2018 (4) TMI 396 - AT - Income Tax

Disallowance of provision of anticipated loss - construction & erection contracts - anticipated loss was a highly budgeted cost in excess of the budgeted revenue on the project - Held that - FAA has not analysed the AS-7 properly and has applied it in a biased way -not in a fair manner. There is no need to cite any judicial authority to state that AS are applicable to the Act and have to be followed while determining the tax liability of a corporate-assesseee. AS-7 recognises theory of anticipated loss and the assessee had made a claim about it. FAA/AO have not doubted about genuineness of the expenditure. The FAA held that it should be allowed in next year and the expenditure claimed by the assessee in the immediate succeeding year should not be allowed. Thus, in his opinion, the issue was only year of allowability and not the genuineness of the expenditure itself. Ground no. 2 is decided in favour of the assessee. Disallowance made about expenditure incurred for purchasing software - AO and the FAA held that payment made by the assessee for purchasing software was royalty, that it had not deducted tax at source for such payment - Held that - We find that the assessee had purchased copyrighted software. In our opinion, payments made on account of copyrighted software is not payment of royalty. Therefore same is not chargeable to tax in India. We would like to refer to the case of Infrasoft Ltd. (2013 (11) TMI 1382 - DELHI HIGH COURT) as held the right to make a backup copy purely as a temporary protection against loss, destruction or damage does not amount to acquiring a copyright in the software - What has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income - The consideration received on grant of licences for use of software is not royalty within the meaning of Article 12(3) of the Double Taxation Avoidance Agreement between India and the United States of America Decided against Revenue.

Summary

Issues Involved:
1. Non-adjudication of grounds by the First Appellate Authority (FAA).
2. Disallowance of provision for anticipated loss.
3. Disallowance of expenditure incurred for purchasing software due to non-deduction of tax at source.

Issue-wise Detailed Analysis:

1. Non-adjudication of Grounds by the FAA:
The Authorized Representative (AR) did not press the first ground of appeal, leading to its dismissal. However, it was noted that the FAA did not adjudicate two grounds raised by the assessee: the short grant of credit in respect of tax deducted at source of ?2.73 crores and the addition of ?5.87 lakhs on account of unexplained credit card expenses as per the AIR report. The Tribunal restored these issues to the file of the FAA for fresh adjudication, directing the FAA to afford a reasonable opportunity for hearing to the assessee. Thus, the third and fourth grounds raised by the assessee were decided in its favor, in part.

2. Disallowance of Provision for Anticipated Loss:
The AO disallowed the anticipated loss of ?6.49 crores claimed by the assessee, stating that the losses were uncertain and had not accrued. The FAA upheld the AO's decision, arguing that the assessee failed to meet the conditions of AS-7 and that anticipated losses could not be recognized if the contract was not completed. The Tribunal, however, found that the FAA had not properly analyzed AS-7 and had applied it in a biased manner. The Tribunal cited the case of ITD Cementation India Ltd., which supported the recognition of anticipated losses under AS-7. It was noted that the FAA did not doubt the genuineness of the expenditure but only the year of its allowability. The Tribunal decided this ground in favor of the assessee, directing the AO to recompute the business profits by allowing the losses provided by the assessee in its books.

3. Disallowance of Expenditure Incurred for Purchasing Software:
The AO and the FAA held that the payment made by the assessee for purchasing software was royalty and disallowed the expenses due to non-deduction of tax at source under section 40(a)(ia). The AR contended that the software was purchased for the assessee's own use and was not royalty. The Tribunal referred to the case of Infrasoft Ltd. and other relevant judgments, concluding that the payment for copyrighted software is not royalty and is not chargeable to tax in India. The Tribunal also addressed the retrospective applicability of section 40(a)(ia), referring to the case of Channel Guide India Ltd., and decided this ground in favor of the assessee.

Separate Judgments:
For the assessment year 2010-11, the solitary ground of appeal was about the anticipated loss of ?2.89 crores. Following the decision for the earlier assessment year, the Tribunal decided this ground in favor of the assessee.

Conclusion:
The appeal for the assessment year 2009-10 (ITA/6219/Mum/2014) was partly allowed, and the appeal for the assessment year 2010-11 (ITA/6916/Mum/2014) was allowed. The order was pronounced in the open court on 04th April 2018.