TMI Blog2022 (7) TMI 862X X X X Extracts X X X X X X X X Extracts X X X X ..... the exclusionary provision contained in first proviso to clause (viib) of section 56(2) of the Act. CIT(A) referred to the decision of Kerala High Court in Sunrise Academy of Medical Specialities (India) (P) Ltd. [ 2018 (8) TMI 203 - KERALA HIGH COURT] . This decision is rendered in the context of first proviso to section 68 inserted by the Finance Act, 2012 w.e.f. 1.04.2013. The Hon ble Court held that section 56(2)(viib) is not controlled by section 68. CIT(A) lost sight of the second proviso to section 68 which carves out an exception to the first proviso which says that first proviso shall not apply if the person, in whose name the sum referred to therein is recorded, is a Venture Capital Fund or a Venture Capital Company as referred to in clause (23FB) of section 10. Hence, reliance by the Ld. CIT(A) on the decision (supra) is misplaced. Accordingly, we hold that the first proviso to section 56(2)(viib) is applicable to the case of the assessee and decide ground No. 2 in favour of the assessee. Nature of expenses - disallowance on account of company international system expense by treating it as capital expenditure - HELD THAT:- It is well settled that if the expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 - - - Dated:- 18-7-2022 - Shri Anil Chaturvedi, Accountant Member And Ms. Astha Chandra, Judicial Member For the Assessee : Shri R.M. Mehta, CA For the Department : Shri Rajinder Jha, Sr. DR ORDER PER ASTHA CHANDRA The appeal by the assessee is directed against the order dated 27.02.2019 of the Ld. Commissioner of Income Tax (Appeals)- 2, New Delhi ( CIT(A) ) pertaining to the assessment year ( AY ) 2015-16. 2. The assessee is a company engaged in the business of providing IT enabled and BPO services. It filed its return for AY 2015-16 on 15.09.2015 declaring loss of Rs. 2,20,29,872/-. The case was selected for scrutiny through CASS. The assessment was completed on 11.09.2017 under section 143(3) of the Income Tax Act, 1961 ( the Act ) on net loss of Rs. 39,03,530/- resulting in addition of Rs. 9,95,086/- under section 56(2)(viib); addition of Rs. 6,82,055/- due to difference in TDS between ITR and 26AS; security deposit of Rs. 1,53,20,438/- shown by the assessee; company international system expenses of Rs. 8,89,844/- and telephone and internet expenses of Rs. 2,38,919/-. On appeal, the Ld. CIT(A) allowed part relief. The assessee is in further app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore added excess premium of Rs. 9,95,086/- (3180 x 312.99) to the income of the assessee. 4.1 Before the Ld. CIT(A) the assessee contended that as per section 56(2)(viib) of the Act taxability arises when a company receives consideration exceeding fair market value of shares from resident. As per first proviso to section 56(2)(viib), exclusion has been provided where the consideration of shares is received by Venture Capital Undertaking ( VCU ) from Venture Capital Fund or Venture Capital Company. In the case of the assessee, the share premium was received by Venture Capital Undertaking (VCU) i.e. Bigfoot Retail Solutions Pvt. Ltd. from Venture Capital Fund (VCF) i.e. Nirvana Digital India Fund which is first scheme of Patni New Age Trust. Following documents were produced to substantiate that Nirvana Digital India Fund is Venture Capital Fund: 1) Certificate of registration as Venture Capital Fund issued by SEBI vide No. 11-12/0216 in the name of Patni New Age Trust. Nirvana Digital India Fund is a first scheme of Patni New Age Trust. 2) Letter filed by IL FS Trust Company Ltd. (Trustee to Patni New Age Trust) with SEBI. 3) Copy of Income Tax return filed by Nirv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch shares as exceeds the fair market value of the shares shall be chargeable to income tax under the head Income from other sources . However, this provision shall not apply where the consideration for issue of shares is received by a Venture Capital Undertaking from a Venture Capital Company or a Venture Capital Fund. Explanation (b) there-under provides that Venture Capital Company , Venture Capital Fund and Venture Capital Undertaking shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10. 