2012 (10) TMI 1108 - AT - Income Tax

Summary

Issues involved: Disallowance u/s 40A(3) of the Income-tax Act for cash payments exceeding Rs. 20,000 and treatment of expenditure on computer software as capital expenditure without allowing depreciation.

Disallowance u/s 40A(3) of the Income-tax Act:
The appellant, a partnership firm engaged in manufacturing and exporting silk fabrics, filed an appeal against the disallowance of Rs. 8,65,844 made by the Commissioner of Income-tax - (Appeals) I at Bangalore under section 143(3) of the Income-tax Act, 1961. The disallowance was related to cash payments exceeding Rs. 20,000 to job workers. The CIT(A) reduced the disallowance to Rs. 8,65,844 from the initial disallowance of Rs. 3,14,89,660 by considering the commercial exigencies and genuineness of the transactions. The appellant argued that the recipients were identified, TDS was deducted, and the recipients had offered income in their returns, thus justifying the cash payments. The ITAT Bangalore, after considering both parties' contentions, concluded that the disallowance u/s 40A(3) was not warranted as the appellant had demonstrated the commercial necessity for making cash payments exceeding Rs. 20,000.

Treatment of expenditure on computer software:
The appellant also contested the treatment of expenditure on computer software as capital expenditure without allowing depreciation. The ITAT observed that although the CIT(A) did not address this issue in the order, the appellant had raised it in the grounds of appeal. The ITAT directed the Assessing Officer to allow depreciation on the capital expenditure for the computer software at the applicable rates. The appeal filed by the appellant was allowed on both grounds.

Conclusion:
The ITAT Bangalore allowed the appeal filed by the appellant, setting aside the disallowance u/s 40A(3) for cash payments exceeding Rs. 20,000 and directing the Assessing Officer to allow depreciation on the capital expenditure for computer software.