2008 (4) TMI 743 - AT - Income Tax

Summary

Issues Involved:
1. Classification of computer software expenses as capital or revenue expenditure.
2. Disallowance of bad debts claim.
3. Computation of long-term capital gain on the sale of property.
4. Applicability of interest u/s 234D.
5. Disallowance of professional fees for software.
6. Disallowance of depreciation on residential premises used by the Managing Director.

Summary:

1. Classification of Computer Software Expenses:
The assessee contended that the computer software expenses, including upgradation, maintenance, and support, should be treated as revenue expenditure. The Tribunal, referencing the Special Bench decision in AMWAY Enterprises vs. DCIT, restored the matter to the AO for reconsideration. Both the assessee's and Revenue's appeals on this issue were allowed for statistical purposes.

2. Disallowance of Bad Debts Claim:
The assessee's claim of Rs. 28,13,116/- as bad debts was disallowed by the AO, who argued that the assessee failed to prove the debts had become bad. The Tribunal, citing the Special Bench decision in DCIT vs. Oman International Bank, held that post-amendment, the assessee is not required to prove that the debt has actually become bad. The Tribunal accepted the assessee's ground and dismissed the Revenue's ground, favoring the assessee.

3. Computation of Long-Term Capital Gain:
The assessee disputed the computation of long-term capital gain on the sale of property, arguing that the indexed cost of acquisition should be based on the year of allotment (1993-94). The Tribunal, referencing its own decisions in similar cases, held that the indexed cost of acquisition as computed by the assessee is correct. The Tribunal reversed the CIT(A)'s order and directed the AO to accept the assessee's computation.

4. Applicability of Interest u/s 234D:
Both parties agreed that the issue of interest u/s 234D, concerning refunds granted prior to June 1, 2003, should be decided based on the pending Special Bench decision. The Tribunal restored the issue to the AO to decide in accordance with the Special Bench's decision and any higher judicial forum's decision available at that time.

5. Disallowance of Professional Fees for Software:
The AO treated the professional fees for software as capital expenditure. The CIT(A) allowed it as revenue expenditure, stating it was for facilitating the company's operations. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenses were related to the company's operations and thus revenue in nature.

6. Disallowance of Depreciation on Residential Premises:
The AO disallowed depreciation on residential flats used by the company's directors/employees, arguing they were not used for business purposes. The CIT(A) allowed the depreciation, and the Tribunal upheld this decision, referencing the Karnataka High Court's decision in CIT vs. McDowell and Co., which allowed depreciation on residential accommodation used by company officials.

Conclusion:
The assessee's appeal was partly allowed, and the Revenue's appeal was partly allowed for statistical purposes. The Tribunal pronounced the order in the open court on April 30, 2008.