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2022 (7) TMI 862 - AT - Income TaxAddition on account of excess share premium received by the assessee - whether or not the case of the assessee is covered by the exception to clause (viib) of sub-section (2) of section 56? - HELD THAT - 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 conditions prescribed under clause (n) of Regulation 2 of the Venture Capital Funds Regulations. Moreover, the assessee company does not fall in the negative list of the Third Schedule of SEBI (Venture Capital Funds) Regulations, 1996 in view of the nature of business carried on by it. We are of the considered view that the assessee fulfils the requisite conditions of being a Venture Capital Undertaking. Therefore, the case of the assessee falls within the ambit of 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 expenditure is not incurred for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business but for running of the business of the assessee more efficiently, it partakes the character of revenue expenditure. The case of the assessee has all along been that it made payment for getting access to pay roll services, subscription services etc. in software wherein the assessee does not get any right to exploit the software for commercial purposes as the ownership remains with the vendor itself. The invoices available on record support the contention of the assessee that payment was made for subscription services and use of software and not for any outright purchase. The reliance by the CIT(A) on the decision of Maruti Udyog 2004 (10) TMI 278 - ITAT DELHI-A is misplaced as in that case the software was acquired by the assessee which was held to be capital asset and hence expenditure incurred on acquiring the software was held to be capital expenditure. In the case of the assesee before us there is no acquisition of software. The payment was made for mere usage of software. The ownership remained with the vendor. We, therefore, hold that the impugned expenditure is of revenue nature and is an allowable deduction. Accordingly, we set aside the order of the Ld. CIT(A) and allow ground No. 3 of the assessee. Ad-hoc disallowance of telephone and internet expenses account - AO disallowed 20% of the expenses claimed observing that utilisation of the services of telephone and internet for purposes other than business of the assessee cannot be denied - CIT(A) reduced disallowance to 10% of the expenses resulting in upholding of the impugned disallowance - HELD THAT - 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). We, therefore, hold that the impugned disallowance is not justified at all. Accordingly, the order of the Ld. CIT(A) is set aside. AO is directed to delete the disallowance in toto and modify the assessment. Ground No. 4 is thus allowed.
Issues Involved:
1. Addition of Rs. 9,95,086/- on account of excess share premium received. 2. Disallowance of Rs. 8,89,844/- on account of company international system expense. 3. Ad-hoc disallowance of Rs. 1,19,460/- out of telephone and internet expenses. Issue-wise Detailed Analysis: 1. Addition of Rs. 9,95,086/- on Account of Excess Share Premium Received: The primary issue revolved around the addition of Rs. 9,95,086/- under section 56(2)(viib) of the Income Tax Act, 1961. The assessee issued 3180 shares at a premium of Rs. 322.99 per share to Nirvana Digital India Fund, a Venture Capital Fund (VCF). The Assessing Officer (AO) contended that the allowable premium as per Rule 11UA was Rs. 10.07 per share, leading to an excess premium addition. The assessee argued that section 56(2)(viib) applies only to shares issued to residents and that the premium received from a VCF is excluded under the first proviso to section 56(2)(viib). The CIT(A) rejected this argument, asserting that the assessee is not a Venture Capital Undertaking (VCU) and thus not covered by the exclusion. Upon appeal, the Tribunal examined the definitions under section 10(23FB) and SEBI (Venture Capital Funds) Regulations, 1996, concluding that the assessee qualifies as a VCU. The Tribunal held that the assessee met the conditions for being a VCU and thus fell within the exclusionary provision of section 56(2)(viib). Consequently, the Tribunal decided in favor of the assessee, allowing the appeal on this ground. 2. Disallowance of Rs. 8,89,844/- on Account of Company International System Expense: The second issue pertained to the disallowance of Rs. 8,89,844/- for company international system expenses, which the AO treated as capital expenditure. The assessee argued that these were recurring expenses for subscription services and software usage, not providing enduring benefits. The CIT(A) upheld the disallowance, considering the software integral to the company's operations. The Tribunal, however, agreed with the assessee, noting that the payments were for software usage and subscription services, not for acquiring software. The Tribunal emphasized that such expenses, which do not result in asset acquisition or enduring benefits, should be treated as revenue expenditure. Citing relevant case law, the Tribunal allowed the appeal on this ground, categorizing the expenses as revenue in nature. 3. Ad-hoc Disallowance of Rs. 1,19,460/- out of Telephone and Internet Expenses: The final issue involved an ad-hoc disallowance of Rs. 1,19,460/- from telephone and internet expenses. The AO disallowed 20% of the claimed expenses, suspecting non-business usage. The CIT(A) reduced this to 10%, resulting in the sustained disallowance. The assessee contended that all expenses were business-related, with telephones and internet used by employees for official purposes. The Tribunal found merit in the assessee's arguments, noting that the increase in expenses was proportionate to the significant rise in revenue. The Tribunal held that the disallowance lacked justification, as the genuineness of the expenses was not in question. Consequently, the Tribunal set aside the CIT(A)'s order and directed the AO to delete the disallowance, allowing the appeal on this ground. Conclusion: The Tribunal allowed the appeal of the assessee on all grounds, directing the deletion of the additions and disallowances made by the AO and upheld by the CIT(A). The judgment emphasized the correct interpretation of section 56(2)(viib) exclusions, the nature of software-related expenses, and the justification of business-related expenses.
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