereby the CITIL has assigned the service agreements between CITI Bank and CITIL in the form of cash management, product agreement, custodial service agreement, trade finance agreement vide assignment of agreement effective from 01.08.1998 which was produced before us also. The assessee company also produced before us copy of Director s report of the assessee company for the year ending 30.06.1999, whereby it is men .....

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e afore-stated assignment agreement effective from 01-08-1998 whereby transaction services contracts are assigned in favour of the assessee company. The assessee company has also showed us that this payment of ₹ 85 lac has been treated as deferred revenue expenditure in the Books of Account of the assessee company. The assessee company also drew our attention to the orders of the CIT(A), whereby it is written that the assessee company has acquired the processing service division which in t .....

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the company rather it is merely assignment of service agreements in favour of the assessee company . The assessee company relied upon the Judgment of Hon ble High Court of Karnataka in the case of CIT v. IBM Global Services India Pvt. Ltd. [ (2014)46 taxmann.com 55(Kar.)] 8. The Ld. DR on the other hand, relied upon the orders of authorities below and stated that these activities requires huge telecom and power infrastructure development which has also been mentioned in the Director s Report of .....

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the aforestated agreement were acquired by the assessee company. Since these are service agreement from which the revenue is to be generated over a period of unexpired 25 months from 01.08.1998 and the assesse s counsel has drawn our attention to the audited accounts for the year ended 30.06.1999 to the fact that the revenue of ₹ 9,06,10,908/- being transaction processing and administrative fees is received by the asssesee company out of these assigned agreement/ contracts only during the .....

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assessee company during the unexpired period of this service agreement ie 25 months from 01.08.1998. Keeping in view the principle of matching concepts of revenue and expenditure and also that these assignment of agreements are towards revenue field, we hold that assessee company has rightly charged as revenue expenses , 7 months expenses out of 25 months unexpired period of contract being ₹ 23,80,000/- and hence additions made by the assessing officer to the tune of ₹ 23,80,000/- t .....

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e company and the assessee company also claimed depreciation on the leased cars. The cars were leased by the assessee company to its associated concerns and not to outsiders. The assessing officer held that this is nothing but financial transaction for purchase of car and only the name was given by the assessee company as leasing transaction to get the benefit of depreciation and also get the benefit to its associated enterprises by way of lease rent paid and also claim depreciation on car lease .....

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etch in the market not less than 50% of the original cost. The assessing officer held that in the hands of lessor , only interest component will be taxed and no depreciation will be available and in the hands of the lessee only deduction will be available in respect of interest paid on installment and depreciation. The assessing officer held that the lessee is claiming lease rental charges which contains principle component and interest component and has also claimed depreciation and unless and .....

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e matter in appeal before the CIT(A) and contended that the leasing was one of the main business activity of the assessee company as per the object clause in Memorandum of Association of the assessee company. The assessee company contended that the assessee company is carrying out leasing activity for several years which is allowed by the Revenue and it is the first time in the assessment year 1999-00, the depreciation on vehicle is disallowed by the Revenue on the allegation that the transactio .....

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ee placed reliance on the following decisions:- 1. CIT v. Shaan Finance (P) Ltd. (SC) (231 ITR 308) 2. CIT v. Maharashtra Apex Corporation Ltd. (SC) (254 ITR 98) 3. CIT v. Madan & Co. (Mad. HC) (254 ITR 445) 4. CIT v. Annamalai Finance Ltd. (Mad. HC) ( 275 ITR 451) 5. CIT v. Mirza Ataullah Baig and Another (Bom HC) (202 ITR 291) 6. CIT v. Cosmo Films Limited (Del.HC) (ITA 1404/2008). 13.The CIT(A) relied upon the decision of Mumbai Tribunal - Special Bench in the case of Indus Ind Bank Ltd. .....

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ee. The lease is for a fixed period and non cancellable and thereby he held that the lease is a financial lease and hence depreciation was rightly disallowed by the assessing officer keeping in view Special Bench decision of Mumbai Tribunal in the Indus Ind Bank Limited(supra) as the assessee company is not owner of the assets. The assessee company submitted before the CIT(A), certificate from the lessee s for assessment year 2000-01 that the lessee s have not claimed any depreciation on the lea .....

