2017 (11) TMI 1366 - AT - Income Tax

Allowability of software expenses - revenue or capital expenditure - Held that - CIT(A) has gone through the invoices submitted by the assessee during the course of appellate proceedings and has arrived at a finding that ₹ 99,031 relates to purchase of software. There is nothing on record to suggest that said finding is perverse. Further, the assessee in its submissions has also stated that it had paid for purchase of software for Website related application for LAN. In light of the same, we donot see any infirmity in the findings of the ld CIT(A). The expenditure of ₹ 99,031 is held to be capital expenditure and being in the nature of intangible assets, the assessee shall however be entitled for depreciation as prescribed for intangible assets under section 32 of the Act. The ground of the assessee s appeal is disposed off accordingly. Addition on account of caution money - 15% of refunded caution money is disallowed for which no proper receipt/evidence has been adduced by the assessee - Held that - merely on account of the fact that some of the repayments which have been made by the assessee in cash are not verifiable, the same cannot form the basis for disallowance. During the course of hearing, the assessee has submitted that it has adequate internal controls for repayment of caution money to the students and books of accounts have been audited and no adverse finding has been given by the auditors. Further, details of repayments in terms of caution money ledger, vouchers and other details were submitted during the course of assessment proceedings which is also not disputed by the Revenue. Further, the question of disallowance comes where there is a claim of expenditure at first place which is not the case before us. In the entirety of facts and circumstances of case, we are of the considered view that there is no basis for adhoc disallowance of 15% of caution money which has been refunded to the students during the year. We accordingly set-aside the findings of the AO and the ld CIT(A) and the disallowance of caution money so refunded is deleted in entirety. In the result, ground of assessee s appeal is allowed Addition u/s 40A(2)(b) on account of salary payment to Arti Bansal - Held that - The reasonableness has to be seen vis-a-vis legitimate needs of the assessee company and benefit derived or accruing to the assessee company and as determined by the assessee company. In the entirety of the facts and circumstances of the case, we are of the view that the salary paid to Arti Bansal is commensurate with qualifications and experience as well as area of her work responsibility in terms of faculty, management and day to day affairs of the Ajmer branch and commensurate vis-a-vis legitimate needs of the assessee company and benefit derived or accruing to the assessee company. In the result, disallowance of salary payment to Arti Bansal under the provisions of section 40A(2)(b) is hereby deleted. Regarding salary payment to Mahima Bansal our reasoning as stated above in case of Arti Bansal shall apply with equal force to the present case. Further, we find that unlike the case of Arti Bansal, in case of Mahima Bansal, comparative data has been examined and analysed by the ld CIT(A) even though it is an internal data as provided by the assessee company. Based on the analysis of the said data, the ld CIT(A) has given a finding that the salary payment to Mahima Bansal is excessive by ₹ 8 lacs in financial year 2011-12 relevant to assessment year 2012-13 and by ₹ 6 lacs in financial year 2012-13 relevant to assessment year 2013-14. The said findings of the ld CIT(A) is therefore in consonance with our reasoning given above in case of Arti Bansal. However, there is no comparative data that is available and analysed for the financial year 2009-10 and 2010-11. We accordingly confirm the deletion of addition of salary payments to Mahima Bansal for AY 2010-11 and AY 2011-12. For AY 2012-13 and AY 2013-14, we confirm the addition as sustained by the ld CIT(A) and balance addition is deleted. The respective grounds of appeal are disposed off accordingly. Disallowance of depreciation on PLD unit building - CIT-A deleted addition on the basis of additional evidence admitted - Held that - As gone through the construction account of the building and it was seen that in the current financial year, last payment was made on 21.12.2009. It was also seen that assessee applied for increase in electric load from 350KW to 500 KW on 27.07.2009 and demand note was issued (by Jaipur Vidhyut Vitran Nigam Ltd.) on 21.08.2000, which was deposited on 28.08.2009. Considering the above, it is of the opinion that the building was completed and put to use during the second half of current financial year. The AO is therefore directed to delete addition Disallowance of deduction claimed by assessee u/s 80G - Held that - Setting aside the matter to the file of the AO for a limited purpose to verify the validity of the approval granted by the Commissioner of Income Tax under the provisions of section 80G(5)(vi) to Bansal Public School Education Society for the financial year relevant to the impunged assessment year. Where the Assessing officer finds that the approval granted under section 80G(5)(vi) to Bansal Public School Education Society is valid and in force for the financial year relevant to the impunged assessment year, he is hereby directed to allow the necessary relief to the assessee company by way of allowing the necessary deduction in terms of provisions of section 80G of the Act as claimed by the assessee company in its return of income. The ground of the revenue is disposed off accordingly. Disallowance towards advertisement expenditure - Held that - No evidence has been submitted to substantiate the expenditure as claimed to have been incurred towards advertisement. Further, the assessee has failed to establish the necessary nexus of incurrence of such expenditure for business purposes. In light of the same, the above findings of the ld CIT(A) remain uncontroverted before us and the same are hereby confirmed. In the result, assessee s ground of appeal is dismissed. Depreciation on xerox machine - Held that - Nothing has been brought on record to suggest that Xerox machine cannot function independent of the computer system unlike a printer whose functionality is interconnected with a computer system. In light of the same, we upheld the action of the AO in treating Xerox machine as eligible for depreciation @ 15% as a standalone machine. In the result, the appeal of revenue is allowed. Contribution towards police welfare fund - Held that - It is an expenditure which has been laid down to develop and strengthen the coordination and working relationship with the local police department. Given the budgetary constraints which, at times, are faced by police department, where an assessee contributes certain amount for welfare of the police personnel to help improve their extreme work conditions where they are deployed in close proximity to assessee s area of operations, the necessary nexus is certainly established with the business of the assessee. In our view, such an expenditure will be eligible for allowance under section 37(1) as incurred for the purposes of its business. Adhoc disallowance of 15% of student welfare expenses - Held that - Both the AO and ld CIT(A) has not highlighted specific expenditure which fail the test of business expediency as laid down by the Courts from time to time. Further, no specific instances of expenditure have been highlighted which could not be verified for want of proper supporting documentation. Merely generalization and holding that payments have been made in cash doesn t necessarily lead to disallowance of eligible expenditure. There is no basis for adhocism in the eyes of law. In the result, disallowance made by the AO is hereby deleted. The assessee s ground of appeal is allowed

