2019 (12) TMI 986 - AT - Income Tax

Software expenses for licence up to 2 years - allowable revenue expense - HELD THAT - Toyota Kirloskar Ltd. 2013 (2) TMI 108 - KARNATAKA HIGH COURT held that software expenses for licence up to 2 years is revenue in nature and is fully allowable as a deduction. Respectfully following this judgment the Tribunal held in that year that the AO is directed to allow the deduction in respect of software expenses having licence period up to 2 years after considering and verifying the details furnished by the assessee. In the present year as per para 27 of his order it is noted by the learned CIT(A) that the Tribunal in the assessee s own case for Assessment Years 2004-05 and 2006-07 held that software expenses up to 2 years are allowable as deduction and directed the AO to allow the same. Learned CIT(A) has followed this Tribunal s order and decided the issue in favour of the assessee. Deduction u/s 10A - interest on loans to subsidiary company - deemed income under section 41(1) - HELD THAT - Regarding the first aspect of interest amounting to 27.80 lakhs we restore the matter back to the file of the AO for fresh decision after examining the factual aspect as to whether the loan given to subsidiary is a loan given in ordinary course of business or not. We do so by following the judgment of Hon ble Karnataka High Court rendered in the case of CIT Vs. Hewlette Packard Global Ltd. . 2017 (11) TMI 205 - KARNATAKA HIGH COURT with observation that incidental activity of parking of surplus funds with the banks or advancing of staff loans by such special category of assessee covered under sections 10A or 10B of the IT Act is integral part of their export business activity but the factual aspect noted by Hon ble Karnataka High Court was this that parking of surplus funds with the bank or advancing of staff loans was in ordinary course of business of the assessee in that case. On this aspect there is no finding of any of the authorities below in the present case as to whether the loan given to subsidiary company and staff advances were given by the assessee in ordinary course of business or not and hence the AO has to examine this factual aspect and if it is found that such loan and staff advances are given by the assessee in ordinary course of business then on resultant interest income earned by the assessee deduction should be allowed under section 10A. Regarding the second aspect in respect of deemed income under section 41(1) of the IT Act 1961 amounting to 107, 62, 841/- we allow the claim of the assessee by following the judgment of Hon ble Karnataka High Court rendered in the case of CIT Vs. Wipro Ltd. 2012 (2) TMI 535 - KARNATAKA HIGH COURT We find that this is true that note was there in the audited accounts for the year ended 31.03.2004 and present year both. In this note only it was stated that one of the customers have agreed to settle consideration in respect of services rendered by assessee by transferring certain software programs along with annual maintenance services which amounted to 157.14 lakhs. Similar note is there in the audited account for the present year also and hence the confusion has arisen as to whether this sale transaction of 157.14 lakhs is pertaining to Assessment Year 2004-05 or the present year or similar transaction is there in both years. Hence we feel it proper to restore this matter to the file of the CIT(A) for fresh decision after examining the facts in this regard carefully and after providing reasonable opportunity of being heard to both sides and he should decide this issue by way of a speaking and reasoned order Disallowance of brokerage charges - HELD THAT - We find that in para Nos.29 and 30 of his order it is noted by the learned CIT(A) that it was explained by the assessee before him that the assessee has incurred this amount as brokerage charges for securing residential accommodation for its employees but no documentary evidence has been furnished by the assessee to support his claim. Before us also no documentary evidence has been submitted by the learned AR of the assessee and hence on this issue we find no reason to interfere in the order of the CIT(A) and accordingly ground No.7 is rejected. Disallowance on account of debonding charges - HELD THAT - Disallowance respect of interest on debonding charges was upheld by learned CIT(A) with a categorical finding that the assessee has not furnished any documentary evidence in this regard. Before us also no documentary evidence has been brought on record and hence on this issue also we find no reason to interfere in the order of the CIT(A).

Summary

Issues Involved:
1. Treatment of software development expenditure.
2. Exclusions from profits of 10A unit.
3. Amount wrongly reduced from export turnover under the caption 'sale proceeds received in kind'.
4. Export sale proceeds realized late reduced from export turnover.
5. Expenses incurred in foreign currency reduced from export turnover.
6. Expenses reduced from export turnover also to be reduced from total turnover.
7. Disallowance of brokerage charges.
8. Disallowance of interest on debonding charges.
9. Levy of interest under section 234B and 234D.

Issue-wise Detailed Analysis:

1. Treatment of Software Development Expenditure:
The Revenue contested the CIT(A)'s directive to treat software development expenditure as allowable. The Tribunal upheld the CIT(A)'s decision, referencing the Tribunal's order in the assessee's own case for AY 2004-05 and the Karnataka High Court's judgment in CIT Vs. Toyota Kirloskar Ltd., which held that software expenses for licenses up to 2 years are revenue in nature and fully deductible. Consequently, the Revenue's appeal was dismissed.

2. Exclusions from Profits of 10A Unit:
The assessee challenged the exclusion of interest on loans to a subsidiary and deemed income under section 41(1) from the profits of the business for 10A deduction. The Tribunal restored the matter regarding the interest to the AO for factual verification, following the Karnataka High Court's judgment in CIT Vs. Hewlett Packard Global Ltd., which allowed such deductions if the loans were given in the ordinary course of business. For the deemed income under section 41(1), the Tribunal allowed the claim by following the Karnataka High Court's judgment in CIT Vs. Wipro Ltd.

3. Amount Wrongly Reduced from Export Turnover:
The assessee argued that the adjustment of ?157.14 lakhs from export turnover was incorrect as the transaction occurred in AY 2004-05. The Tribunal restored this issue to the CIT(A) for fresh examination, noting confusion due to similar notes in the audited accounts for both years.

4. Export Sale Proceeds Realized Late:
The assessee contended that export sale proceeds realized within 12 months should not be excluded from export turnover, citing RBI Circulars. The Tribunal restored the issue to the CIT(A) for fresh decision, as the CIT(A) had not considered the RBI Circulars.

5. Expenses Incurred in Foreign Currency Reduced from Export Turnover:
The Tribunal noted that the CIT(A) had not adjudicated this issue and restored it to the CIT(A) for fresh decision.

6. Expenses Reduced from Export Turnover Also to be Reduced from Total Turnover:
Similarly, the Tribunal restored this issue to the CIT(A) for fresh adjudication.

7. Disallowance of Brokerage Charges:
The assessee argued that similar brokerage charges were allowed in AY 2004-05. However, the Tribunal found no documentary evidence supporting the claim for the current year and upheld the CIT(A)'s disallowance.

8. Disallowance of Interest on Debonding Charges:
The Tribunal upheld the CIT(A)'s disallowance of ?43,05,015 for interest on debonding charges, noting the absence of documentary evidence from the assessee.

9. Levy of Interest under Section 234B and 234D:
The Tribunal noted that this issue is consequential and does not require adjudication.

Conclusion:
The appeal of the Revenue was dismissed, and the appeal of the assessee was partly allowed, with several issues restored to the CIT(A) for fresh adjudication.