TaxTMI 
TaxTMI 
2021 (8) TMI 369
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.... "Whether on the facts and circumstances of the case and in law, the Ld, CIT(A) erred in allowing technology recharge cost to the extent of Rs. 4,07,89,789/- as revenue expenditure without appreciating the fact that the assessee had incurred the said expenditure to set up technology and platform which would help him in conducting the business in the future?" 3. For all other financial years only one common ground relating to ground No. 2 above is raised. We are referring to facts and figures of A.Y. 2011-12 Apropos ground No. 1 3. Brief facts of the case are that during the course of assessment proceedings, the Assessing Officer observed from the annual report of the company that it is engaged in the business of providing credit information service and the assessee received the certificate of registration for commencing the business of credit information, issued by the RBI, on 17/2/2010 under the Credit Information Companies Regulation Act 2005 (CICRA). Under the terms of registration received from the RBI, the company was required to commence business within 6 months of grant of such registration. The assessee claimed that it commenced business operation from 12/8/2....
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....R. That the entire range of services rendered by the assessee is based on the availability of a comprehensive and up-to-date database on suitable software to operate it. That in the absence of such data, no worthwhile reports can be generated even if the software delivery platforms are ready. That no user of such CIR would find a report based on limited and incomplete data to be of use for the purpose intended. That the user of such reports i.e. banks/NBFCs/FIs would find utility therein, only is credit track record of the individual is culled out from a comprehensive database. That it is seen from the details of customers from whom the assessee has signed agreements for furnishing data, submitted by the assessee by its letter dated 3/12/13 that most of its database has been built and generated much after the day when it claims to have commenced business. 5. That significant part of the database was scattered and built-up, by receiving from bank/MBA CS/FIs much later, the assessee could have commenced business with the aid of a relatively small database and if the database was insufficient the utility of CIR to the user thereof was itself doubtful. That moreover, the assessee co....
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....d by the assessee to show that it has commenced his business. That since the business was not set up and commenced as strongly claimed by the assessee, the claim of the assessee for all the expenses debited to profit and loss account was rejected by the Assessing Officer as far as depreciation was concerned ,the same was also rejected as it cannot be claimed by an entity which is yet to commence its business. That the other income earned by the assessee of Rs. 2,81,98,850/- does not have any nexus with the business activity, and has been disallowed under the head "income from other sources". The Assessing Officer also relied on the decision of the Hon'ble Supreme Court in the case of Alkali Chemicals and Fertilisers in the assessee's case. Thus in view of the fact and circumstances, the Assessing Officer concluded that the assessee company was yet to set up and commence its business activities and, therefore, the income of Rs. 2,81,98,850/-was disallowed and added back to the total income of the assessee. 7. Upon assessee's appeal learned CIT(A) deleted the disallowance by holding as under : "5.2.4 It is noted that the appellant is in the business of providing c....
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....uality reports. Nevertheless, it is seen that vide letter dated 23/12/2013, the appellant had submitted details of agreement with banks etc., to the Assessing Officer which clearly shows 25 agreements were entered into on or before 10/08/2010. It is contended by the appellant that by 12/10/2010 it had a database of 27.4 3 million records out of which 19.43 million records were processed as on 12/08/2010. There is no adverse finding about the amount of data collected by the appellant and processed in the assessment order. 5.2.7 During the relevant year, 32 individual customers approached the appellant for CIR report's and paid service fee. Of these, 28 customers were given a Nil report and balance for reports were appropriately issued. All details relating to these 32 individual customers were submitted to the Assessing Officer vide letter dated 16/01/2014. The details therein are not disputed. 5.2.8 Distilling all the objections of the Assessing Officer, it can be said that the primary objection was that the appellant did not have sufficient database to make it possible even to generate a single CIR report. Secondly, 32 individual customers were too low a numb....
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....onal Bank. Admittedly, such a report would be not very robust credit rating report and may not be able to give any analysis about an individual who is not or has never been a client of the said bank. However, that does not mean that the appellant was not engaging in business activity just because of such data handicap, unless there is any contrary finding of fact. In the instant case, there is no such finding of fact. 5.2.11 Coming to the small number of clients CIR procured by the appellant during the year, the conclusion of the Assessing Officer that it was done merely to create resemblance of having commenced business appears to be based on conjectures and not on any hard investigative finding. There is nothing to indicate that these customers were kind of dummy customers shown only to establish that business had commenced. Setup or commencement of business cannot be dependent upon the number of customers opted or the value of business done. Even if one genuine customer has been provided any goods or services, it will have to be accepted that business has commenced. Moreover, for a business like this, data from banks/FIs etc., is akin to raw material. Procurement of raw....