Summary

Issues Involved:
1. Disallowance of Software Expenses
2. Addition on Account of Caution Money
3. Disallowance under Section 40A(2)(b) on Account of Salary Payments
4. Disallowance of Depreciation on PLD Unit Building
5. Disallowance of Deduction under Section 80G
6. Disallowance of Advertisement Expenses
7. Disallowance of Public Welfare Expenses
8. Disallowance of Depreciation on Xerox Machine
9. Disallowance of Student Promotion Expenses
10. Disallowance of Travelling Expenses

Detailed Analysis:

1. Disallowance of Software Expenses:
The assessee claimed software expenses of ?1,19,429 as revenue expenditure, which the AO treated as capital expenditure. The CIT(A) sustained the disallowance of ?99,031. The Tribunal upheld the CIT(A)'s decision, noting that the expenditure was for software purchase, qualifying as capital expenditure, but allowed depreciation under section 32 for intangible assets.

2. Addition on Account of Caution Money:
The AO made additions for caution money refunds, citing lack of proper evidence. The CIT(A) reduced the additions, accepting that caution money is a liability and should only be treated as income if written off. The Tribunal agreed with the CIT(A) and deleted the disallowance, emphasizing that the Revenue did not dispute the refund of caution money.

3. Disallowance under Section 40A(2)(b) on Account of Salary Payments:
The AO disallowed salary payments to related persons, considering them excessive. The CIT(A) partially upheld the disallowance. The Tribunal examined qualifications, responsibilities, and market comparisons, concluding that the salaries were reasonable and deleted the disallowance for Arti Bansal. For Mahima Bansal, partial disallowance was sustained based on comparative data.

4. Disallowance of Depreciation on PLD Unit Building:
The AO disallowed depreciation on the PLD Unit Building, questioning its completion. The CIT(A) allowed the depreciation, stating the building was completed and put to use. The Tribunal confirmed the CIT(A)'s findings, validating the completion and usage of the building based on construction accounts and increased electricity load.

5. Disallowance of Deduction under Section 80G:
The AO disallowed the deduction for donations under section 80G, questioning the legitimacy and commercial expediency of donations to Bansal Public Education Society. The CIT(A) allowed the deduction, stating section 80G does not require business nexus or commercial expediency. The Tribunal remanded the matter to the AO to verify the validity of the approval granted under section 80G(5)(vi).

6. Disallowance of Advertisement Expenses:
The AO disallowed advertisement expenses due to lack of nexus with business purposes. The CIT(A) upheld the disallowance, noting no evidence was provided to show the expenses were for advertisement. The Tribunal confirmed the CIT(A)'s decision, emphasizing the need for substantiating evidence.

7. Disallowance of Public Welfare Expenses:
The AO disallowed expenses for public welfare, considering them donations. The CIT(A) upheld the disallowance. The Tribunal allowed the expenses, recognizing the nexus with business purposes, particularly for contributing to police welfare for student safety.

8. Disallowance of Depreciation on Xerox Machine:
The AO disallowed excess depreciation claimed on Xerox machines, treating them as standalone machines eligible for 15% depreciation. The CIT(A) allowed 60% depreciation, following ITAT's decision in another case. The Tribunal upheld the AO's decision, confirming 15% depreciation for Xerox machines.

9. Disallowance of Student Promotion Expenses:
The AO disallowed a percentage of student promotion expenses due to lack of proper documentation. The CIT(A) reduced the disallowance. The Tribunal deleted the disallowance, rejecting adhocism and emphasizing the need for specific evidence of non-business expenditure.

10. Disallowance of Travelling Expenses:
The AO disallowed a percentage of travel expenses due to inadequate documentation. The CIT(A) reduced the disallowance. The Tribunal deleted the disallowance, rejecting adhocism and emphasizing the need for specific evidence of non-business expenditure.

Conclusion:
The Tribunal provided a detailed analysis for each issue, emphasizing the need for proper evidence and documentation to support claims. It upheld reasonable claims, allowed necessary deductions, and rejected arbitrary disallowances, ensuring decisions were based on substantiated facts and legal principles.