2012 (9) TMI 1070 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of interest income on Non-Performing Assets (NPA) as per RBI guidelines.
2. Disallowance of delayed payment of Provident Fund.
3. Disallowance of expenditure related to dividend income.
4. Addition of accrued interest on Government Securities.
5. Treatment of software expenditure as capital or revenue expenditure.

Summary:

1. Disallowance of interest income on Non-Performing Assets (NPA) as per RBI guidelines:
The assessee reversed income of Rs. 45,78,232/- following RBI guidelines on "Prudential Norms" for income recognition in respect of NPAs. The AO disallowed this, stating the reversal was not in accordance with the Income Tax Act, particularly section 43D. The CIT(A) did not accept the assessee's primary plea but accepted an alternative plea, restoring the matter to the AO for verification. The Tribunal, relying on the Delhi High Court decision in CIT vs. Vasisth Chay Vyapar Ltd., ruled that the RBI guidelines take precedence over section 145 of the Income Tax Act, allowing the assessee's claim of Rs. 45,78,232/-.

2. Disallowance of delayed payment of Provident Fund:
The AO disallowed Rs. 2,11,495/- for employer's contribution to Provident Fund and Rs. 2,632/- for employees' contribution, which were paid after the due date. The CIT(A) upheld the disallowance. The Tribunal allowed the assessee's claim, citing the Delhi High Court decision in CIT vs. Dharmendra Sharma, as the payments were made before the due date of filing the return.

3. Disallowance of expenditure related to dividend income:
The AO disallowed Rs. 45,40,697/- as management/administrative expenses related to earning dividend income, estimating 25% of the dividend income of Rs. 1,81,62,786/-. The CIT(A) upheld this disallowance. The Tribunal found that 98% of the dividend income was from long-term investments in group companies, requiring no extra effort. The matter was restored to the AO for reasonable disallowance based on the facts.

4. Addition of accrued interest on Government Securities:
The AO added Rs. 81,99,745/- representing interest on Government Securities, stating it had accrued to the assessee following the mercantile system of accounting. The CIT(A) deleted this addition, following the Tribunal's decisions for earlier years and the ITAT decision in State Bank of Bikaner and Jaipur vs. DCIT. The Tribunal upheld the CIT(A)'s decision, rejecting the revenue's appeal.

5. Treatment of software expenditure as capital or revenue expenditure:
The AO treated software expenditure of Rs. 1,64,152/- as capital expenditure, allowing depreciation and disallowing Rs. 1,23,114/-. The CIT(A) treated the expenditure as revenue, considering rapid technological developments. The Tribunal upheld this, following its own decision for AY 1997-98 and the Delhi High Court's affirmation that software like MS Office requires regular upgrades and is not of enduring nature.

Conclusion:
Both the appeals by the assessee and the department were partly allowed for statistical purposes, with specific issues restored to the AO for further verification and reasonable disallowance. The Tribunal's decisions were guided by precedents and statutory guidelines, ensuring compliance with applicable laws.