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2015 (7) TMI 906 - AT - Income TaxDisallowance of provision made for doubtful advance paid for advancement of existing soft ware - Capital expenditure or revenue expenditure - assessee had made a claim u/s.37 stating that expenditure incurred by it on account of upgradation of ERP software was revenue expenditure, that it had advanced a sum of ₹ 15.91 lakhs to BT but the work was not executed to the satisfaction of the assessee - Held that - The expenditure incurred by the assessee for up-gradation of system was allowable as revenue expenditure. Here we would like to follow the judgment of Hon ble Bombay High Court of IVM World Trade Corporation (1988 (12) TMI 23 - BOMBAY High Court ) wherein the assessee had made advance payment for an expenditure that was revenue in nature. As the receiver of the advance payment became insolvent, so, the entire amount inclusive of the interest and the principal amount advanced by the assessee was written off by the assessee. The assessee claimed it as a business loss. The AO disallowed it and the Tribunal held that the loss was not deductible under sections 36 and 37 of the Act. On a reference, the Hon ble Court held that the amounts were advanced by the assessee was allowable as revenue expenditure, that the amounts advanced were for business purposes,that the advances made proved irrecoverable, that the consequent loss was a business loss and not a capital loss. Respectfully, following the above judgment, we decide ground no.1 in favour of the assessee. Excess remuneration paid to Director - AO found that the auditor in form no.3CB, vide note no.3,had reported that the assesee had paid ₹ 36,40,038/- in excess of limits prescribed under the Companies Act - Held that - The assessee had made excessive payment of remuneration to the Director, but same was approved by the central government, as required by the Companies Act. In these circumstances, we are of the opinion that there was no contravention of the provisions of the Act. Therefore, reversing the order of the FAA, we decide ground in favour of the assessee. Depreciation on expenditure treated as revenue expenditure by the assessee but held as capital expenditure in earlier years - Held that - If the AO capitalised certain revenue expenditure and allowed depreciation in that year then there is no justification for not allowing the same in subsequent AY.s. In the interest of justice we are remitting back the issue to the file of the AO for fresh adjudication. We want to clarify that file being sent back to the AO to verify the claim made by the assessee of capitalization of revenue expenses in earlier years. If the AO has already allowed depreciation in those years and denied the benefit to the assessee, then he should allow depreciation to the assessee as per the provisions of the Act. He is directed to afford a reasonable opportunity of hearing to the assessee. Decided in favour of assessee for statistical purposes.
Issues Involved:
1. Provision for Bad Advances 2. Alleged Directors' Excess Remuneration 3. Depreciation on Expenditure Treated as Revenue Expenditure Issue 1: Provision for Bad Advances: The appellant challenged the order confirming the disallowance of a provision made for doubtful advance for software upgradation. The AO considered the expenditure as capital instead of revenue, leading to the addition of the amount to the income. The CIT(A) upheld this decision, stating the software was a capital asset. However, the ITAT disagreed, citing precedents where advance payments for revenue purposes were allowed as business losses. Following these judgments, the ITAT ruled in favor of the appellant, allowing the expenditure as revenue. Issue 2: Alleged Directors' Excess Remuneration: The AO disallowed excess remuneration paid to directors, citing non-compliance with the Companies Act limits. The CIT(A) affirmed this decision, stating the excess remuneration was not allowable under Section 37(1) of the Act. However, the ITAT found that the Central Government had approved the excess remuneration, complying with the Companies Act. Consequently, the ITAT reversed the CIT(A)'s decision, ruling in favor of the appellant regarding the excess remuneration. Issue 3: Depreciation on Expenditure Treated as Revenue Expenditure: The appellant disputed the AO's disallowance of depreciation on revenue expenses treated as capital in previous years. The FAA rejected the claim due to lack of evidence and appropriate submissions. The ITAT remitted the issue back to the AO for fresh adjudication, emphasizing the need to allow depreciation if capitalization and depreciation were previously permitted. The ITAT directed the AO to provide a fair hearing to the appellant. Thus, the ITAT partially favored the appellant on this issue. In conclusion, the ITAT's judgment favored the appellant on the provision for bad advances and the alleged directors' excess remuneration issues. However, regarding the depreciation on expenditure treated as revenue expenditure, the ITAT remitted the issue back to the AO for further consideration.
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