2015 (8) TMI 915 - AT - Income Tax

Disallowance of network support service charges - non deduction of TDS for payment of the same before due date of filing the return - Held that - There is no dispute that the assessee is liable to deduct TDS on the amount paid to the parent company M/s. GAC Shipping Co., Vaduz, Greece towards international network support service charges and technical fees. The assessee made the provision in the books of account and credited to the party s account on the last date of the financial year. The time limit for remitting the TDS is upto May 31, i.e., the succeeding financial year. In this case, the assessee remitted the tax amount only on January 3, 2007 i.e., after May 31, 2006, which is belatedly remitted by the assessee. Being so, the provisions of section 40(a)(i) is applicable. Hence, in our opinion, the lower authorities are justified in disallowing the expenditure on this count. - Decided against assessee. Restriction of rate of depreciation to 50 per cent. on software - Held that - In this case, the purchase bill for the software was dated December 31, 2005. However, the assessee took the plea that the software was installed before September 30, 2005. However, no evidence is placed before us to show that the software was installed and payment was made before September 30, 2005 so as to own the software and use it for business purposes. Hence, the applicable rate of depreciation is to be 50 per cent. of the prescribed rate arrived at by the lower authorities - Decided against assessee. Disallowance u/s 41(1) on the amount outstanding in the name of sundry creditors - Held that - The assessee has drawn balance-sheet based on its books of account in which the above amounts were being claimed as liabilities due to the various parties as at the end of the accounting year under dispute. However, the assessee failed to establish the genuineness of these liabilities by citing credible evidence. Simply the liabilities being reflected against certain names in its books of account would not establish the genuineness of such liabilities. On the other hand, the Assessing Officer went to the root of the issue and came to the conclusion that the alleged creditors were not genuine. The assessee was not able to establish the existence of these liabilities. In the circumstances, the lower authorities are justified in treating the liabilities as income under section 41(1) of the Income-tax Act. Being so, the lower authorities are justified in holding that such liabilities did not exist at the end of the accounting year under dispute and rightly added the said liabilities which had ceased to exist - Decided against assessee. Treatment of the expenditure incurred for obtaining the linear agency business as capital expenditure and treatment of amount of compensation received for premature termination of the agency as revenue in nature - Held that - In the present case, the expenditure was incurred with a view to bring in an asset or advantage in the nature of agency. It is not necessary that the assessee should have final result. Admittedly in this case, the business was secured by the assessee from Hamburg Sued Line Germany and was terminated for which the assessee has received compensation from the parent company. The purpose of incurring expenditure was to acquire a capital asset. In this case, an unforeseen cancellation of agreement and receipt of compensation cannot be set off against capital expenditure because such receipt can never go into the making of the expenditure incurred for securing the agency business. The compensation received by the assessee is not from the person to whom the payment of ₹ 1,30,17,000 was made for securing the agency business and has nothing to do with acquiring of agency. The compensation received by other than the person to whom payment was made and received on termination of the agency agreement has nothing to do with the expenditure made towards securing agency business. Being so, the compensation received on termination of the agency business cannot be said to be capital receipt. Hence the treatment given by AO of the expenses incurred for securing the business as capital expenditure and the receipt of compensation on termination of the agency business as revenue in nature is justified - Decided against assessee. Disallowance u/s 40(a)(ia) - payments made outside India, on which TDS is not made/remitted within the due date - software development and licences - CIT(A) deleted disallowance - Held that - The expenditure was not in the nature of revenue expenditure and it was capitalised by the assessee as it was in nature of software development fee and licence fee for softwares and depreciation has also been claimed on such capital expenditure by the assessee. The assessee has produced evidence in support of its contention before the Commissioner of Income-tax (Appeals) and on obtaining the requisite evidence for treating it as capital expenditure, the Commissioner of Income-tax (Appeals) allowed the same. In our opinion, it is proper to remit the issue to the file of the Assessing Officer for fresh consideration in the light of the fresh evidence produced before the Commissioner of Income-tax (Appeals). Accordingly, this issue is remitted back to the file of the Assessing Officer for fresh consideration. - Decided in favour of revenue for statistical purposes. Addition being contributions to group gratuity fund - CIT(A) deleted the addition - Held that - The expenditure was disallowed by the Assessing Officer on the reason that the amount was contributed to the group gratuity fund which was not approved by the Commissioner. Before the Commissioner of Income-tax (Appeals), the assessee took the plea that it has been paid to LIC of India towards gratuity. In our opinion, the payment to LIC towards gratuity is to be verified and accordingly, this issue is remitted back to the file of the Assessing Officer to see whether the payment has been made to the LIC towards gratuity fund. - Decided in favour of revenue for statistical purposes. Amount written off which represent amount advanced to an ex-employee of the assessee - CIT(A) delted addition - Held that - If the debt has not been taken into account while computing the income of the assessee in the previous year or in any previous year in which the amount of such debt is written off, the bad debt claim of the assessee cannot be allowed. Being so, it cannot be treated as bad debt under section 36(2)(i) of the Act. However, it could be allowed under section 37 of the Income-tax Act. Accordingly, the nature of expenditure should be examined by the Assessing Officer. If it is a business expenditure, then the same should be allowed. Accordingly, this issue is remitted back to the file of the Assessing Officer for fresh consideration. Decided in favour of revenue for statistical purposes.