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....en the business can be said to be 'set-up' It is noted from the 'Notes to the Computation Sheet' attached with the return of income that assessee had clearly given its date of setting up of business as 11-10-2006 being the date on which the assessee-company received NBFC registration certificate from RBI. On this date, the assessee was legally and commercially competent to do its business. The expression "setting-up" means, as defined in the Oxford English Dictionary, "to place on foot" or "to establish", and in contradistinction to "commence". The distinction is this that when a business is established and is ready to be commenced, then it can be said that business is 'set-up'. But before it is ready to commence business, it is not setup. In other words, for setting up of business, what is required is readiness for commencement of business and actual commencement of business would not be necessary."[Para 10] 5.2.14 The above decision took into consideration ratios of Western India Vegetable Products Ltd. v. C/T[1954] 26 ITR 151 (Bom.) (para 10), CITv. Ralliwolf Ltd. [1980J 121 ITR 262 (Bom.) (para 10), CIT Vs. Saurashtra Cement & Chemical Industrie....
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....ence from our part. Accordingly, we uphold the same. In the result, this issue is decided in favour of the assessee and against the Revenue. Apropos ground No. 2 10. During the assessment proceedings, the Assessing Officer observed that the appellant company had claimed the technology recharge cost of Rs. 10,18,95,804/-in its profit and loss account out of which Rs. 5,13,62,128/- was considered as capital and the balance as a revenue in nature. On perusal of the items, the Assessing Officer noted that all relate to the creation of intangibles which constitute the primary assets/resource, to enable the company to conduct the business. That the expenses were set up for a technology to enable the company to conduct its business and therefore only of capital nature. That the costs were related to intangibles, which are not owned by the company, but are a key resource for the conduct of its business. That they represented technology cost, which are the most critical resource for enabling the assessee to conduct its business and provide a benefit of an enduring nature to the company. That it is the CBV2 software platform and all related intangibles that enable the company to run it....
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.... Total 4,07,89,789 3. The nature of above expenses is as under: i. Software maintenance fee-Rs. 11,42,081 The amount of Rs. 11,42,081 is incurred towards annual maintenance cost for the CBV2 software. These costs are incurred towards the smooth functioning of the business and not towards acquisition of the CBV2 platform. The software maintenance costs are incurred towards increasing the stability of the platform. The said expenditure is recurring and therefore revenue in nature. Accordingly a deduction has been claimed under section 37(1) while computing the total income. ii. Computer hardware installation and maintenance cost - Rs. 3,87,505 The amount of Rs. 3,87,505 in incurred towards hardware installation and support services for the stability of the CBV2 platform. iii. CBV2 support and maintenance cost - Rs. 1,81,17,617 The above expenses are towards maintenance cost for the CBV2 software from 12 August 2010 to 31 March 2011. These are additional monthly cost for standby resources from EL to support CBV2 team of the appellant. The expenses also cover support services provided by EL to stabilize the CBV2....
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....re and software platform/architecture. Applying the ratio of decision of Hon'ble Supreme Court in Empire Jute Company Ltd (124 ITR 1) cited by the-appellant, in my opinion, the impugned expenses cannot be considered as capital in nature. Perhaps, the Assessing Officer did because he did not fully understand the difference between a bricks and mortar business and a business that uses computers and software platform/architecture as machinery that requires regular upkeep, repair and maintenance. Accordingly, disallowance of Rs. 4,07,89,789/-is deleted. This ground of appeal is allowed. 13. Against the above order the Revenue is in appeal before us. 14. We have heard both the parties and perused the records. We find that the issue here is whether the assessee's claim of technology recharge cost is revenue expenditure or capital expenditure. The order of the Assessing Officer is again thoroughly based upon surmises and conjecture with no cogent material whatsoever. The opinion of the Assessing Officer that cost and expenses are incurred not to earn income during the year but continue to provide benefit over a period of years is totally a surmises and conjecture. Moreover, in t....