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on which depreciation is being claimed. The assessee company contended that this is the first year on which the depreciation is disallowed by Revenue on these leased cars while for the earlier year, the same was allowed by the Revenue. The assessee company stated that these cars are provided to employee s and at the end of the period cars are sold to the employees. The assessee company relied upon the Judgment of Hon ble Supreme Court in the case of I.C.D.S. Ltd. v. CIT (2013)350 ITR 527,(2013) .....

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ial on record. We have observed that to claim depreciation, the asset should be owned by the assessee and it should be used for the purpose of business of the assessee. In this case, the assessee company is owning the asset i.e. cars till the same are sold to the associated concern/employees. The assessee company by giving these cars on lease is in fact using the same for its own business. The Judgment of Hon ble Supreme Court in the case of ICDS Ltd (Supra) is directly applicable in the facts a .....

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in view of the above, we hold that assessee company has rightly claimed the depreciation on the leased assets i.e. cars and the disallowance of Depreciation of ₹ 3,00,52,049/- claimed by the assessee company on leased asset i.e. cars as disallowed by the assessing officer and as confirmed by the CIT(A) is hereby deleted. We order accordingly. 18. Ground no. 3 is with respect to the depreciation @ 40% should be allowed on car lease which were purchased after 1.10.1998 but before 01st April .....

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or for tourists. The assessing officer held that these are given by the assessee company to the associated concerns on lease and they were used for the office purpose, therefore, depreciation is available at the rate of 20% and hence excess depreciation claimed is disallowable. 20.Aggrieved by the orders of the assessing officer, the assessee company carried the matter in appeal before the CIT(A), whereby, the assessee company contended that depreciation at the rate of 40% is in accordance with .....

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associated concern which are used for office purposes by the associated concerns . The assessee company contended that these are commercial vehicle and depreciation at the rate of 40% is rightly claimed for the vehicles purchased after 1.10.1998 but before the 1st day of April 1999 , and , is put to use before the 1st day of April 1999. The CIT(A) held that since the lease transaction of cars is a financial lease and the assessee is not the owner of these leased vehicles and hence , the assessee .....

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ded that depreciation at the rate of 40% is in accordance with the entry III (2) (iia) of part A of Appendix I applicable to the assessment years 1998-99 to 2002-03. The assessee company contended that the commercial vehicles have been defined in Note No. 3A of the Appendix I to Rule 5 below the table of rates at which depreciation is admissible which includes light motor vehicles . The assessee company submitted that the assessee company is engaged in the business of giving cars on lease in the .....

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erused the material on records and relied upon case laws. As we have already adjudicated in the preceding para s that the assessee company is owner of these leased cars till they are sold to employees/associated concerns . We also held that the assessee company is entitled for depreciation on these leased vehicles . Since the assessee is engaged in the business of leasing and these cars have been given on lease in the normal course of business, hence, it is to be held that the assessee company h .....

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which includes light motor vehicles , for the purpose of business or profession as per amended provisions of Section 32 of the Act . We order accordingly. 25. Ground no. 4 is regarding disallowance of depreciation of ₹ 3,288,246/-on computers leased by the assessee company being charged to revenue account which was disallowed by the assessing officer treating it to be in the nature of financing and not leasing transactions.. 26.The assessing officer held that these leased transaction is no .....

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morandum of Association of the assessee company. The assessee company submitted that the assessee company is carrying out leasing activity for the last several years and only for the first time in the assessment year 1999-2000, depreciation on computers was disallowed on the alleged ground that the transaction is a financing arrangement to avail the benefit of depreciation on assets given on lease. The assessee company placed on records evidence regarding the fact that the Revenue has allowed de .....

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r (Bom HC) (202 ITR 291) 6. CIT Vs. M/s Cosmo Films Limited (Del. HC) (ITA 1404/2008). Without prejudice , the assesee company further submitted that the assessing officer ought to have disallowed the amount of depreciation claimed at ₹ 986,474/- as against ₹ 3,288,246/- being the adjusted WDV of the computers given on lease. Computers for giving on lease amounting to ₹ 3,288,246/- were purchased during the year. Depreciation of ₹ 986,474/- on leased computers was claimed .....

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at these are also the financial lease and assessee is not the owner of these leased computers and not entitled for depreciation as in view of the CIT(A), the issue is similar to the leased vehicles except that in the instant case it is leased computers instead of leased vehicles and he has adjudicated the issue of leased vehicles in details and the same shall be applicable to the leased computers also and accordingly the appeal of the assessee company was dismissed by CIT(A). 28. Aggrieved by th .....

