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2014 (10) TMI 472 - AT - Income TaxAnnual web hosting charges treated as prior period expenses Held that - The main contention of the assessee is that the bill was raised on 17.4.2006, therefore, the liability of prior period was crystallized during the financial year relevant to the AY, as per mercantile system of accounting, the claim of expenditure was allowable and the authorities below grossly erred in making disallowance and addition on this issue as decided in Saurashtra Cement And Chemical Industries Limited Versus Commissioner Of Income-Tax 1994 (10) TMI 30 - GUJARAT High Court - if any liability, though relating to earlier year depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the later previous year, it cannot disallowed as deduction merely on the basis that the accounts are maintained on mercantile basis and that it is related to a transaction of previous years - the revenue authorities grossly erred in disallowing the claim of expenditure incurred by the assessee during relevant previous year pertaining to the liability relating to earlier year the AO is directed to verify and examine the claim of the assessee Decided in favour of assessee. Addition u/s 14A r.w Rule 8D Held that - The authorities below have not dealt with the issue of disallowance u/s 14A of the Act as per letter and spirit of the relevant statutory provisions and as per decision of Maxopp Investment Ltd. & Others Versus Commissioner of Income Tax 2011 (11) TMI 267 - Delhi High Court - the issue of disallowance u/s 14A of the Act requires thorough verification and examination at the end of AO and hence assessment order as well as order is set aside and the issue is restored to the file of AO with a direction that the AO shall adjudicate the issue afresh by affording due opportunity of hearing for the assessee without being prejudiced with the observations and findings of the assessment order as well as impugned order Decided in favour of revenue. Capitalization of the advertisement expenses Held that - The AO has not doubted the genuineness and truthfulness of the claim of the assessee pertaining to the expenses for glow sign board and hoardings in view of decision of CIT vs Liberty Group Marketing Division 2008 (4) TMI 219 - PUNJAB AND HARYANA HIGH COURT - the AO was not justified in making the disallowance and addition and on the other hand, CIT(A) rightly deleted the addition by holding that the expenses for hoardings and glow sings are expenditure of revenue in nature because the same neither bring any enduring benefit for the assessee and the advantage consists merely in facilitating the assessee's trading operations, supporting the management and conduct of assessee's business to be carried out on more efficiently or more profitably leaving fixed capital of the assessee untouched Decided against revenue. Horticulture expenses at plant and colony Held that - CIT(A) rightly was of the view that as the main purpose of expenditure on horticulture was to facilitate the operations by providing better environment which is of revenue in nature, hence, the same is allowable u/s 37 of the Act - there are other several expenses which are incurred for decorating the building and for providing general security, beautification and required environment for day to day activities of manufacturing unit of the assessee, the kind of expenses are incurred for the purpose of business and the same cannot be disallowed. Security services at the staff colony Held that - Following the decision in Empire Jute Co. Ltd. vs CIT 1980 (5) TMI 1 - SUPREME Court - the expenditure incurred for welfare of employees and even general public interest is allowable as revenue deduction - the CIT(A) was right in deleting the addition. Computer peripherals supply expenses Held that - The AO treated the expenditure as capital in nature and made an addition, after allowing depreciation @15%, by holding that the assessee has not furnished details/evidence to support the claim - the CIT(A) granted relief for the assessee on perusal of the details furnished before him but the CIT(A) has not given any finding about the nature of expenditure and facts emerging from details/evidence submitted before him, neither and remand report has been called from the AO the matter is to be remitted back to the AO for adjudication. Software purchase and development expenditure Held that - CIT(A) rightly held that the expenditure incurred on software licence fee, purchase/development of miscellaneous software and hosting and maintenance of website and charges for internet band with connectivity are expenditure revenue in nature and there is no valid reason to interfere with the same, hence, order of CIT(A) is upheld - the issue of horticulture expenses in plant and staff colony, security, charge for staff colony and software development expenses is decided in favour of the assessee and it is partly dismissed on above four issues and on the issue of computer supplies part ground of the revenue is deemed to be allowed by restoring the issue to the file of the AO with the directions - Decided in favour of revenue.
