2016 (3) TMI 1292 - AT - Income Tax

Nature of expenditure on software - revenue or capital - Held that - The issue is also covered in favour of the assessee by the decision of the Hon ble Bombay High Court in the case of Raychem RPG Ltd. (2011 (7) TMI 953 - Bombay High Court) wherein it was held that software facilitate assessee s trading operations or enable the management to conduct assessee s business more efficiently or more profitably but it is not in the nature of profit-making apparatus. Therefore, expenditure on software was to be allowed. In the instant case also, assessee was in the business of shipping agent, software was used to facilitate assessee s business of shipping, therefore, there is no reason to treat the expenditure on software as capital. Addition of closing balance of CENVAT credit on account of unutilized service tax credit u/s 145A - Held that - Tssue with regard to applicability of Sec. 145A on unutilized service tax credit was considered by the Tribunal in assessee s own case 2015 (8) TMI 312 - ITAT MUMBAI as held this section only applies to purchase and sale of goods and inventory for the purpose of valuation of stock on the date of valuation. In the normal circumstances it is at the time of valuation of closing stock and not for the valuation of service contracts. If the provision of section 145A is not applicable on services, then the action of the AO in invoking the provisions of section 145A to make the addition is legally not correct. Accordingly on this reason, the order of the Ld. CIT(A) is set aside and the addition made by the AO is deleted. Disallowance u/s 14A - Held that - As there was no exempt income during the year under consideration, therefore, no disallowance should be made. See case of Cheminvest Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT wherein it was held that no disallowance u/s 14A should be made when there is no exempt income during the year. Thus we delete the disallowance made u/s 14A of the Income Tax Act, 1961. - Revenue appeal dismissed.

Summary

Issues:
1. Treatment of software expenses as capital expenditure.
2. Addition of closing balance of CENVAT credit on account of unutilized service tax credit.
3. Adjudication of ground not considered by CIT(A).
4. Disallowance under section 14A in absence of exempt income.

Analysis:

Issue 1: Treatment of software expenses as capital expenditure
The Appellate Tribunal considered cross-appeals filed by the assessee and revenue against the order of CIT(A) for A.Ys 2007-08 and 2008-09 regarding the treatment of software expenses. The AO had disallowed the assessee's claim of software expenses as capital in nature. The Tribunal noted that the issue was covered by its own previous order and by the decision of the Hon'ble Bombay High Court in a similar case. It was held that software expenses were to be allowed as they facilitated the assessee's business operations. Consequently, the appeals of the revenue were dismissed.

Issue 2: Addition of closing balance of CENVAT credit on account of unutilized service tax credit
The AO made an addition of the closing balance of CENVAT credit on account of unutilized service tax credit under section 145A of the Act. The CIT(A) confirmed this addition, leading the assessee to appeal further. The Tribunal referred to its previous order in the assessee's case, where it was held that section 145A applied only to the valuation of goods and inventory, not services. Following this reasoning, the addition made by the AO was deleted, and the ground of the assessee's appeal was allowed for both years.

Issue 3: Adjudication of ground not considered by CIT(A)
In A.Y 2007-08, the assessee raised a ground regarding the non-adjudication of a matter by the CIT(A). The Tribunal found that the CIT(A) had not considered this ground and, in fairness, decided to restore the matter back to the CIT(A) for a fresh decision, considering the revised return income and providing due opportunity to the assessee.

Issue 4: Disallowance under section 14A in absence of exempt income
For A.Y 2008-09, the assessee challenged the disallowance under section 14A amounting to a specific sum, arguing that there was no exempt income during the year. The Tribunal referred to a decision of the Hon'ble Delhi High Court, which held that no disallowance under section 14A should be made when there is no exempt income. Consequently, the disallowance made under section 14A was deleted, following the Delhi High Court's order.

In conclusion, the appeals of the revenue were dismissed, while the appeals of the assessee were allowed in part based on the Tribunal's findings and the applicable legal precedents.