2016 (11) TMI 66 - AT - Income Tax

Depreciation at the rate of 60% on the courseware - Held that - We find that the assessee is engaged in the business of imparting computer training and education on customized basis as per the requirements of the customers. The assessee developed various types of educational software/special courses keeping in view of the requirements of each institution/customer and these courses are designed and developed keeping in view of the requirements which varies from customer to customer, from industry to industry and these courses when combined with the software were called coursewares. In our view these courses are nothing but specially designed computer softwares meant for training and e-learning. We find that the ld. CIT(A) has wrongly held that these courses are basically manual which are used by the assessee in training institutes and mere fact that these manuals were on software could not be taken to mean that these are computer softwares. We further find that the department has allowed depreciation to the assessee at the rate of 60% in the previous and succeeding years even in the assessments framed u/s 143(3) of the Act and thus, the department cannot be allowed to take different view in the different assessment years qua the same assets which are nothing but specialized software or customized training softwares which are eligible for depreciation at the rate of 60% as per the Income Tax Rules and the same was correctly depreciated at the rate of 60% by the assessee. Accordingly, we set aisle the order of ld.CIT(A) and direct the AO to allow the deprecation at the rate of 60%. - Decided in favour of assessee. Disallowance at the rate of 10% being the expenditure incurred on Lucknow School Project - Held that - We find that the assessee has incurred expenses on Lucknow school project which have been increased by 25% over the last three years. The reasons cited by the assessee for such increase was that the expenses which were as per terms as agreed in the memorandum of agreement and accordingly the assessee made payments through banking channels as agreed. We find merit in the submissions of the ld. AR that mere increase in expenditure was not sufficient ground for disallowance on estimation basis which is no basis in our opinion and is not justified particularly when these expenses were incurred in terms of agreement between the assessee and franchisees. The ld. CIT(A) has not given any cogent and solid reasons to support the addition made by AO. The assessee was maintaining proper bills and vouchers which were subject of various types of audit . We therefore of the view that the adhoc disallowance at the rate of 10% when the assessee is maintaining books of accounts which audited and supported with bills and vouchers and the payments were made by account payee cheques as per the agreements with franchisees can not be sustained especially when the AO took the total expenses of three years and thereby making disallowance of ₹ 23,34,738/- in a casual manner. In view of these facts and the manner in which adhoc disallowance was made, we are inclined to set aside the order of the ld. CIT(A) and direct the AO to delete the addition. Disallowance in respect of ESOP charges - Held that - In the case of Biocon Ltd (2013 (8) TMI 629 - ITAT BANGALORE ), the Special Bench of the Bangalore Tribunal has held that discount on issue of shares to the employee stock option is allowable deduction in computing the income in the profit and loss account of business or profession and the same was on account of ascertained liability and not contingent liability. It was also held that by issuing shares at discounted price under the scheme ESOP is simply one of the motive to compensate the employees for their services and is part of the remuneration . In the case of PVP Ventures Limited (2012 (7) TMI 696 - MADRAS HIGH COURT ), the Hon ble Madras High Court has held that the assessee had to follow SEBI guidelines and by following such directions the assessee has claimed ascertained amount as eligible for deduction arising on account of Employees Stock Option Plan. In the case of LEMON TREE HOTELS LTD (2015 (11) TMI 404 - DELHI HIGH COURT) upheld and fully endorsed that ESOP was an allowable expenses. In view of the facts as discussed above and the ratio laid down in the various decisions, we are of the view that the assessee has rightly written off ESOP charges and therefore, the order of the ld. CIT(A) is wrong and cannot be sustained. Accordingly, we set aside the order of ld.CIT(A) and direct the AO to delete the disallowance - Decided in favour of assessee. Disallowance u/s 40(a)(ia) - non deduction of tds on hire charges - Held that - hese expenses were incurred by employees out of their tour advances while they were on tour. Looking into the facts and circumstances of the case, we find that the assessee had incurred these