2017 (7) TMI 172 - AT - Income Tax

Addition on account of rent - Held that - When the lessor company admitted of leasing out and also simultaneously handing over the possession of the premises on 1.4.2005 the mere fact that the lease deed was recorded a little later on 1.8.2005 cannot per se lead to disallowance of rent for a period of four months as has been done by the authorities below. When the assessee placed a copy of the letter of the lessor company to the effect that the premises were in fact handed over to the assessee on 1.4.2005 it was incumbent upon the authorities either to accept this proposition or rebut the same with some cogent reasons. No such rebuttal has been done in the instant case. In our considered opinion the user of the premises by the assessee for a full period of one year coupled with the fact of having made payment of rent for similar period clearly entitle the assessee to deduction of the rent for the whole of the year. The impugned order is set aside to this extent. Disallowance u/s 14A - Held that - AR has placed on record a copy of the consequential order passed by the AO pursuant to the restoration of the matter by the ld. CIT(A) for computing disallowance u/s 14A on some reasonable basis. As per this order dated 30.3.2013 the AO has computed the fresh disallowance at 2 lac. In our considered opinion the sustenance of disallowance at this level is quite reasonable which does not require any further interference. Disallowance of remaining expenses - Held that - AO made disallowance of 16.12 crore simply by means of a mathematical exercise carried out by him. If he found the expenditure incurred by the assessee to be on higher side it was incumbent upon him to specifically point out as to which expenses were not incurred for the purposes of business. No such exercise worth the name has been carried out. In our considered opinion the ld. CIT(A) was fully justified in deleting this addition made by the AO on ad hoc basis. This ground is therefore not allowed. Disallowance of depreciation allowable on licence to use software @ 60% and not at 25% - Held that - Once it is found that the software used by the assessee were of standard nature to be used in computer hardware and not meant for any independent usage such software qualify for depreciation @ 60%. Appendix I to the Income-tax Rules under the broader head III Machinery and plant at Sl. no. (5) provides Computers including computer software . Rate of depreciation at 60% has been prescribed against this item. When we consider Appendix I to the Income-tax Rules containing rates of depreciation available for the purposes of income-tax it becomes manifest that the computer software which are necessary and integral for the working of hardware are eligible for depreciation @ 60% as was claimed by the assessee. We therefore approve the view taken by the ld. CIT(A) in deleting this disallowance. This ground is not allowed. Expenditure on development of website is a revenue expenditure. Disallowance on account of expenses towards Telecom web support - Held tht - There is some calculation mistake in the assessment order in respect of the amount paid by the assessee to these two parties. Since the very nature of the expenditure is that of revenue there is no need to go deep into such a calculation mistake as the entire amount on this score is deductible as revenue expenditure. CIT(A) was justified in deleting this disallowance. Addition being Web page updation charges - Held that - We find it as an undisputed fact that this expenditure was incurred by the assessee on web page updation. When the Hon ble jurisdictional High Court in Indian Visit.com (P) Ltd. (2008 (9) TMI 8 - DELHI HIGH COURT) has held the expenditure incurred on development of website as revenue it is but natural that the expenditure incurred on website updation cannot assume the character of a capital expenditure. We therefore uphold the impugned order on this issue. Annual maintenance cost is undoubtedly revenue expenditure and qualifies for deduction in entirety. Deduction on account of Repairs to furniture and fixtures - Held that - From the details of such repair and maintenance of furniture and fixtures it can be seen that there are certain items of the capital nature such as payment towards purchase of LCD TV frame etc. Such expenditure cannot be considered as a revenue expenditure. In view of the fact that the AO has not specifically dealt with the details of expenses for which he made disallowance we consider it expedient to set aside the impugned order on this score and remit the matter to the file of AO for making an itemwise analysis of the nature of expenses claimed by the assessee under this head and thereafter make disallowance to the extent permissible as per law. Disallowance of receipt of advances - Held that - The assessee was following matching principle in recording income as well as expenses under the mercantile system of accounting. Paper book indicates that not only the income pertaining to the succeeding year but received in the year under consideration was taken as deferred revenue income but the expenditure incurred during the year not pertaining to the year under consideration was also similarly accounted for. This unearned income of 1.55 crore was taken as income for the succeeding year and accepted by the Revenue as such in the assessment u/s 143(3) of the Act. In view of the fact that this income did not pertain to the year under consideration we hold that the ld. CIT(A) was justified in deleting this disallowance.

