2017 (7) TMI 174 - AT - Income Tax

Disallowance of additional depreciation - Held that - When an allowance which is ordinarily not available under normal commercial principles of accounting, is made specifically allowable, through enactment of certain specific provisions of the Act, it is also a requirement that there should be similar specific provision which shows its applicability every year, unless the context strongly calls for such an interpretation. We are thus of the opinion that CIT(Appeals) was justified in confirming the disallowance of additional depreciation. Software expenses should be treated as revenue in nature Royalty payment - nature of expenditure - revenue or capital - Held that - Royalty amount received by the CRI Industries India Ltd., which was holding the brand CRI is not the point at issue either before the Department or before the Tribunal. Since the royalty amount paid by the assessee User to M/s. C.R.I. Amalgamation Pvt. Ltd. (Proprietor was high, the Assessing Officer has made the disallowance. The assessee paid the royalty for exclusively using the trade mark CRI based on monthly turnover at the rate of 0.50%, which was duly agreed and executed a User Agreement between the proprietor and user. Therefore, the expenses incurred towards payment of royalty has been treated as revenue expenditure by the ld. CIT(A) for the assessment 2008-09, which was duly confirmed by the Tribunal against the appeal of the Revenue after elaborately discussing the facts Addition made towards implementation of oracle additional report development - Disallowance of improvement of software or purchase of software - Held that - The assessee has filed the copies of invoices raised by M/s. Astral Consulting Ltd. and the payments are made for the information systems services rendered. There was no dispute that the payments were made for the purpose of improvement of the software consequent upon merger of other companies, which was necessitated to generate some reports in oracle application. Any expenditure incurred for the purpose of improvement of software or purchase of software that expenditure should be treated as revenue expenditure Disallowance made on account of dividend income - addition u/s 14A r.w.r. 8D - Held that - The provisions of section 14A of the Act are not applicable to assessee s case since the investment made in foreign subsidiaries and the income earned from the aforesaid investments have been offered to tax. Thus, we confirm the order passed by the ld. CIT(A) on this issue and dismiss the ground raised by the Revenue Levy penalty under section 271(1)(c) - Held that - It is not a fit case to levy penalty under section 271(1)(c) of the Act and accordingly, confirm the order passed by the ld. CIT(A) in directing the Assessing to delete the penalty.

Summary

Issues Involved:
1. Disallowance of additional depreciation.
2. Disallowance of software expenses.
3. Payment of royalty.
4. Implementation of Oracle additional report development.
5. Disallowance under section 14A.
6. Reopening of assessment.
7. Deletion of penalty under section 271(1)(c).

Detailed Analysis:

1. Disallowance of Additional Depreciation:
The assessee claimed additional depreciation on plant and machinery acquired in previous years. The Assessing Officer (AO) disallowed this claim, stating that additional depreciation under section 32(1)(iia) is allowable only in the year of acquisition and installation. The CIT(A) upheld the AO's decision, and the Tribunal, following its earlier decision in the assessee's own case for AY 2010-11, dismissed the assessee's appeal. It was reiterated that additional depreciation is a one-time benefit in the year of installation and cannot be claimed in subsequent years.

2. Disallowance of Software Expenses:
The AO disallowed expenses related to payroll, billing, and export/import software, treating them as capital in nature. The CIT(A) confirmed the disallowance due to the absence of invoices. However, the Tribunal, relying on the Delhi High Court's decision in CIT v. Amway India Enterprises, held that software expenses should be treated as revenue in nature and directed the AO to delete the disallowance.

3. Payment of Royalty:
The AO disallowed the royalty payment to M/s. CRI Amalgamations Pvt. Ltd., arguing that the assessee was the owner of the trademark "CRI" after the merger. The CIT(A) found that the trademark was retained by M/s. CRI Amalgamations Pvt. Ltd. as per the Scheme of Amalgamation approved by the High Court. The Tribunal upheld the CIT(A)'s decision, stating that the royalty payment was justified and allowable as revenue expenditure, as it was based on a valid agreement and sanctioned by the High Court.

4. Implementation of Oracle Additional Report Development:
The AO treated the expenditure on Oracle report development as capital in nature. The CIT(A) allowed the claim as revenue expenditure, noting that the payments were for information systems services necessary due to the merger. The Tribunal confirmed this view, stating that expenses for software improvement should be treated as revenue expenditure.

5. Disallowance under Section 14A:
The AO disallowed expenses under section 14A, asserting that the assessee used borrowed funds for investments in non-performing companies. The CIT(A) deleted the disallowance, noting that the investments were in foreign subsidiaries and the dividend income was taxable in India. The Tribunal affirmed this decision, referencing the Gujarat High Court's ruling in CIT v. Suzlon Energy Ltd., which held that section 14A does not apply to investments in foreign subsidiaries.

6. Reopening of Assessment:
The assessee challenged the reopening of assessment on the grounds of change of opinion. The CIT(A) did not adjudicate this issue. The Tribunal set aside the CIT(A)'s order and remitted the matter back to adjudicate the legal issue of reopening the assessment.

7. Deletion of Penalty under Section 271(1)(c):
The AO levied a penalty for furnishing inaccurate particulars of income due to disallowance of additional depreciation. The CIT(A) deleted the penalty, stating that the assessee had a bona fide belief based on the provisions of section 32. The Tribunal upheld the CIT(A)'s decision, following the Supreme Court's ruling in CIT v. Reliance Petroproducts Pvt. Ltd., which held that a mere unsustainable claim does not amount to furnishing inaccurate particulars.

Conclusion:
The Tribunal provided detailed rulings on various issues, largely upholding the CIT(A)'s decisions favoring the assessee, except for the disallowance of additional depreciation, which was consistently denied based on prior rulings. The Tribunal emphasized the importance of valid agreements and High Court orders in determining the allowability of royalty payments and treated software-related expenses as revenue in nature. The reopening of assessment and penalty issues were remitted and dismissed, respectively, based on legal precedents and factual correctness.