expenses through employees out of their travelling advances for hiring motor vehicles during the course of their employment and the expenditures incurred by them out of travelling advances. In our view, the same are not liable for deduction u/s 40(a)(ia) of the Act as it is the settled law that re-imbursement to the employees is not laible to the provisions of TDS . Accordingly, we direct AO to delete the addition. Disallowance being the provisions for rebate - Held that - We find that the provision of rebate which is a kind of de-recognizing the revenue which was already credited in the books of accounts of the assessee as is clear from the ledger account of the Directorate of Education, New Delhi Government in the books of assessee. In our view provisions of rebate was rightly claimed by the assessee upon the same being denied by the person from whom it was receivable and also satisfies the conditions as laid down in section 36(1)(vii) of the Act particularly when the similar deductions were allowed by the department in the earlier and succeeding years. Accordingly, we direct AO to delete the addition. Disallowance made u/s 14A - Held that - The total investments made in the subsidiary companies were to the tune of ₹ 23,85,10,386/- whereas the share capital of the assessee company were ₹ 43,15,11,170/- no interest disallowance is called for as the assessee s own fund were sufficient to cover the investment in the shares in subsidiary companies. It is also clear from the copy of audited balance sheet as on 31.3.2007 that the assessee s own funds were sufficient to meet the investment in the subsidiary company. Moreover, the investments made in the subsidiary companies were primarily made not with the objective of earning dividend but made out of strategic considerations to which the provisions of section 14A cannot be applied as has been held in the case of Commissioner of Income-tax v.Oriental Structural Engineers (P.) Ltd. 2013 (1) TMI 720 - DELHI HIGH COURT Addition u/s 68 - Held that - There some un-reconciled entries in ITNS amounting to ₹ 5,15,396/- pertaining to several parties with whom the assessee has stated not to have any business or other dealings and could not be reconciled. The AO made addition on the basis of merely ITNS information without making any other further verification of ITNS information available with the AO and therefore, the addition as made by the AO and sustained by the ld.CIT(A) was not justified when the assessee has completely disowned the transactions with the said parties. The information as contained in the ITNS are filed by the third parties and the AO could have enquired from those parties whose information was available, however the AO simply proceeded to add the unaccounted amount without doing any inquiry. Accordingly, we direct the AO to delete the addition. Allowance of brand building expenses - expenses revenue in nature OR of capital nature - Held that - e. We find that the assessee has incurred expenses on marketing/advertising and retainer-ship etc. for running and operation of business more profitably and efficiently which did not result in the creation of fixed asset or creation of any benefit of enduring nature in favour of the assessee and thus observation and findings of the AO was not correct and the ld. CIT(A) has rightly deleted the addition made by the AO after considering the submissions of the assessee and by recording the findings of facts that the expenditure incurred were of revenue in nature expended for day to day running and operation of assessee s business. We are of the opinion that the order passed by the ld.CIT(A) is correct and does not require any interference from our part and accordingly we uphold the same on this issue by dismissing the appeal of revenue. Disallowance on account of writing off advances - Held that - The company has paid various advances for obtaining telephone and electric connections in the business premises in its franchisees as the assessee carried on the business of imparting education and training and rendering other services. These deposits were adjusted by the department concerned against the outstanding and pending bills of electricity and telephone, when the franchisees failed to make the payments and the same could not be recovered for the reasons stated above in large number of cases. We also find merit in the arguments of the ld.AR that the record of the assessee were destroyed in flood in 2005 and the deposits could not be claimed due to damage and destructions of record of the assessee. In our opinion, the said writing off advances given in the ordinary course of business which has direct nexus of the operation of business of the assessee and the amount of advances were written off out of business exigency and is therefore business loss. Accordingly, we set aside the order of the ld.CIT(A) and direct the AO to delete the disallowance.

