2015 (6) TMI 395 - AT - Income Tax

Disallowance of expenditure towards purchase of software - Held that - AO at least in the case of one of the software, viz., MPC 4 data preparation software has observed that it enhances the technical capacity of the computers. If that is the case, then it cannot be said that it brings in a radical change to the operations of assessee or part of the profit making apparatus. Further, though, AO has observed that software packages are going to give benefit to the assessee in the ensuing years, hence are of enduring nature, but he has not examined the exact life span of the software packages. Ld.CIT(A) has also not examined these aspects. In our view, without examining the nature of software purchased by applying the tests laid down by the Special Bench of ITAT, Delhi in case of Amway International Vs. DCIT (2008 (2) TMI 454 - ITAT DELHI-C ), it cannot be condusively said that expenditure incurred on software is capital in nature. As the departmental authorities have not done the aforesaid exercise, we are inclined to remit the matter back to the file of the AO for deciding afresh keeping in view the decision of the Special Bench of ITAT, Delhi referred to above. Needless to say AO must afford a reasonable opportunity of being heard to the assessee in the matter. - Decided in favour of assessee for statistical purposes. Disallowance of expenditure incurred on repairs and maintenance - Held that - On examining the details of expenditure, we are of the view that expenditure incurred towards replacement of flooring cannot be considered to be a Capital Expenditure as no new asset comes into existence as a result of such expenditure, rather, the expenditures incurred is more in the nature of maintenance of a capital asset. However, as far as false ceiling and partition charges are concerned, admitted fact is these were not existing earlier. Thus, the expenditure incurred by the assessee has brought into existence certain new assets. Therefore, the expenditure incurred being of enduring nature, it has to be treated as Capital Expenditure . Similarly, the expenditure of ₹ 16,100/- has not been explained by the assessee with proper evidence. Therefore, on over all consideration of facts and materials on record, we direct the AO to allow the expenditure incurred towards replacement of flooring. - Decided partly in favour of assessee. Disallowance of depreciation on Plant & Machinery due to foreign exchange fluctuation - Held that - It is manifest from record that deduction claimed by the assessee is on the basis of notional loss due to foreign exchange fluctuation. In our view, no addition or deduction can be made to the cost of the asset on account of such notional loss/gain on account of foreign exchange fluctuations as the assessee has not made any payment during the year. Only when the assessee makes payment any loss or gain on account of foreign exchange fluctuations can be adjusted towards cost of the asset. In that view of the matter, we do not see any reason to disturb the finding of the Ld.CIT(A). - Decided against assessee. Disallowance of expenditure towards subscriptions - Held that - On verifying the details of expenditure incurred, we are of the view that the subscription fees paid on behalf of the Directors cannot be allowed as expenditure at the hands of the assessee-company. However, as far as the amount of ₹ 50,000/- claimed to be towards insurance payment relating to earlier years is concerned, we are of the view that the same requires examination by the AO. Therefore, to the limited extent of verifying the payment of ₹ 50,000/-, we remit the issue back to the file of AO to verify and allow the expenditure if assessee s claim is found to be correct. - Decided partly in favour of assessee for statistical purposes. Disallowance of Miscellaneous Expenditure - Held that - As can be seen from the explanation of the assessee before the departmental authorities, assessee has claimed that such expenditures were incurred on employees when they were sent out station. However, considering the fact that the expenditures incurred were not supported by any authentic bills/vouchers, some amount of inflation by the assessee while claiming this expenditure cannot be ruled out. In these circumstances, disallowance of 25% of the expenditure claimed in our view is reasonable and need not be interfered with. - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of expenditure towards purchase of software.
2. Disallowance of expenditure on repairs and maintenance.
3. Disallowance of depreciation on Plant & Machinery due to foreign exchange fluctuation.
4. Disallowance of subscription fees.
5. Disallowance of miscellaneous expenditure.

Detailed Analysis:

1. Disallowance of Expenditure Towards Purchase of Software:
The assessee challenged the disallowance of Rs. 89,47,827/- towards the purchase of software, arguing it should be treated as 'Revenue Expenditure' since it was application software. The AO treated it as 'Capital Expenditure' due to its enduring nature and significant value addition to the business. The CIT(A) upheld this view, emphasizing that the software brought about a significant change in technology and operations, thus qualifying as capital expenditure. The ITAT remitted the matter back to the AO for fresh examination, directing the AO to apply the tests laid down by the ITAT Delhi Special Bench in Amway India Enterprises Vs. DCIT, which considers the functionality and enduring nature of the software.

2. Disallowance of Expenditure on Repairs and Maintenance:
The AO disallowed Rs. 23,10,434/- claimed as repairs and maintenance, treating it as 'Capital Expenditure' due to its enduring nature. The CIT(A) sustained this view. The ITAT analyzed the nature of the expenditures and directed the AO to allow the expenditure towards replacement of flooring, as it did not bring a new asset into existence. However, expenditures on false ceiling and partition charges were treated as capital expenditures due to their enduring nature and the creation of new assets.

3. Disallowance of Depreciation on Plant & Machinery Due to Foreign Exchange Fluctuation:
The AO disallowed depreciation on foreign exchange fluctuation losses capitalized to the value of imported Plant and Machinery, considering them notional losses. The CIT(A) upheld this view, referencing the Supreme Court decision in CIT Vs. Woodward Governor India Pvt. Ltd. The ITAT agreed, stating that no adjustment to the cost of the asset can be made based on notional losses or gains, and such adjustments can only be made upon actual payment.

4. Disallowance of Subscription Fees:
The AO disallowed Rs. 93,928/- claimed as subscription fees, treating it as personal expenditure of the Directors. The CIT(A) confirmed this view. The ITAT upheld the disallowance of subscription fees paid on behalf of the Directors but remitted the issue of Rs. 50,000/- claimed as insurance payment for earlier years back to the AO for verification.

5. Disallowance of Miscellaneous Expenditure:
The AO disallowed 25% of the expenditure claimed under 'Business Promotion' and 'Miscellaneous Expenses' due to lack of supporting authentic bills, amounting to Rs. 2,82,600/-. The CIT(A) confirmed this disallowance. The ITAT upheld the disallowance, considering the possibility of inflation of expenses by the assessee and finding the 25% disallowance reasonable.

Conclusion:
The ITAT partly allowed the appeal for statistical purposes, remitting specific issues back to the AO for fresh examination and verification while upholding other disallowances based on the nature and supporting evidence of the expenditures claimed.