2017 (5) TMI 1717 - AT - Income Tax

Assessment of assessee insurance company - allowability of prior period expenditure - Whether only an expenditure inadmissible under Sections 30 to 43B of the Act, can be adjusted to the balance of the profits disclosed in the Account? - HELD THAT - It is evident, assessee has not claimed any deduction of prior period expenditure as inferred by the AO. On the contrary, the assessee has voluntarily added back part of the expenditure to the total income, following the consistent accounting method adopted by it. It is also evident that assessee is following similar method of accounting from earlier assessment years and offered similar income on account of adjustment of prior period income and expenditure and the AO in assessments completed u/s. 143(3) has accepted non only such accounting treatment given by the assessee but also the income offered. Therefore, when the assessee has not claimed any deduction on account of prior period expenditure by debiting it to the profit loss account, the disallowance made by the AO is totally unjustified. Therefore, we direct deletion of the amount from the income of the assessee. The ground raised by the assessee is allowed and that of the department is dismissed. Disallowance made u/s. 14A - HELD THAT - As relying on case of ICICI Prudential Insurance Company Ltd. 2012 (11) TMI 13 - ITAT MUMBAI held when the income of the assessee as well as the expenditure are governed by specific provision which have an overriding effect then it is not open for the AO to invoke the other provisions of the Act for carrying out the disallowance of adjustment in the income. Thus, we hold that no disallowance u/s 14A can be made in the case of the assessee and hence grounds raised by assessee allowed. Depreciation on computer software - HELD THAT - There is no dispute to the fact that the assessee has acquired software and installed them in its computer. The AO has denied assessee s claim of depreciation only for the reason that the payment to be made for the software has been deferred to subsequent assessment year as per license agreement. In our considered opinion, that cannot be a valid reason to disallow assessee s claim of depreciation, once the assessee has acquired the asset and used it for the purpose of its business. The factual finding of the learned CIT(A) that, assessee has in fact acquired the software and installed in its computers has not been controverted by the learned DR. No infirmity in the order of the learned CIT(A) in allowing assessee s claim of depreciation, since, the assessee is otherwise eligible to claim depreciation on computer software under the provisions of the Act. - Assessee appeal allowed.

Summary

Issues Involved:
1. Prior period expenditure adjustment.
2. Disallowance under Section 14A of the Income Tax Act.
3. Depreciation on intangible assets (computer software).

Detailed Analysis:

1. Prior Period Expenditure Adjustment:
The primary issue in both the appeals was the adjustment of prior period expenditure amounting to ?2,33,22,600/-. The assessee, a public sector enterprise engaged in insuring credit risk, had declared an income of ?438,04,88,996/- for the assessment year 2009-10. During the assessment, the AO noted that the assessee included ?25,08,640/- to the total income on account of prior period adjustment. The AO found that the assessee had shown total prior period expenses of ?2,58,31,240/- and after adjusting prior period income of ?2,33,22,600/-, debited ?25,08,640/- to the profit and loss account. The AO disallowed the prior period expenses of ?2,33,22,600/- as they were not relatable to the impugned assessment year. The CIT(A), however, directed the AO to delete the addition subject to verification that the prior period income was offered to tax in earlier years. The Tribunal found that the assessee had not claimed the prior period expenditure in its profit & loss account and had consistently followed the same accounting method in earlier years, which was accepted by the AO. Therefore, the Tribunal directed the deletion of the disallowance, allowing the assessee’s appeal and dismissing the department’s appeal.

2. Disallowance under Section 14A of the Income Tax Act:
The second issue was the disallowance of ?55,05,796/- under Section 14A. The AO noticed that the assessee earned exempt income by way of dividend amounting to ?4,91,63,414/- and made a suo motu disallowance of ?32,16,629/-. The AO, however, computed the disallowance under Rule 8D at ?55,05,796/-. The CIT(A) confirmed this addition. The Tribunal referred to its decision in the assessee’s own case for A.Y. 2007-08 and the case of ICICI Prudential Insurance Company Ltd., where it was held that Section 14A does not apply to insurance companies due to the overriding provisions of Section 44. Following these precedents, the Tribunal held that no disallowance under Section 14A read with Rule 8D can be made in the case of the assessee, thus allowing the assessee’s appeal on this ground.

3. Depreciation on Intangible Assets (Computer Software):
The final issue was regarding the allowance of depreciation on computer software amounting to ?1,88,51,231/-. The AO disallowed the claim on the basis that the payments for the software were due in subsequent years and were in the nature of license fees payable annually. The CIT(A) allowed the claim after finding that the software had been installed in the assessee’s computers. The Tribunal upheld the CIT(A)’s decision, noting that the deferral of payment does not invalidate the claim for depreciation once the asset is acquired and used for business purposes. The Tribunal found no infirmity in the CIT(A)’s order and dismissed the department’s appeal on this ground.

Conclusion:
In conclusion, the Tribunal allowed the assessee’s appeal regarding prior period expenditure and disallowance under Section 14A, and upheld the CIT(A)’s decision on the allowance of depreciation on computer software, thereby dismissing the department’s appeal. The order was pronounced in the open court on 12th May 2017.