Summary

Issues Involved:
1. Depreciation on Courseware
2. Disallowance of Expenses on Lucknow School Project
3. Disallowance of ESOP Charges
4. Disallowance under Section 40(a)(ia) for Hire Charges
5. Disallowance of Provision for Rebate
6. Disallowance of Provision for Leave Encashment
7. Disallowance under Section 14A for Exempt Income
8. Addition under Section 68 for Unexplained Cash Receipts
9. Brand Building Expenses as Capital or Revenue Expenditure
10. Write-off of Advances

Issue-wise Detailed Analysis:

1. Depreciation on Courseware:
The assessee claimed depreciation at 60% on courseware, which the AO reduced to 15%, resulting in a disallowance of ?1,67,76,003. The CIT(A) upheld the AO's decision. The Tribunal found that the courseware, being specialized software for training, qualifies for 60% depreciation as per the Income Tax Rules. The Tribunal directed the AO to allow depreciation at 60%.

2. Disallowance of Expenses on Lucknow School Project:
The AO disallowed 10% of the expenses incurred on the Lucknow School Project due to a substantial increase in expenses. The CIT(A) confirmed the disallowance. The Tribunal found the disallowance unjustified as the expenses were incurred as per agreements and paid through banking channels. The Tribunal directed the AO to delete the addition.

3. Disallowance of ESOP Charges:
The AO treated ESOP charges of ?11,06,563 as capital in nature. The CIT(A) upheld this view. The Tribunal, relying on various judgments, including the Special Bench decision in Biocon Ltd., held that ESOP charges are revenue expenses as they compensate employees for their services. The Tribunal directed the AO to delete the disallowance.

4. Disallowance under Section 40(a)(ia) for Hire Charges:
The AO disallowed ?36,75,372 under Section 40(a)(ia), which the CIT(A) reduced to ?4,46,593. The Tribunal found that the expenses were incurred by employees out of travel advances and were not liable for TDS. The Tribunal directed the AO to delete the addition.

5. Disallowance of Provision for Rebate:
The AO disallowed ?2,50,00,000 as a provision for rebate, treating it as a contingent liability. The CIT(A) upheld the disallowance. The Tribunal found that the provision was made for amounts not acknowledged by the Directorate of Education, Delhi, and was part of the billed amount already treated as income. The Tribunal directed the AO to delete the disallowance.

6. Disallowance of Provision for Leave Encashment:
The AO disallowed ?40,71,369, which the CIT(A) reduced to ?19,00,418, citing Section 43B(f). The Tribunal restored the matter to the AO, directing him to await the Supreme Court's decision in the case of Exide Industries Ltd.

7. Disallowance under Section 14A for Exempt Income:
The AO disallowed ?1,56,27,270 under Section 14A read with Rule 8D. The CIT(A) directed recalculating the disallowance by excluding investments in foreign companies. The Tribunal found that the assessee's own funds were sufficient to cover the investments and that the investments were made for strategic purposes. The Tribunal deleted the disallowance.

8. Addition under Section 68 for Unexplained Cash Receipts:
The AO added ?1,73,41,224 under Section 68 based on ITS information. The CIT(A) reduced the addition to ?5,15,396. The Tribunal found that the AO made the addition without proper verification and directed the AO to delete the addition.

9. Brand Building Expenses as Capital or Revenue Expenditure:
The AO treated brand building expenses as capital, allowing 25% depreciation. The CIT(A) treated them as revenue expenses. The Tribunal upheld the CIT(A)'s decision, finding that the expenses were incurred for running the business and did not create any fixed assets or enduring benefits.

10. Write-off of Advances:
The AO disallowed ?1,04,08,418 written off as advances for electricity and telephone connections. The CIT(A) upheld the disallowance. The Tribunal found that the advances were given in the ordinary course of business and written off due to non-recovery. The Tribunal directed the AO to delete the disallowance.

Conclusion:
The Tribunal allowed the appeals of the assessee on several grounds, directed the AO to delete various disallowances, and upheld the CIT(A)'s decisions on brand building expenses. The Tribunal's decisions were based on detailed analysis and relevant case laws.