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2016 (12) TMI 42 - ITAT MUMBAI

2016 (12) TMI 42 - ITAT MUMBAI - TMI - Revision u/s 263 - Claim of depreciation on the amount of computers purchased - whether the business of the assessee was set-up during the year under consideration, so as to enable it to claim depreciation? - Held that:- 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 Distri .....

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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. - ITA NO.2255/Mum/ .....

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pal Commissioner of Income-tax - 20, this appeal petition is submitted on the following grounds which may considered without prejudice to one another:- 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 ₹ 59,55,717/- on computers is .....

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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 .....

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77; 10,34,831/- as against loss from business declared by the assessee in its return for ₹ 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 e .....

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om 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 .....

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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 .....

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dy 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 that expenses are allowable immediately after setting up of the business, even if business is not yet actually commenced. Wit .....

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n 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 .....

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leasing business where the assets are deemed to be 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 the .....

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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. Coun .....

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ve gone through submissions made by both the parties on all the aspects. We shall first deal with the issue on its merits and if the need arises then we shall go into aspect of jurisdictional validity of order passed u/s 263. Ld. CIT has directed the AO to disallow the depreciation on the amount of computers purchased by the assessee during the year under consideration and his reasoning for disallowance can be divided into two parts. The first part of the reasoning is that assessee had not comme .....

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hat stage onwards the expenses are allowed. The business of the assessee may have many stages. For example, first of all a company is incorporated and then it makes requisite arrangements to put together and install requisite infrastructure to enable it to carry on its business. Thereafter, eventually, after making further efforts, actual commencement of business takes place. Thus, at least three stages are involved. Under these circumstances, a question arises that expenses shall be allowable f .....

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y set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year. 4.2. Thus, a plain reading of the aforesaid provisions clearly shows that for a new business or a source of income newly coming into existence, the previous year is the perio .....

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n up as date of setting-up of business. The law in this regard was also explained by Hon ble Bombay High Court in its landmark judgment in the case of Western Indian Vegetables Products Limited v CIT 26 ITR 151; at page 157 Hon ble High Court observed that once it is known what the business of the assessee is then: ……the important question that has got to be considered is from which date are the expenses of this business to be considered permissible deductions and for that purpose .....

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e deduction because those expenses would be incurred at a point of time when the previous y ear of the business would not have commenced. In this case Hon ble Bombay High Court was dealing with the corresponding provision of the Indian Income Tax Act, 1922. Their lordship also explained the distinction between concept of commencement and setting up of business at pages 158 and 159 as under: It seems to us, that the expression setting up means, as is defined in the Oxford English Dictionary, to p .....

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f the business, all expenses during the interregnum, would be permissible deductions under section 10(2) 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 .....

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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 .....

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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 ₹ 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 ₹ 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 atten .....

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rd 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. The assessee furnished its detailed reply vide its letter dated 10.10.2012 wherein it gave details on the nature of busi .....

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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 a .....

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Our attention was also drawn upon the certificate issued by M/s 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 .....

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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 .....

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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. .....

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l 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 the computers by 31.03.2010 that too without any contrary material in his possession. In our view, the role of income tax authoritie .....

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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 y .....

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ue 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 .....

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