2011 (1) TMI 1444 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of software expenditure as capital or revenue expenditure.
2. Disallowance of expenditure on leased premises.
3. Disallowance of payment for non-deduction of TDS u/s 40(a)(ia).

Summary:

1. Treatment of Software Expenditure:
The primary issue was whether the software expenditure of Rs. 2,03,500 should be treated as capital or revenue expenditure. The Assessing Officer (AO) treated it as capital expenditure, relying on the decision of the Hon'ble Rajasthan High Court in CIT v/s Arawali Construction Co. (P) Ltd., 259 ITR 30 (Raj.). The CIT(A) upheld the AO's decision, stating that the nature of expenditure does not change due to the economic environment and that computer software is included in the block of assets with allowable depreciation at 60%. However, the Tribunal, after considering the nature of the software and the need for constant upgradation, concluded that there is no enduring benefit and allowed it as revenue expenditure, setting aside the order of the CIT(A).

2. Disallowance of Expenditure on Leased Premises:
The second issue was the disallowance of Rs. 41,522 towards the capitalization of expenditure on leased premises. The AO found that out of the total expenditure of Rs. 1.11 crore, Rs. 44,32,997 was for renovation and improvement of the building, thus falling under Explanation 1 of Section 32 of the Act. The CIT(A) confirmed the AO's action, stating that the expenses were indeed for renovation/improvement of office premises. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenditure provided a permanent benefit to the company and confirmed the addition of Rs. 41,00,522.

3. Disallowance of Payment for Non-Deduction of TDS u/s 40(a)(ia):
The third issue involved the disallowance of Rs. 2,37,01,175 for non-deduction of TDS on payments made to the parent company, Strategic Capital Corporation. The AO observed that the payments were for work including the supply of labor, attracting TDS u/s 194C. The CIT(A) upheld the AO's decision, stating that the payments were for work and supply of labor, thus TDS was deductible. The Tribunal, however, found that the payments were reimbursements for shared services and infrastructure on a cost-to-cost basis without any markup. It held that TDS was not required on reimbursed expenses as they had already been subjected to tax deductions at source when originally paid. Thus, the Tribunal allowed this ground of appeal.

4. Levy of Interest u/s 234A, 234B, 234C, and 234D:
The last ground regarding the levy of interest charged u/s 234A, 234B, 234C, and 234D was not addressed by the CIT(A). The Tribunal set aside this issue to the file of the CIT(A) for fresh adjudication.

Conclusion:
The appeal was partly allowed, with the Tribunal ruling in favor of the assessee on the treatment of software expenditure and the disallowance of payment for non-deduction of TDS, while upholding the disallowance of expenditure on leased premises. The issue of interest levy was remanded to the CIT(A) for fresh consideration.