2022 (1) TMI 288 - AT - Income Tax

Disallowance of depreciation of block of computer equipment - AO disallowed depreciation as invoices were not reconciled with the tax audit report - HELD THAT - CIT(A) called for a remand report from the A.O. and the A.O. in the remand report stated that the invoices for an amount of 6, 18, 80, 241 were not produced and conveyed his objections for allowing the claim of depreciation. A.O. however in the remand report stated that there is no objection for allowing depreciation on actual amount of invoices furnished and the CIT(A) may decide the issue based on the records available. CIT(A) rejected the appeal of the assessee for the reason that the invoices produced are not legible. The legible copies of all the invoices in relation to the additions made to the computer equipments are placed on record (refer pages 185 to 195 of the paper book). Therefore in the interest of justice and equity we are of the view that the matter needs to be verified by the A.O. afresh. Hence the issue raised as regards to the disallowance of depreciation on addition made on block of computer equipments is restored to the files of the A.O. The A.O. is directed to examine the invoices in respect of 6, 18, 80, 241 and if found in order the A.O. is directed to grant depreciation on the same. It is ordered accordingly. Nature of expenditure - software development expenses - revenue or capital expenditure - CIT(A) held that the expenditure incurred on the software development is capital expenditure - HELD THAT - CIT(A) failed to appreciate that the assessee does not test on a single software during the entire year. Further a software is not customized and deployed on the electronic products and a new product is launched every year and the same is a continuous activity. Since the CIT(A) has not understood the business model of the assessee it is necessary that the matter needs to be examined afresh by the A.O. Accordingly the issue raised in ground 2 is restored to the files of the A.O. The A.O. is directed to examine the expenditure incurred and come to a conclusion whether it is a capital or revenue expenditure. The A.O. shall afford a reasonable opportunity of hearing to the assessee before a decision is taken in this matter. It is ordered accordingly. Deduction of education cess on Income Tax and Secondary and Higher education cess on Income Tax - admission of Additional ground - HELD THAT - The Mumbai Bench of the Tribunal in the case of Voltas Limited 2020 (7) TMI 125 - ITAT MUMBAI had admitted additional ground of appeal with regard to the claim of education cess and adjudicated the matter in favour of the assessee by following the judgment of the Hon ble Bombay High Court in the case of Sesa Goa Limited 2020 (3) TMI 347 - BOMBAY HIGH COURT . In the light of the aforesaid judicial pronouncements we hold that education cess is to be allowed as deduction. It is ordered accordingly.

Summary

Issues Involved:
1. Disallowance of depreciation under the Income Tax Act - ?3,62,98,140.
2. Disallowance of software development expenses - ?2,05,05,279.
3. Deduction in respect of 'education cess on income-tax' and 'secondary and higher education cess on income-tax'.

Issue-wise Detailed Analysis:

Disallowance of Depreciation on Computer Equipment (Ground 1):
The assessee claimed depreciation on fixed assets amounting to ?12,28,67,305, including ?3,62,98,140 for additions to the block of computer equipment. The Assessing Officer (AO) disallowed the entire depreciation claim due to the lack of supporting documents for the computer equipment block. The assessee filed a rectification application, leading to partial relief but the depreciation on computer equipment remained disallowed.

Upon appeal, the CIT(A) upheld the disallowance, citing unclear and illegible invoices. Despite the assessee's submission of legible invoices and reconciliation statements, the CIT(A) found no new evidence and sustained the addition.

The Tribunal noted that the assessment was taken up late, limiting the assessee's opportunity for a proper hearing. The Tribunal found that the assessee had submitted sample invoices and a reconciliation statement during the rectification process, but the AO did not grant the depreciation claim. The Tribunal directed the AO to re-examine the invoices and grant depreciation if found in order.

Conclusion: The issue was restored to the AO for fresh examination of the invoices. Ground 1 was allowed for statistical purposes.

Disallowance of Software Development Expenses (Ground 2):
The assessee claimed software development expenses of ?2,05,05,279 as revenue expenditure. The AO disallowed the claim, arguing that no explanation was provided to justify the expenses as revenue in nature. The CIT(A) upheld the disallowance, treating the expenses as capital expenditure due to their enduring benefit, and directed the AO to allow depreciation on the same.

The Tribunal reviewed the nature of the expenses, which included testing charges and purchases of electronic items for various projects. The Tribunal found that the CIT(A) failed to appreciate the business model of the assessee, which involves continuous testing and customization of software for new products. The Tribunal directed the AO to re-examine the expenses and determine whether they should be treated as capital or revenue expenditure.

Conclusion: The issue was restored to the AO for fresh examination. Ground 2 was allowed for statistical purposes.

Deduction of Education Cess on Income Tax (Additional Ground):
The assessee sought a deduction for education cess and secondary & higher education cess amounting to ?34,72,811, which was omitted in the return of income. The Tribunal admitted the additional ground for adjudication, citing it as a pure legal issue requiring no factual verification.

The Tribunal referred to the Bombay High Court judgment in Sesa Goa Limited v. JCIT, which held that education cess is an allowable expenditure as it is not included in the term "tax" under section 40(a)(ii) of the Income Tax Act. The Tribunal also cited the Rajasthan High Court judgment in CIT v. Chambal Fertilizers and Chemical Limited, which supported the deduction of education cess.

Conclusion: The Tribunal allowed the deduction of education cess, following the judicial precedents. The additional ground was adjudicated in favor of the assessee.

Final Outcome: The appeal was partly allowed for statistical purposes, with the issues of depreciation on computer equipment and software development expenses remanded to the AO for fresh examination, and the deduction of education cess allowed.