4.6.1 Clause (a) of Explanation to section 10(23FB) defines Venture Capital Company to mean a company which has been granted a certificate of registration, before the 21st day of May, 2012, as a Venture Capital Fund and is regulated under SEBI (Venture Capital Funds) Regulations, 1996 made under the SEBI Act, 1992. 4.6.2 Clause (b) of Explanation to section 10(23FB) defines Venture Capital Fund to mean a fund operating under a trust deed registered under the provisions of the Registration Act, 1908 which has been granted a certificate of registration, before the 21st day of May, 2012, as a Ven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the category of Venture Capital Undertaking and that it has received the money from Venture Capital Fund i.e. Nirvana Digital India Fund. Therefore, section 56 is not applicable. The assessee submitted documentary evidence before the Ld. AO/CIT(A) to prove that Nirvana Digital India Fund comes under the category of Venture Capital Fund. Though Ld. AO did not agree with the contention of the assesee that Nirvana Digital India Fund was a VCF, the Ld. CIT(A), in our opinion rightly, on appreciation of the documentary evidence on record, came to the conclusion that the assesee received consideration from a Venture Capital Fund. However, the Ld. CIT(A) was of the view that the assessee is not a VCU. The case of the assessee before the Ld. AO/CIT(A) was that the assessee is a VCU. We have perused the definition of Venture Capital Undertaking given in clause (c) of Explanation to section 10 (23FB) as also its (VCU) definition in clause (n) under the head definitions contained in the SEBI (Venture Capital Funds) Regulations, 1996 issued by the SEBI. The assessee is a private limited company engaged in the business of IT enabled and BPO services. The assessee thus satisfies the twin con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o case was made out by the Ld. AO that the periodic payments made by the assessee for software services were for acquisition of such software and the payment was not for mere usage of software. It was also submitted that payment for usage of software services did not have the effect of any enduring benefit for holding the same as capital in nature. Since the payment made for usage of software did not provide any enduring benefit to the assessee, it did not bring into existence an asset or advantage of enduring nature. In support of the proposition that when expenditure is not incurred for acquiring or bringing into existence an asset or advantage of enduring nature, it cannot be treated as capital expenditure. Following decisions were cited:- (1) Assam Bengal Cement Co. Ltd. vs. CIT (1965) 27 ITR 34 (SC) (2) Bombay Steam Navigation Co. (P) Ltd. vs. CIT (1965) 56 ITR 52 (SC) (3) Hilton Roulunds Ltd. vs. CIT (2018) 92 taxmann.com 368 (Delhi) (4) CIT vs. J K Synthetics Ltd. (2009) 309 ITR 371 (Delhi) (5) ACIT vs. M/s. GE Capital Business Process Management Services 64 taxmann.com 156 (Delhi ITAT) 6.2 The Ld. CIT(A) confirmed the disallowance observing that since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst which the assessee is in appeal before us. 7.1 We have heard the Ld. Representative of the parties and perused the material on record. 7.2 It is observed that the assessee submitted before the Ld. AO/CIT(A) that all telephones are either installed at office premises or used by officers and the employees of the assessee company and that usage of telephone/internet is done by employees for official purposes only. It was also submitted that the impugned expenses were incurred in the course of business of the assessee company and that it was not in the nature of personal expenditure. We agree with the above contentions of the assessee. The Ld. AO/CIT(A) made the observation that there was twelve times increase in the expenditure as compared to the preceding year which is disproportionate but that alone cannot be the basis of disallowance. Genuineness of the expenditure has not been doubted. Moreover, the increase in revenue from Rs. 1,21,78,271/- in the last year to Rs. 5,64,16,108/- in this year has been overlooked by both Ld. AO and Ld. CIT(A). 7.3 We, therefore, hold that the impugned disallowance is not justified at all. Accordingly, the order of the Ld. CIT(A) is se ..... 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