Court Upholds Depreciation Claim in Online Lottery Business, Dismisses Revenue's Appeal

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Case Name:

Commissioner of Income Tax Vs Cairs Computer Aided Information & Services Pvt. Ltd. (High Court of Delhi)

ITA 273/2015 & C.M. No. 7357/2015

Date: 22nd April 2015

Key Takeaways

1. Depreciation claims on assets used in business, even if through sub-distributors, can be valid.

2. Previous years' scrutiny assessments carry weight in subsequent years' disputes.

3. The court emphasized the importance of factual findings in tax matters.

Issue

Was the assessee's (Cairs Computer Aided Information & Services Pvt Ltd) claim for depreciation for the assessment year 2009-10 justified, given the circumstances of their online lottery business model?

Facts

1. Cairs provides online lottery services on behalf of the Nagaland Government.

2. The company appointed distributors and sub-distributors for its business.

3. Their business model included providing gaming solutions for customer access.

4. For the assessment year 2008-09, Cairs claimed depreciation of ₹72,16,610/-.

5. The Assessing Officer (AO) initially disallowed this claim.

6. The machinery in question was provided to sub-distributors for customer use.

7. For assessment years 2006-07 and 2007-08, depreciation had been allowed in scrutiny assessments.

Arguments

Assessee's (Cairs) Arguments:

1. The machinery was provided to sub-distributors for business use.

2. Depreciation had been allowed in previous years under scrutiny.

3. A sub-distributor confirmed that the machinery was provided on-site.

Revenue's Arguments:

1. The assessee couldn't demonstrate ownership or acquisition of the machinery for its business.

2. The depreciation claim for AY 2009-10 was not justified.

Key Legal Precedents

The judgment mentions a previous case: ITA No. 238/2015 Commissioner of Income Tax-I vs. M/s Cairs Computer Aided Information & Services Pvt. Ltd. (Decided on 13.04.2015). This case had affirmed the ITAT's order for previous years, which influenced the current decision.

Judgement

The High Court dismissed the revenue's appeal and upheld the ITAT's decision in favor of Cairs. Key points in the judgment:

1. The court found no reason to question the scrutiny assessments of AY 2006-07 and 2007-08.

2. The revenue's attempt to reopen the assessment for 2009-10 failed as a sub-distributor confirmed the assessee's claim.

3. The court emphasized that the findings were factual in nature, and no substantial question of law arose for consideration.

FAQs

Q1: Why did the court allow the depreciation claim?

A: The court allowed the depreciation claim because the assets were part of an existing block of assets, had been allowed in previous years, and were used for the assessee's business, even if through sub-distributors.

Q2: What role did previous years' assessments play in this case?

A: The scrutiny assessments for AY 2006-07 and 2007-08, which allowed depreciation, were considered significant by the court. This established a precedent for allowing similar claims in subsequent years.

Q3: How did the sub-distributor's statement impact the case?

A: The statement from M/s Best & Company, a sub-distributor, confirmed the assessee's contention about the use of machinery, which helped to validate the depreciation claim.

Q4: What sections of the Income Tax Act were relevant in this case?

A: The judgment mentions Section 143(3) (of Income Tax Act, 1961) for scrutiny assessments and Section 133(6) (of Income Tax Act, 1961) for inquiries conducted by the Assessing Officer.

Q5: Why did the High Court dismiss the revenue's appeal?

A: The High Court dismissed the appeal because it found the ITAT's decision to be based on factual findings, and no substantial question of law arose for consideration.

1. The revenue is aggrieved by the order of the Income Tax Appellate Tribunal (ITAT). It contends that the assessee’s claim for depreciation for assessment year (AY) 2009-10 was, in the circumstances of the case, wrongly permitted. The revenue’s appeal against the order of the CIT(Appeals) was rejected by the impugned order.

2. The assessee provides online lottery services on behalf of Nagaland Government and for this purpose it had appointed distributors and sub- distributors. The business model, inter alia, included provision of gaming solution which enabled the customer to access the scheme. In its return for AY 2008-09, the assessee claimed depreciation to the extent of ₹72,16,610/-. The AO disallowed this on the ground that the assessee was unable to demonstrate that the machinery claimed to have been used by it was in fact owned or acquired by assessee for its business. The assessee’s contention was that the machinery was provided to sub-distributor at that site for use by the customers.

3. The assessee’s appeal to the CIT (Appeals) was allowed, who took note, inter alia, of two facts i.e. for AY 2006-07 and 2007-08, depreciation had been allowed in scrutiny assessment and that for AY 2009-10, in the reply to queries under Section 133(6) (of Income Tax Act, 1961), one of the assessee’s sub-distributors had confirmed that the machinery on the site was provided. The revenue’s appeal was rejected by the ITAT. The impugned order holds as follows :

“6. We have heard rival contentions and perused the material available on record, Following facts clearly emerge :

a. The assets qua which the depreciation is claimed were not purchased during this year, but in earlier years. Purchases and depreciation thereon have been allowed in earlier years.

b. It is undisputed that they were purchased in earlier years i.e. in A.Y. 2006-07 and 2007-08 besides depreciation was allowed and the assessments were framed u/s 143(3) (of Income Tax Act, 1961).

c. The impugned assets became part of the block of assets and any question in subsequent year about the ownership is meaning less, therefore, we are unable to sustain the finding of the assessing officer that assets were not owned by the assessee.

6.1. Adverting to the issue about user of impugned assets towards the assessee’s business of online lottery the assessee has demonstrated the use of the assets along with the sub- distributor. The subsequent upgradation of the software and machinery etc. though may be with the sub distributor the fact remains that the assessee’s assets were also used. It is not the case of the revenue that the upgradation expenditure was not incurred by the sub-distributor and it has been claimed by the assessee. This is so because in that case assessing officer ought to have disallowed it. Under these circumstances we are of the view that the impugned assets were used for the purpose of the assessee’s business, therefore, depreciation is to be allowed. We find force in the argument of ld. Counsel for the assessee that assuming worst against the assessee the assets being the part of the existing block of assets on such presumption also become assets already part of the block of assets kept in readiness for use of the business, the depreciation is to be allowed. In view of above we find no merit in revenue's appeals.”

4. This Court has considered the submissions. It is a matter of record that for AY 2006-07 and 2007-08, the assessments were completed under Section 143(3) (of Income Tax Act, 1961) after due enquiries were conducted by the AO. There is nothing on the record to suggest that those were either erroneous or based on premises which did not disclose relevant details. The revenue’s attempt in reopening the assessment of 2009-10, by relying upon statement of one of the sub-distributors also failed because the said concern, M/s Best & Company, in fact confirmed the assessee’s contention. Given the factual nature of these findings, the Court is of the opinion that no substantial question of law arises for consideration.

5. For the previous years, we have affirmed the order of the ITAT (in ITA No. 238/2015 Commissioner of Income Tax-I vs. M/s Cairs Computer Aided Information & Services Pvt. Ltd. Decided on 13.04.2015). In view of the said order, no question of law arises to be determined.

6. The appeal and application are consequently dismissed.

S. RAVINDRA BHAT, J

R.K.GAUBA, J

APRIL 22, 2015