2014 (11) TMI 682 - AT - Income Tax

Unexplained expenses u/s 69C Capital expenses made on renovation/refurbishment to leasehold premises or not - Held that - The order of the AO as well as of the CIT(A) is self contradictory - Under section 69C of the Act, the addition can be made in respect of expenditure incurred by the assessee if the assessee is not able to offer any explanation about the source of expenditure - the AO on the one hand is disbelieving the incurring of expenditure thus denying the claim of depreciation and on the other hand is making addition on account of unexplained expenditure and thereby admitting the incurring of expenditure by the assessee - The AO has tried to blow hot and cold in one stream - The assessee was never asked to prove the source of expenditure, rather the incurring of expenditure itself has been disbelieved by the lower authorities - no additions can be made u/s 69C of the Act - the addition made on this account under section 69C is ordered to be deleted Decided in favour of assessee. Claim of depreciation u/s 32(1)(i) @ 10% - Disallowance of bad debts written off Held that - The assessee has invited attention to various documents in the shape of bills, vouchers and further details of the improvements done in the premises in question the matter is to be remitted back to the AO for fresh adjudication Decided in favour of assessee. Allowability of set off of unabsorbed depreciation against income from other sources Held that - If the current year s depreciation cannot be set off owing to the profits or gains chargeable being less than the allowance, the allowance or the part of the allowance to which effect has not been given shall be added to the amount of allowance for depreciation for the following previous year and deemed to be part of the allowance which means that brought forward depreciation merges with the current year s depreciation because of the legal fiction created by provisions of Sec. 32(2) of the Act - However, this fiction has been subjected to the provisions of Sec. 72(2) and 73(3) of the Act - the unabsorbed depreciation is to be added to the account of allowance of depreciation of the next year and as such merges with next year s depreciation allowance because of the legal fiction created by provisions of section 32(2) of the Act and further that as per the provisions of section 71 of the Act such depreciation allowance can be set off from income from other heads and further that section 72 does not create any bar to it Decided in favour of assessee. Depreciation on software disallowed u/s 32(1)(i) Held that - It is immaterial as to whether the software was purchased along with the computer or thereafter - The interpretation of the CIT(A) that the assessee will be eligible for depreciation at the rate of 60% only when the software is purchased along with the computer is wrong - when the statute has provided a specific percentage to be allowed on a particular thing, no different view can be adopted - Since the statute has provided a depreciation allowance at the rate of 60% on computer as well as computer software, the assessee is entitled to depreciation at the rate of 60% on purchase of computer software Decided in favour of assessee.

Issues Involved:
1. Addition of Rs. 34,75,000 as unexplained expenditure under section 69C of the Income Tax Act.
2. Disallowance of depreciation of Rs. 3,47,500 claimed under section 32(1)(i).
3. Non-allowance of set off of unabsorbed depreciation of Rs. 9,07,981 against income from other sources.
4. Disallowance of bad debts written off amounting to Rs. 7,32,113.
5. Disallowance of depreciation of Rs. 1,31,538 on software expenses.

Issue-wise Detailed Analysis:

Ground Nos. 1 & 2: Addition of Rs. 34,75,000 as Unexplained Expenditure under Section 69C and Disallowance of Depreciation of Rs. 3,47,500
The assessee claimed capital expenditure of Rs. 34,75,000 on renovation/refurbishment of leasehold premises and depreciation of Rs. 3,47,500. The AO disallowed the claim, treating the expenditure as unexplained under section 69C. The CIT(A) confirmed the addition. The tribunal observed that the AO's approach was contradictory, as he disbelieved the expenditure while simultaneously treating it as unexplained. The tribunal deleted the addition under section 69C, noting that the assessee was not asked to prove the source of expenditure, only the incurring of it. The issue of depreciation was remanded to the AO for fresh consideration, allowing the assessee an opportunity to present necessary evidence.

Ground No. 3: Non-allowance of Set Off of Unabsorbed Depreciation of Rs. 9,07,981
The lower authorities denied the set off of unabsorbed depreciation against income from other sources. The tribunal noted that as per section 32(2) read with section 71, unabsorbed depreciation merges with the next year's depreciation allowance and can be set off against income from other heads. The tribunal referenced the Madras High Court decision in "CIT vs. SPEL Semi Conductor Ltd." and the coordinate bench decision in "M/s. Suresh Industries Pvt. Ltd. vs. ACIT," which supported the assessee's claim. The tribunal decided this issue in favor of the assessee, allowing the set off of unabsorbed depreciation against income from other sources.

Ground No. 4: Disallowance of Bad Debts Written Off Amounting to Rs. 7,32,113
The AO disallowed the provision for doubtful debts, adding Rs. 10,01,113 to the assessee's income. The CIT(A) upheld the disallowance, noting the assessee failed to prove the debts had become bad. The tribunal, after reviewing the documents and hearing the parties, remanded the issue to the AO for fresh adjudication, instructing the AO to provide the assessee an opportunity to present evidence and decide the matter by a speaking order.

Ground No. 6: Disallowance of Depreciation of Rs. 1,31,538 on Software Expenses
The assessee claimed depreciation at 30% on software expenses of Rs. 4,38,460. The AO allowed only 12.5%, treating the software as an intangible asset eligible for 25% depreciation per annum. The CIT(A) interpreted that 60% depreciation was applicable only if software was purchased with the computer. The tribunal disagreed, noting that Rule 5 and Appendix-I of the Income Tax Rules provide 60% depreciation for "computers including computer software" without stipulating that software must be purchased with the computer. The tribunal held that the assessee was entitled to 60% depreciation on software, allowing this issue in favor of the assessee.

Conclusion:
The tribunal allowed the appeal for statistical purposes, deleting the addition under section 69C, remanding the issues of depreciation on renovation and bad debts to the AO for fresh consideration, and allowing the set off of unabsorbed depreciation and the higher rate of depreciation on software expenses. The order was pronounced in open court on 14.11.2014.

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