Summary

Issues Involved:
1. Sustenance of addition on account of rent.
2. Disallowance under Section 14A of the Income-tax Act.
3. Disallowance of expenses related to Medianet, Content Selling, and Sale of standalone publication.
4. Disallowance of consultancy expenses treated as capital in nature.
5. Depreciation on software licenses.
6. Capitalization of software expenses.
7. Capitalization of website launch expenses.
8. Capitalization of Telecom web support expenses.
9. Capitalization of web page updation charges.
10. Capitalization of repairs and maintenance of computers, furniture, and fixtures.
11. Addition of unearned income.

Detailed Analysis:

1. Sustenance of Addition on Account of Rent:
The assessee's appeal challenged the addition of ?1,31,68,000/- for rent. The lease deed between the assessee and its holding company was effective from 1.4.2005, although executed on 1.8.2005. The AO disallowed the rent for four months, but the Tribunal found that the premises were indeed handed over on 1.4.2005, thus allowing the rent deduction for the entire year.

2. Disallowance under Section 14A:
The assessee earned exempt dividend income but did not offer any disallowance under Section 14A. The AO applied Rule 8D, which was not applicable for the year under consideration. The CIT(A) remanded the matter to the AO, but the Tribunal held that the AO had recorded proper satisfaction and upheld a reasonable disallowance of ?2 lakh, following the precedent for the subsequent years.

3. Disallowance of Expenses Related to Medianet, Content Selling, and Sale of Standalone Publication:
The AO disallowed ?16,12,31,000/- based on the percentage of expenses to revenue. However, the Tribunal found no specific expenditure incurred by the assessee for these withdrawn businesses and upheld the deletion of this ad hoc disallowance.

4. Disallowance of Consultancy Expenses Treated as Capital in Nature:
The AO treated consultancy expenses as capital expenditure, but the CIT(A) deleted this addition, which was upheld by the Tribunal, following the precedent set in the assessee's own case for the previous year.

5. Depreciation on Software Licenses:
The AO restricted depreciation on software licenses to 25% instead of 60%. The Tribunal upheld the CIT(A)'s decision that the software was of standard nature used in computer hardware, thus eligible for 60% depreciation.

6. Capitalization of Software Expenses:
The AO capitalized certain software expenses, which the CIT(A) treated as revenue expenditure. The Tribunal upheld this view, following the precedent for the previous year.

7. Capitalization of Website Launch Expenses:
The AO capitalized website creation charges, but the CIT(A) treated them as revenue expenditure. The Tribunal upheld this view, following the jurisdictional High Court's judgment in CIT vs. Indian Visit.com (P) Ltd.

8. Capitalization of Telecom Web Support Expenses:
The AO capitalized telecom web support expenses, but the CIT(A) treated them as revenue expenditure. The Tribunal upheld this view, noting that the expenses were incurred to earn revenue from SMS services.

9. Capitalization of Web Page Updation Charges:
The AO capitalized web page updation charges, but the CIT(A) treated them as revenue expenditure. The Tribunal upheld this view, following the jurisdictional High Court's judgment in Indian Visit.com (P) Ltd.

10. Capitalization of Repairs and Maintenance of Computers, Furniture, and Fixtures:
The AO capitalized repairs and maintenance expenses. The Tribunal upheld the CIT(A)'s decision regarding AMC charges of computers but remanded the issue of repairs to furniture and fixtures for a detailed analysis.

11. Addition of Unearned Income:
The AO added ?1,55,59,504/- shown as unearned income. The Tribunal upheld the CIT(A)'s deletion of this addition, noting that the assessee followed the matching principle, and the income was recognized in the subsequent year.

Conclusion:
The Tribunal's judgment addressed multiple issues, providing detailed reasoning for each decision. The appeals were partly allowed for statistical purposes, with several disallowances being upheld or remanded for further consideration. The judgment emphasized the importance of following precedents and statutory provisions in tax assessments.