2016 (8) TMI 69 - AT - Income Tax

Non granting 100% depreciation on software purchase - Held that - In this case, the assessee acquired the software for the purpose of its business and it is a intangible asset under clause (iia) to sec.32(I) of the Act. Thus, outright acquisition of computer software is nothing but acquisition of know-how and relevant expenditure is a capital expenditure. This software falls in the new entry was introduced as Sl. No.iii(5) in Part-A of the Table of rates for the depreciation in Appendix-I in respect of computer including computer software. In view of the above, we have no doubt in our mind that software acquired by the assessee is intangible within meaning of clause (ii) to Sec.32(I) of the Act and the CIT(A) considering the above observed that it is an intangible asset entitled for depreciation @ 60% and being the software used by the assessee during the second half of the relevant previous year and granted deduction at 30% and the same is confirmed. - Decided partly in favour of assessee Disallowance of deferred revenue expenditure written off - Held that - The expenditure is not relating to the assessment year under consideration and it was incurred prior to the commencement of the assessee s business and it is prior period expenditure and the assessee placed reliance in the judgement of M/s.Madras Industrial Investment Corporation Ltd. Vs. CIT (1997 (4) TMI 5 - SUPREME Court ) have no relevance. Since the expenditure is wholly and exclusively laid out for the purpose of marketing of the business of the assessee in earlier assessment year, it cannot be allowed as revenue expenditure during the assessment year under consideration as this expenditure is not related to the assessment year 2004-05.- Decided in favour of revenue TDS u/s 195 - disallowance u/s.40(a)(ia) in respect of amounts paid by the assessee to in foreign currency towards advance for purchase of software, without deduction of tax at source - Held that - Since we have already held the purchase of software is an intangible asset and the assessee is entitled for depreciation in the assessment year 2004-05, applying the same ratio we are of the opinion that being the purchase of software, it cannot be liable for TDS in view of the judgement of Supreme Court in the case of G.E.India Technology Centre P Ltd Vs. CIT reported in 2010 (9) TMI 7 - SUPREME COURT OF INDIA .- Decided in favour of assessee

Summary

Issues:
1. Disallowance of 100% depreciation on software purchase.
2. Deletion of disallowance of deferred revenue expenditure written off.
3. Disallowance under section 40(a)(ia) for advance payment for software purchase without TDS.

Issue 1: Disallowance of 100% depreciation on software purchase (Assessee's Appeal: AY 2004-05)
- The appeal concerns the disallowance of ?4,65,861 towards software expenses treated as capital expenditure by the Assessing Officer (AO).
- The Commissioner of Income Tax (Appeals) upheld the AO's decision, stating that software is a capital expenditure as recognized by the Act.
- The Assessee argued that software is a revenue expense due to regular upgrades and lack of enduring benefits, citing various case laws.
- The ITAT held that the software acquired by the Assessee is an intangible asset under the Income Tax Act, eligible for depreciation at 30%.
- The ITAT dismissed the Assessee's appeal, upholding the lower authorities' decision.

Issue 2: Deletion of disallowance of deferred revenue expenditure written off (Revenue's Appeal: AY 2004-05)
- The appeal revolves around the disallowance of ?28,12,769 as deferred revenue expenditure written off by the Assessing Officer.
- The Commissioner (Appeals) allowed the claim, considering it deferred revenue expenditure, relying on relevant case law.
- The ITAT held that the expenditure, incurred prior to the assessment year and not related to the current year, cannot be claimed as revenue expenditure.
- Consequently, the ITAT allowed the Revenue's appeal in this regard.

Issue 3: Disallowance under section 40(a)(ia) for advance payment for software purchase without TDS (Revenue's Appeal: AY 2007-08)
- The issue pertains to the disallowance of ?44,19,188 paid in foreign currency as an advance for software purchase without TDS compliance.
- The Commissioner (Appeals) deleted the disallowance, stating that the payment for software purchase does not attract TDS.
- The Revenue contended that the payment should be considered as royalty falling under Explanation 2 to section 9(1)(vi) of the Act, requiring TDS deduction.
- The ITAT, based on previous judgments and the nature of the payment, dismissed the Revenue's appeal, holding that TDS was not applicable in this case.

In conclusion, the ITAT dismissed the Assessee's appeal regarding depreciation on software purchase, allowed the Revenue's appeal on deferred revenue expenditure, and partly allowed the Revenue's appeal on the disallowance of advance payment for software purchase without TDS compliance.