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should be used for the purpose of business of the assessee. In this case, the assessee company is owning the asset i.e. computers which are leased to parties . The assessee company by giving these computers on lease is in fact using the same for its own business. The Judgment of Hon ble Supreme Court in the case of ICDS Ltd (Supra) is directly applicable in the facts and circumstances of the present case and the assessee company has rightly claimed the depreciation on the computers leased by the .....

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d. We order accordingly. 32. Ground no. 5 disallowance of depreciation of ₹ 64,708/- claimed on cars held for own use which were purchased after 1.10.1998. 33.The assessee company has claimed 40% depreciation on the car owned by the assessee company which were purchased after 1.10.1998 but before 1st day of April 1999 and put to use for its own office purpose before 1st day of April 1999. The assessee company submitted before the assessing officer that depreciation @40% is to be allowed on .....

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essee company claimed depreciation @ 40% but it was restricted by the assessing officer to 20% and hence the assessing officer disallowed excess depreciation of ₹ 64,708/- claimed by the assessee and added the same to income of the assessee. 34. Aggrieved by the orders of the assessing officer, the assessee company carried the matter before the CIT(A) and contended that for the commercial vehicles purchased after 1.10.1998 but before 1st day of April 1999 and put to use before 1st day of A .....

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t entitled for depreciation and there is no question of higher or lower rate of depreciation and hence appeal of the assessee company on this ground was rejected. 35. Aggrieved by the decision of the CIT(A), the assessee company is in appeal before us. 36.Before us, the assessee company contended that the depreciation should be allowed at the rate of 40% in view of amendment w.e.f 1.10.1998 whereby the commercial vehicle purchased after 1.10.1998 but before 1st day of April 1999 and put to use b .....

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the parties and considered the relevant material on record. We hold that the cars which are purchased by the assessee after 1.10.1998 but before 1st April 1999 and put to use for its own office purposes before 1st April 1999 are commercial vehicle as referred to in the entry III(2)(iia) of part A of Appendix I, under the definition of commercial vehicle which include light motor vehicle as per definition contained in Motor Vehicles Act,1988 and there is no such stipulation that the cars are to .....

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₹ 4,40,000 on computer repairs and maintenance expenses. 40. The assessee company incurred expenditure of ₹ 3,198,207/- on repair and maintenance of the computers. The assessing officer noted that the assessee company has purchased computer for office after 1.10.1998 amounting to ₹ 5,29,709/- and before 1.10.1998 of ₹ 51,502, therefore the total cost of computer used in the office premises comes to ₹ 5,81,211/-while computers given on lease which is purchased after .....

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t order, the assessee company carried the matter to the CIT(A) and contended that the company transitioned from being a NBFC to a processing company during the year 1998-99. A major component of the income of the Company is from transaction processing business during the year 1998-99. Their aim was to provide remote processing to customers using technology and telecommunication infrastructure. This involves doing data entry and process management for large volume transactions such as checks, bil .....

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This also involved having qualified personnel being deputed to the company premise to provide services. Hence, it was submitted that it would be incorrect to determine the reasonability of the expense by linking the same to the cost of computers. Further, it was also submitted that since the above expenses have been incurred to maximize client servicing abilities and to ensure the flow of revenue, the same should be fully allowable as a deduction. It was submitted that to enable the assessee com .....

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g that LAN administrative charges of ₹ 9,68,002/-ought to be allowed as a deduction being in the nature of networking maintenance charges which is not computer maintenance charges and of the balance ₹ 22,00,000/- , the CIT(A) held that it will be fair to restrict the disallowance to 20% of the repair and maintenance charges . 42.Aggrieved by the order of the CIT(A), the assessee company is in appeal before us. 43.Before us, the assessee company submitted that ad-hoc disallowance has .....

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unt. The assessee company submitted that the expenses incurred are mainly LAN administration charges paid to CMS (Rs.9,68,002/- ) , Microbanker AMC(Rs.1,68,750/- ) Microland AMC (Rs.11,01,267/-) and Toner cartridge purchases-computer consumabes (Rs.4,82,895/- ) which aggregates to ₹ 27,20,914/- out of total expenses of ₹ 31,98,307/-. The assessee company reiterated its stand before us as contended before the authorities below and contended that the company transitioned from being a N .....

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in this industry, where time is of essence it is vital to ensure that all infrastructure facilities are fully functional at all time and any lapse in this matter could have a serious impact on the client servicing ability of the appellants. In order to quell such risks the Company had entered into contracts with various vendors who would provide continuous service, backup and support. This also involved having qualified personnel being deputed to the company premise to provide services. Hence, i .....

