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2013 (9) TMI 1 - AT - Income TaxCapital expenditure or Revenue expenditure - Disallowance of software expenses - Whether The expenditure incurred by the assessee on account of software and professional expenses was a revenue expenditure or not - CIT held it as capital expenditure - Held that - The treatment of a particular expense or a provision in the books of accounts can never be conclusively determinative of the nature of the expense. An assessee cannot be denied a claim for deduction which is otherwise tenable in law on the ground that the assessee had treated it differently in its books - Following decision of COMMISSIONER OF INCOME TAX Versus M/S ASAHI INDIA SAFETY GLASS LTD. 2011 (11) TMI 2 - DELHI HIGH COURT - Decided in favour of Assessee. Disallowance of royalty expenses - CIT confirmed disallowance - Held that - Assessee claimed expenditure on acquisition of such rights from producers as revenue expenditure. Assessing Officer held that audio rights could not be equated to raw material/stock material but were right in perpetuity on global right basis and that master plate did not become useless after recording of series of cassette. He held that acquiring of audio right was of enduring nature and therefore expenditure incurred thereon by assessee had to be treated as capital in nature applying provision of section 35A. Whether since revenue had treated-in-house expenses of production of similar item as revenue in nature, assessee was correct in claiming expenses for acquiring audio rights as revenue expenditure - Royalty paid for obtaining copyright by the assessee who was in the business of manufacturing pre-recorded cassettes was held to be revenue expenditure - Following decision of Tips Cassettes & Records Co. vs. ACIT 2000 (7) TMI 210 - ITAT BOMBAY-E and Commissioner of Income-Tax Versus M. Subramaniam 2003 (12) TMI 9 - MADRAS High Court - Decided in favour of assessee. Disallowance of Distributor s Settlement expenditure - Held that - nature of payment is not clear and what is coming out of the finding of the Assessing Officer is that there was some kind of criminal suit filed by the Distributors against the Employees and Director of the companies for which out of Court settlement was done and sum of Rs. 10,00,000/- was paid. It has not been brought on the record as how such an expenses was incurred for business purposes or for smooth functioning of the business. The onus is upon the assessee, which has not been discharged - Decided against assessee.
Issues Involved:
1. Disallowance of provision for stock obsolescence written back. 2. Disallowance of software expenses as capital expenditure. 3. Disallowance of royalty expenses for original sound track (OST) and licensing rights. 4. Disallowance of royalty paid to non-residents under section 40(a)(i). 5. Disallowance of distributor's settlement expenditure. Detailed Analysis: 1. Disallowance of Provision for Stock Obsolescence Written Back The assessee challenged the disallowance of Rs. 69,02,460/- for the provision of stock obsolescence written back. The assessee argued that the stock had a short lifespan and the provision was made for a potential future fall in market price. The Assessing Officer (AO) rejected this claim, citing a lack of scientific basis and consistency with the previous year's disallowance. The CIT(A) upheld this disallowance, following the earlier year's decision. The Tribunal, referencing its previous decision, set aside the order and remanded the matter to the AO for fresh consideration, emphasizing the need to examine the consistent accounting practices followed by the assessee. 2. Disallowance of Software Expenses as Capital Expenditure The AO treated Rs. 4,68,768/- of software expenses as capital expenditure, based on the previous year's assessment. The CIT(A) confirmed this disallowance. However, the Tribunal, referencing the decision in CIT vs. Amway India Enterprises, held that software expenses are revenue in nature and allowable as business expenditure. The Tribunal set aside the CIT(A)'s order and deleted the disallowance, allowing the assessee's claim. 3. Disallowance of Royalty Expenses for Original Sound Track (OST) and Licensing Rights The AO disallowed 80% of the royalty expenses, amortizing the expenditure over five years, based on earlier assessments. The CIT(A) upheld this decision. The Tribunal, referencing its earlier decisions, held that royalty expenses should be treated as revenue expenditure to the extent of 80%, as the AO had already allowed 20%. The Tribunal allowed the assessee's claim for the current year, following the precedent set in earlier years. 4. Disallowance of Royalty Paid to Non-Residents Under Section 40(a)(i) The assessee claimed a deduction of Rs. 16,55,761/- for royalty paid to non-residents, having paid the TDS on such payments. The Tribunal directed the AO to verify the payment of TDS and allow the expense accordingly. This ground was partly allowed for statistical purposes. 5. Disallowance of Distributor's Settlement Expenditure The AO disallowed Rs. 10,00,000/- paid towards a distributor's settlement, citing a lack of clarity on the nature of the criminal complaint and the settlement deed. The CIT(A) confirmed this disallowance. The Tribunal upheld the CIT(A)'s decision, noting the assessee's failure to demonstrate how the expenditure was incurred for business purposes. This ground was dismissed. Conclusion: The appeal was partly allowed for statistical purposes, with the Tribunal remanding some issues for fresh consideration by the AO and allowing others based on precedents and relevant legal principles. The Tribunal emphasized the need for thorough examination and adherence to established accounting practices and legal standards.
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