2016 (6) TMI 1240 - AT - Income Tax

Software expenditure - nature of expenditure - Held that - The functional test would become material and if on application of the same, it is found that the expenditure operates to confer benefit in the revenue field, then the same would be revenue expenditure, irrespective of the duration of time for which the assessee acquires rights in a software. It has been held that the period of advantage in the context of computer software should not be viewed from the point of view of different assets or advantage like tenancy or use of know-how because software is a business tool enabling a businessman to run his business. It is thus necessary that in order to treat any expenditure as capital expenditure the same should result in accrual of advantage of enduring benefit and the benefits should accrue to the assessee in the capital field. What is meant by accrual of benefit in the capital field that the said benefit should form part of the profit making apparatus of the assessee s business. In the facts of the present case, we find there is no discussion on facts. The argument that the issue should be decided on the basis of past precedent cannot be accepted as the issue is purely factual and the relevant discussion on facts both by the taxpayer and the tax authorities is found to be missing. We find that the description of the softwares acquired given before the CIT(A) does not throw any light on the nature, use or purpose of the software which has to be understood in the context of its functional use to the taxpayer s specific business. Accordingly, for this necessary exercise the issue is restored to the file of the AO. The assessee is given liberty to place necessary supporting evidences in support of its claim. Claim deferred revenue expenditure - Held that - There is no dispute about the fact that assessee had incurred the expenditure and the expenses are not of capital nature, therefore, as per section 37 of Act, these are allowable in the year in which such expenditure has been incurred. The A.O. had relied upon the judgement of Madras Industrial Corpn. For disallowing a part of expenditure. However, in the judgement of Madras Industrial Investment 1997 (4) TMI 5 - SUPREME Court had held that expenditure can be spread over a period of time provided the assessee decides to do so and therefore, from the above judgement it can be concluded that right to claim deferred revenue expenditure is given to assessee and not to revenue Deduction as foreign exchange loss allowed.

Issues Involved:
1. Deletion of disallowance under Section 14A on account of interest paid on borrowed funds.
2. Deletion of disallowance of foreign exchange fluctuation loss.
3. Confirmation of disallowance of expenses on purchase of software as capital expenditure.
4. Ad-hoc disallowance under Section 14A for management/administrative expenses.
5. Addition on account of revenue expenditure incurred in raising loan funds treated as Deferred Revenue expenditure.
6. Addition on account of provision for Bad and doubtful debts.
7. Disallowance in respect of Amortization of loss on forward cover premium.
8. Levy of interest under Section 234D.

Detailed Analysis:

1. Deletion of Disallowance under Section 14A on Account of Interest Paid on Borrowed Funds:
The Revenue's appeal challenged the deletion of disallowance of ?12,65,44,530/- made under Section 14A on account of interest paid on borrowed funds used for investments in shares, which earned tax-free dividend income of ?6,85,58,082/-. The CIT(A) held that the investments were made from internal accruals and not borrowed funds. The Tribunal upheld this view, noting that the assessee demonstrated sufficient internal accruals to cover the investments, and thus, no interest expense was attributable to the exempt income. The Tribunal also referenced the decision in the case of Eicher Ltd., emphasizing that disallowance under Section 14A requires a finding of actual expenditure incurred in relation to exempt income.

2. Deletion of Disallowance of Foreign Exchange Fluctuation Loss:
The Revenue's appeal also contested the deletion of disallowance of ?1,13,35,384/- on account of foreign exchange fluctuation loss. The CIT(A) and the Tribunal found that the loss was incurred due to forward cover premium amortized in the accounts for the relevant year. The Tribunal held that the loss was neither contingent nor notional and should be allowed as a revenue expenditure, referencing the decision in ONGC Ltd. vs DCIT.

3. Confirmation of Disallowance of Expenses on Purchase of Software as Capital Expenditure:
The assessee's appeal challenged the confirmation of disallowance of ?23,04,500/- for software expenses considered as capital expenditure. The Tribunal noted that the nature and use of the software were not adequately addressed by the assessee. Citing the decision in Amway India Enterprises vs DCIT, the Tribunal emphasized the need to apply the functional test to determine whether the expenditure was capital or revenue in nature. The issue was remanded to the AO for a fresh determination based on the functional utility of the software.

4. Ad-hoc Disallowance under Section 14A for Management/Administrative Expenses:
The assessee contested the ad-hoc disallowance of ?25,00,000/- under Section 14A for management/administrative expenses. The Tribunal found that the AO had not provided specific evidence of expenditure incurred to earn the exempt income. Following the precedent set in the assessee's own case for the previous year and the decision in Hero Cycles Ltd., the Tribunal allowed the assessee's appeal, noting that without a finding of actual expenditure, no disallowance under Section 14A could be justified.

5. Addition on Account of Revenue Expenditure Incurred in Raising Loan Funds Treated as Deferred Revenue Expenditure:
The assessee's appeal also challenged the addition of ?8,14,14,298/- treated as Deferred Revenue expenditure. The Tribunal noted that the issue was similar to the previous year, where the ITAT had allowed the expenditure as revenue expenditure in the year it was incurred, referencing the decision in Taparia Tools Ltd. vs JCIT. The Tribunal followed this precedent and allowed the assessee's appeal.

6. Addition on Account of Provision for Bad and Doubtful Debts:
The assessee's appeal against the addition of ?13,21,40,466/- for the provision for Bad and doubtful debts, created in compliance with RBI directives, was dismissed as not pressed, following the decision in Southern Technology.

7. Disallowance in Respect of Amortization of Loss on Forward Cover Premium:
The assessee and the Revenue both appealed the disallowance of ?1,13,35,384/- for amortization of loss on forward cover premium. The Tribunal found that the loss was incurred on revenue account and should be allowed in the year it was incurred, referencing the decision in CIT vs Industrial Finance Corporation of India Ltd. The Tribunal allowed the assessee's appeal and directed the AO to grant necessary relief.

8. Levy of Interest under Section 234D:
The assessee's appeal against the levy of interest under Section 234D amounting to ?12,63,900/- was not specifically addressed in the detailed analysis provided.

Conclusion:
The Tribunal's judgment addressed multiple issues related to disallowances and additions made by the AO and upheld or reversed these based on legal precedents and specific facts of the case. The Tribunal emphasized the need for factual determination and adherence to judicial precedents in deciding the nature of expenditures and their allowability under the Income Tax Act.

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