2014 (5) TMI 346 - AT - Income Tax

Deletion of disallowance of deduction - Provision made for after sales services Held that - Following M/s. Rotork Controls India (P) Ltd. Versus Commissioner of Income Tax, Chennai 2009 (5) TMI 16 - SUPREME COURT OF INDIA - the provision is being made by the assessee on the basis of actual expenditure incurred in the subsequent assessment year relating to sales made in the relevant previous year - a provision is recognized when an enterprise has a present obligation as a result of past event and it is probable that an outflow of resources will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation the provision has to be made based on the reliable estimation of the obligations the matter needs to be remitted back to the CIT(A) for fresh adjudication Decided in favour of Revenue. Allowability of software expenses Purchase of operating software Held that - The assessee had incurred expenses on software expenses and was claimed as revenue expenses - the incurring of expenses has not been disputed by the Revenue - if the expenses is considered to be capital expenditure, the Assessee will have to be granted depreciation @ 60% on WDV basis in A.Y. 06-07 and also in subsequent years - the total taxable income determined by the AO, the changes that would be required to be made in subsequent assessments orders if the depreciation is to be allowed in all subsequent years, the claim of the assessee is to be allowed - the allowance of the expenditure should not be considered as a precedence for allowance of the expenditure Decided in favour of Assessee.

Summary

Issues Involved:
1. Disallowance of deduction for provision made for after-sales services.
2. Non-allowance of software expenses as revenue expenditure.

Detailed Analysis:

1. Disallowance of Deduction for Provision Made for After-Sales Services:

The Assessee claimed Rs. 39,75,783 as "after-sales services" expenses, which the AO disallowed, considering them contingent in nature. The CIT(A) deleted this addition, referencing previous decisions in the Assessee's favor. The Revenue appealed, arguing the AO's stance, while the Assessee cited past Tribunal decisions supporting their claim.

The Tribunal noted that similar issues in previous years were resolved favorably for the Assessee, emphasizing the need for reliable estimation of obligations as per the Supreme Court's decision in Rotork Controls India P Ltd vs CIT. The Tribunal found no specific findings by lower authorities on compliance with these conditions and remitted the issue to the CIT(A) for re-examination in light of the Supreme Court's guidelines and past Tribunal decisions, granting the Revenue's appeal for statistical purposes.

2. Non-Allowance of Software Expenses as Revenue Expenditure:

The Assessee incurred Rs. 8,73,485 on software expenses, which the AO treated as capital expenditure, allowing 60% depreciation and disallowing Rs. 3,49,384. The CIT(A) upheld this view, considering software as a capital asset eligible for depreciation.

The Assessee argued that the software had a short life span and the expenditure was minimal compared to their total revenue. They contended that treating the expenses as capital would require adjustments in subsequent years with insignificant tax impact. The Tribunal acknowledged the facts and the minimal tax impact, allowing the expenses as revenue expenditure in this case, but clarified that this decision should not set a precedent for future cases.

Conclusion:

The Tribunal allowed the Revenue's appeal for statistical purposes, remitting the issue of after-sales service provision to the CIT(A) for re-examination. The Assessee's appeal was allowed, treating software expenses as revenue expenditure for this specific case.