Issues Involved:
1. Prior period expenses. 2. Disallowance under Section 14A read with Rule 8D. 3. Capitalization of advertisement expenses. 4. Miscellaneous expenses including horticulture, security services, computer supplies, and software purchase expenses. Detailed Analysis: 1. Prior Period Expenses: The assessee's appeal included a ground challenging the CIT(A)'s decision to treat annual web hosting charges as prior period expenses. The assessee argued that the liability was crystallized during the relevant financial year, making the expenditure allowable under the mercantile system of accounting. The Tribunal referred to the Gujarat High Court's decision in Saurashtra Cement & Chemicals Ltd. vs CIT, which held that if a liability is crystallized and paid in a later year, it should be allowed as a business expenditure. The Tribunal concluded that the revenue authorities erred in disallowing the claim and directed the AO to verify the claim in light of the Gujarat High Court's decision. Ground no. 3 was allowed for statistical purposes. 2. Disallowance under Section 14A read with Rule 8D: The revenue's appeal contested the CIT(A)'s deletion of disallowance made under Section 14A read with Rule 8D. The Tribunal noted that Rule 8D is applicable prospectively from AY 2008-09, as held by the Bombay High Court in Godrej & Boyce Manufacturing Co. Ltd. vs DCIT. For AY 2007-08, the AO should have determined the disallowance based on a reasonable method after rejecting the assessee's claim with cogent reasons, as per the Delhi High Court's decision in Maxopp Investment Ltd. vs CIT. The Tribunal restored the issue to the AO for fresh adjudication, directing the AO to follow the principles laid down in Maxopp Investment. Ground no. 1 of the revenue was allowed for statistical purposes. For AY 2008-09, the Tribunal reiterated that Rule 8D is applicable and restored the issue to the AO for fresh adjudication, following the same principles. Ground no. 1 in ITA 3686/Del/2013 and ITA 3694/Del/2013 was allowed for statistical purposes. 3. Capitalization of Advertisement Expenses: The revenue's appeal also challenged the deletion of addition made on account of capitalization of advertisement expenses. The Tribunal upheld the CIT(A)'s decision, referencing Supreme Court judgments in Empire Jute Co. Ltd., Associated Cement Co. Ltd., and Alembic Chemical Works Ltd., which held that if the expenditure facilitates trading operations without touching fixed capital, it is revenue in nature. The Tribunal found no enduring benefit or capital asset creation from the advertisement expenses and upheld the CIT(A)'s deletion of the addition. Ground no. 2 of the revenue was dismissed. 4. Miscellaneous Expenses: The revenue's appeal included disallowances related to horticulture expenses, security services, computer supplies, and software purchase expenses. - Horticulture Expenses: The Tribunal upheld the CIT(A)'s deletion of disallowance, agreeing that the expenses were incurred for maintaining a dust-free environment and facilitating business operations, thus being revenue in nature. - Security Services: The Tribunal upheld the CIT(A)'s decision, noting that the expenses were for the business purpose of maintaining a staff colony near the plant, following the principle of consistency from the previous year. - Computer Supplies: The Tribunal restored the issue to the AO for fresh adjudication, directing the AO to examine the details and evidence provided by the assessee. - Software Purchase: The Tribunal upheld the CIT(A)'s decision, agreeing that the software expenses were revenue in nature, facilitating business operations without creating a new asset or enduring benefit. The Tribunal's decisions resulted in partial dismissals and allowances for statistical purposes, as detailed in the summarized result. Summarized Result: 1. ITA No. 3214/D/2013: Dismissed as withdrawn. 2. ITA No. 3215/Del/2013: Partly allowed for statistical purposes. 3. ITA No. 3684/Del/2013: Dismissed on ground no. 2, allowed for statistical purposes on ground no. 1. 4. ITA No. 3686/Del/2013: Partly dismissed and partly allowed for statistical purposes. 5. ITA No. 3694/Del/2013: Allowed for statistical purposes.
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