2016 (10) TMI 926 - AT - Income Tax

Allowability of expenditure for routine maintenance and for procuring license for SAP and M.S. Office - revenue v/s capital expenditure - Held that - The expenditure incurred towards for routine maintenance and for procuring license of software cannot be treated as capital in nature as it would not create a new asset and accordingly, we hold the assessee is entitled to claim such expenditure as revenue in nature.

Issues Involved:
1. Disallowance of ?1,51,03,956/- on account of provision for leave encashment.
2. Disallowance of ?9,97,00,000/- on account of provision for warranty.
3. Disallowance of ?12,18,60,300/- towards expenditure incurred in earning dividend income and applicability of Rule 8D.
4. Disallowance of ?1,36,32,019/- on account of payments made for software repairs and maintenance expenses.

Detailed Analysis:

1. Disallowance of ?1,51,03,956/- on Account of Provision for Leave Encashment:
The issue pertains to the disallowance made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] under Section 43B(f) of the Income Tax Act. The assessee argued that the issue is covered by the consolidated order of the Coordinate Bench in its own case for earlier assessment years. The Tribunal noted that the Hon'ble Calcutta High Court had ruled in favor of the assessee by holding the introduction of Clause (f) to Section 43B as ultra vires. However, the Supreme Court stayed this judgment. Following the precedent set by the Coordinate Bench, the Tribunal remanded the issue to the AO with directions to await the Supreme Court’s final decision and then decide accordingly. Thus, grounds 1(a) & (b) were allowed for statistical purposes.

2. Disallowance of ?9,97,00,000/- on Account of Provision for Warranty:
The AO disallowed the provision for warranty on the grounds that it was a notional and contingent liability, which was upheld by the CIT(A). The assessee contended that the issue is covered by the Supreme Court's decision in the case of Rotork Controls India (Pvt.) Limited, which allows such provisions if certain conditions are met. The Tribunal agreed that the conditions laid down by the Supreme Court need verification and remanded the issue back to the AO for this purpose. Grounds 2(a), (b), & (c) were allowed for statistical purposes.

3. Disallowance of ?12,18,60,300/- Towards Expenditure Incurred in Earning Dividend Income and Applicability of Rule 8D:
The AO disallowed the amount by applying Rule 8D, as the assessee could not provide a one-to-one nexus showing that borrowed funds were not used for investments. The CIT(A) partially agreed with the assessee’s computations but made adjustments for foreign investments. The Tribunal found that the AO did not have the necessary details to verify the assessee's claims and remanded the issue back to the AO for verification of the details of payment of interest as shown in the annual report. Grounds 3(a), (b), (c), & (d) were allowed for statistical purposes.

4. Disallowance of ?1,36,32,019/- on Account of Payments Made for Software Repairs and Maintenance Expenses:
The AO treated the expenditure on software repairs and maintenance as capital expenditure, which was confirmed by the CIT(A). The assessee argued that this issue is covered by the Coordinate Bench’s order in its own case for earlier years, which treated similar expenses as revenue in nature. The Tribunal agreed that such expenditures do not create a new asset and should be treated as revenue in nature. Thus, ground 4 was allowed.

Conclusion:
The appeal was partly allowed, with the issues remanded back to the AO for further verification and decision in accordance with the Supreme Court’s final judgment and the principles laid down by the Tribunal. The Tribunal's directions ensure that the AO re-examines the disallowances with the necessary details and legal precedents in mind.

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