2015 (12) TMI 498 - AT - Income Tax

Disallowance of expenditure by invoking section 14A read with Rule 8D - Held that - Rule-8D of the Rules was inserted by the I.T (Fifth Amendment) Rules 2008 with effect from 24.03.2008. Therefore this rule will be in operation only from assessment year 2009-10. The earlier decisions of the Tribunal on several occasions had decided that 3% of the exempt income shall be treated as the expenditure incurred towards earning such exempt income U/s.14A of the Act. Accordingly for the assessment year 2008-09 in the case of the assessee we hereby hold that 3% of the exempt income shall be treated as the expenditure that will be disallowed U/s.14A of the Act.As far as the assessment year 2009-10 is concerned since Rule 8D comes into effect from that assessment year onwards we do not find any infirmity in the order of the Ld. CIT (A) who has applied only Rule-14A and reworked the disallowance U/s.14A of the Act and arrived at the disallowance at Rs. 12, 31, 129/- as against Rs. 14, 95, 934/- worked out by the Ld. Assessing Officer. Accordingly the order of the Ld. CIT (A) is confirmed for the assessment year 2009-10. - Decided partly in favour of assessee. Computing deduction U/s. 10A - not reducing the overseas travel expenses and telecommunication expenses incurred in foreign currency from the total turnover when the same is excluded from the export turnover.( A.Y. 2008-09) - Held that - This issue is squarely covered by the Special Bench of the Tribunal in ITO Vs. Sak Soft reported 2009 (3) TMI 243 - ITAT MADRAS-D wherein it was held that when any such amount is deducted from the export turnover from the numerator the same shall also be deducted from the total turnover in the denominator while applying the formula (Profit x Export turnover Total turnover) as provided under the Act. - Decided in favour of assessee. Treating the soft ware expenses as revenue expenditure - Held that - The software purchased by the assessee are application software used in the back up office operations and thereafter following the decision of CIT Vs. Asahi India Safety Glass Ltd. 2011 (11) TMI 2 - DELHI HIGH COURT CIT Vs. Amway India Enterprises Ltd. 2011 (11) TMI 4 - DELHI HIGH COURT held the issue in favour of the assessee by treating the entire expenses as revenue expenditure. Since no further materials or arguments is brought before us by the Revenue to counter the decision of the Ld.CIT(A) and since the Ld. CIT (A) has only followed the decision of the Hon ble Delhi High Court and Mumbai Bench of the Tribunal in arriving at his decision we hereby confirm the order of the Ld. CIT (A). - Decided against revenue Addition made towards donation while computing the book profit U/s. 115JB - CIT(A) deleted the addition - Held that - Since the assessee company had paid donation it has to be construed that such donation is paid for meeting out the objects of the company directly or indirectly though as per Income Tax Act such donation may not be allowable as a deduction. The decision of the Ld. CIT (A) in directing the Ld. Assessing Officer to treat the donation paid as allowable expenditure while computing the book profit of the assessee for the purpose of section 115JB of the Act is correct. Therefore we hereby confirm the order of the Ld. CIT (A) on this issue.- Decided against revenue

Summary

Issues:
- Disallowance of expenditure under section 14A for A.Ys 2008-09 & 2009-10
- Computing deduction U/s. 10B of the Act for A.Y. 2008-09
- Treatment of software expenses as revenue expenditure for A.Y. 2008-09
- Addition made towards donation while computing book profit U/s. 115JB for A.Y. 2008-09
- Reducing overseas travel and telecommunication expenses from total turnover for A.Y. 2009-10

Disallowance of Expenditure under Section 14A:
- The appeals were filed by the Assessee and the Revenue against the order of the Commissioner of Income Tax (A)-III, Chennai, for A.Ys 2008-09 & 2009-10.
- The Assessee challenged the disallowance of expenditure under section 14A read with Rule 8D of the Act. The Tribunal held that Rule 8D was applicable only from the assessment year 2009-10, and for 2008-09, 3% of the exempt income should be treated as the disallowed expenditure.
- For A.Y. 2009-10, Rule 8D was applied, and the disallowance was reworked by the CIT (A) to `12,31,129/-. The Tribunal confirmed this decision.

Computing Deduction U/s. 10B of the Act:
- The issue for A.Y. 2008-09 was whether overseas travel and telecommunication expenses in foreign currency should be reduced from total turnover. The Tribunal relied on a Special Bench decision, stating that such deductions should be made both from export turnover and total turnover.

Treatment of Software Expenses:
- The Revenue challenged the treatment of software expenses as revenue expenditure for A.Y. 2008-09. The CIT (A) considered the nature of the software purchased and relied on legal precedents to support treating the entire expense as revenue expenditure. The Tribunal upheld this decision.

Addition towards Donation for Book Profit:
- The Revenue disputed the deletion of the addition made for donation while computing book profit under section 115JB for A.Y. 2008-09. The CIT (A) directed that the donation should be treated as an allowable expenditure, aligning with the Companies Act and relevant legal principles. The Tribunal confirmed this decision.

Reducing Overseas Expenses from Total Turnover:
- The Revenue raised an issue regarding reducing overseas travel and telecommunication expenses from total turnover for A.Y. 2009-10. The Tribunal upheld the CIT (A)'s decision, which was based on a Special Bench ruling.

Conclusion:
- The appeals of the Assessee for A.Y. 2008-09 were partly allowed, and for A.Y. 2009-10 were dismissed. The Revenue's appeals for both years were dismissed. The Tribunal's order was pronounced on 2nd June 2015 in Chennai.