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ame should be fully allowable as a deduction and not linked to the cost of computers. It was submitted that to enable the assessee company to provide timely services to their customers, they in turn have to ensure that their computer systems operate at the optimum capacity and for this purpose it is essential to enter into contract with various parties so that the equipment is serviced at regular intervals and any corrective action required to be taken is undertaken in the shortest possible time .....

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r, the assessee company transitioned from being a NBFC to a processing company. A major component of the income of the assessee company is from transaction processing business. The assessee company has duly demonstrated that these expenses are to be incurred for the purposes of business of the assessee company . The assessee company has demonstrated that the expenses incurred are mainly LAN administration charges paid to CMS (Rs.9,68,002/- ) , Microbanker AMC(Rs.1,68,750/-) Microland AMC (Rs.11, .....

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d for the purpose of business of the assessee company and hence the disallowance of ₹ 4,40,000.00 as upheld by the CIT(A) is deleted. We order accordingly. 46. We have observed the issue s involved in the appeal no. ITA No 5232/Mum/2012 for assessment year 2000-01 and appeal No. ITA No5233/ Mum/2012 for assessment year 2001-02 are identical issues as raised by the assessee in the appeal no. ITA No.3570/Mum/2012 for assessment year 1999-00 which we have adjudicated in the preceeding para s .....

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r 2002-03 is with respect to the grievance with respect to the quashing of the notice dated 24th March 2008 issued u/s 148 of the Act by the CIT(A) while the rest grounds of appeal are consequential and shall arise for determination if we uphold the validity of notice issued u/s 148 of the Act which was quashed by the CIT(A). 49. Before us, the Ld. DR contended that the CIT(A) has illegally quashed the notice dated 24th March 2008 u/s 148 of the Act . He drew our attention to the reasons recorde .....

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are under installation, the interest expenses of ₹ 15,83,080/- claimed by the assessee company was not used for business purposes and the same cannot be treated as business expenditure and needed to be disallowed. He stated that the assessee has not duly replied to the query raised by the assessing officer during original assessment u/s 143(3) of the Act whereby the assessee company has not furnished all necessary facts with respect to the details of utility of loans raised by the assessee .....

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t March 2003. The assessee company drew our attention to the reason recorded by the assessing officer for initiating proceedings u/s 147 of the Act which are primarily concerned with fixed assets pending installation as existing in the books of accounts of the assessee company of ₹ 1,12,55,903/- and the corresponding secured loan of ₹ 1,31,26,833/- existing in the books of accounts and the allegation by the assessing officer that since the afore-stated secured loans were not utilized .....

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oan raised of ₹ 1,31,26,833/- which the assessee company duly replied to the assessing officer vide letter No. Corp/e-Serve/KSV/275 filed with Revenue on 13th February 2005 that these secured loans are the cash credits, demand loan and packing credits which are used for meeting working capital requirement of the company during the course of the year and hence there is no correlation between the secured loan of ₹ 1,31,26,833/- raised by the company and fixed assets pending capitalizat .....

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sed for working capital purposes and no portion of loans were raised for funding fixed assets which are pending installation. The assessee company submitted that the notice u/s 148 is dated 24-03-2008 which is beyond the period of 4 years from the end of assessment year and the provisio to Section 147 of the Act is applicable and no action can be taken u/s 147 of the Act unless the income chargeable to tax has escaped assessment due to failure on the part of the assessee company to make a return .....

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dings u/s 143(3) read with Section 143(2) and hence notice u/s 148 dated 24th March 2008 of the Act for re-assessment is merely change of opinion and is bad in law and was rightly quashed by the CIT(A). 51. We have heard the rival contentions and perused the material on record. We have observed that during the original assessment proceedings u/s 143(3) read with section 143(2) of the Act, the assessing officer has raised specific query regarding the interest paid by the assessing company of S .....

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fixed assets pending capitalization of ₹ 1,12,55,909/-. We have observed that the assessing officer has passed the assessment order u/s 143(3) of the Act in original assessment proceedings after considering the replies of the assessee company. The issue of notice u/s 148 of the Act dated 24th March 2008 for initiating re-assessment proceedings u/s 147 of the Act beyond four year from the end of assessment can be validly done if the income chargeable to tax has escaped assessment due to fai .....

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