Summary

Issues Involved:

1. Disallowance of network support service charges due to non-deduction of TDS before the due date.
2. Restriction of depreciation rate on software to 50%.
3. Disallowance under section 41(1) of the Income-tax Act on amounts outstanding in the name of sundry creditors.
4. Treatment of expenditure for obtaining linear agency business as capital expenditure and compensation received for premature termination of the agency as revenue in nature.
5. Deletion of addition made under section 40(a)(ia) of the Act.
6. Deletion of addition of Rs. 12,50,000 being contributions to group gratuity fund.
7. Amount of Rs. 3,32,116 written off, representing an amount advanced to an ex-employee of the assessee.

Issue-wise Detailed Analysis:

1. Disallowance of Network Support Service Charges:

The first ground in I.T.A. No. 803/Coch/2013 concerns the disallowance of Rs. 21,26,805 claimed under administrative expenses towards fees for international network support charges. The Assessing Officer disallowed the expenditure due to non-deduction of TDS before the due date, invoking section 40(a)(i) of the Act. The Commissioner of Income-tax (Appeals) confirmed this disallowance, noting that the payment was made without deducting tax at source, which was remitted belatedly on January 3, 2007. The Tribunal upheld the disallowance, referencing the jurisdictional High Court's judgment in Prudential Logistics and Transports v. ITO, which clarified that the amendment to section 40(a)(ia) by the Finance Act, 2010 is not retrospective.

2. Restriction of Depreciation Rate on Software:

The next ground involves the restriction of the depreciation rate on software to 50%. The assessee claimed full-year depreciation on software and licenses, but the Assessing Officer restricted it to 50% as the invoices were dated December 31, 2005, indicating usage for less than 180 days. The Commissioner of Income-tax (Appeals) confirmed this, and the Tribunal upheld the decision, noting the lack of evidence to show installation and payment before September 30, 2005.

3. Disallowance under Section 41(1) on Sundry Creditors:

The third issue pertains to the disallowance under section 41(1) on amounts outstanding in the name of sundry creditors. The Assessing Officer added Rs. 10,61,041 and Rs. 5,29,708 to the income, observing that these liabilities had ceased to exist. The Commissioner of Income-tax (Appeals) confirmed the addition, stating that the refund received and the cancellation of cheques should be accounted for in the current year. The Tribunal upheld the disallowance, citing the Delhi High Court's decision in CIT v. Chipsoft Technology P. Ltd., which emphasized the pragmatic approach to fiscal legislation, noting the assessee's failure to establish the genuineness of these liabilities.

4. Treatment of Expenditure for Linear Agency Business:

In I.T.A. No. 804/Coch/2013, the issue is the treatment of expenditure for obtaining linear agency business as capital expenditure and the compensation received for premature termination as revenue in nature. The assessee paid Rs. 1,30,17,000 for acquiring the agency business, which was treated as capital expenditure by the Assessing Officer. The compensation of Rs. 59,69,040 received on termination was treated as revenue. The Tribunal upheld this treatment, noting that the expenditure brought enduring benefit and the compensation received was not from the party to whom the payment was made for securing the agency business.

5. Deletion of Addition under Section 40(a)(ia):

In I.T.A. No. 317/Coch/2014, the Revenue appealed against the deletion of addition under section 40(a)(ia). The assessee claimed Rs. 22,43,000 as fees for technical services, which was disallowed by the Assessing Officer due to late remittance of TDS. The Commissioner of Income-tax (Appeals) allowed the claim, noting that the expenditure was capitalized. The Tribunal remitted the issue back to the Assessing Officer for fresh consideration, emphasizing the need for verification of the nature of expenditure.

6. Deletion of Addition of Rs. 12,50,000 for Group Gratuity Fund:

In I.T.A. No. 361/Coch/2014, the Revenue contested the deletion of addition of Rs. 12,50,000 being contributions to the group gratuity fund. The Assessing Officer disallowed the expenditure as the fund was not approved by the Commissioner. The Commissioner of Income-tax (Appeals) allowed the claim, relying on the Supreme Court's judgment in CIT v. Textool Co. Ltd. The Tribunal remitted the issue back to the Assessing Officer for verification of payment to LIC towards the gratuity fund.

7. Amount of Rs. 3,32,116 Written Off:

The final issue in I.T.A. No. 361/Coch/2014 involves the amount of Rs. 3,32,116 written off, representing an advance to an ex-employee. The Assessing Officer disallowed the claim as it did not meet the criteria for bad debt under section 36(2)(i). The Commissioner of Income-tax (Appeals) deleted the addition, allowing the claim as bad debt. The Tribunal remitted the issue back to the Assessing Officer to examine the nature of expenditure and allow it if it qualifies as business expenditure under section 37.

Conclusion:

The appeals filed by the assessee are dismissed, and the appeals filed by the Revenue are partly allowed for statistical purposes. The Tribunal emphasized the need for verification and fresh consideration by the Assessing Officer on certain issues, ensuring compliance with the relevant provisions of the Income-tax Act.