2023 (7) TMI 687 - HC - Income Tax

Deduction u/s 10A - claim allowed for initial years - HELD THAT - Issue are covered by the decision in CGI Information Systems and Management Consultants Pvt. Ltd. 2022 (10) TMI 1186 - KARNATAKA HIGH COURT in assessee's own case. Nature of expenses - expenses incurred towards subscription of Microsoft licences - treated as capital in nature on the basis that the said software was an operating system software - HELD THAT - It is not disputed that software licence fee is paid annually. Revenue's contention that software is embedded into personal computer and the computer has been treated as a capital expenditure, on the face of it, is untenable because there is no dispute with regard to expenditure which is an annual subscription charge. Once the payment is for a fixed period, it is obvious that the said software cannot be used after expiry of that year. As decided in Toyota Kirloskar Motors 2013 (2) TMI 108 - KARNATAKA HIGH COURT when the life of a computer or software is less than two years and as such, the right to use it for a limited period and without renewing the licence or without paying the fee on such renewal, it is not possible to use those software in those circumstances the findings recorded by the authorities that the fee paid for obtaining the software and the licence and for renewing the same is to be construed as only revenue expenditure - Decided in favour of assessee. Disallowance of the provision for expenses - Addition on the basis that they were contingent in nature and the details as to the manner of creation of the provisions were not furnished - HELD THAT - The contention urged on behalf of the Revenue that the determined amounts were not made available before the Revenue is factually incorrect and therefore untenable. Now, the point that remains to be considered and answered is whether the above seven expenditures could be allowed or not. The specific contention of the assessee is that these expenditures are ascertained liabilities as on the date of closure of books of account. The objection raised by the Revenue that there are possibilities of employees leaving the company and not getting paid is also untenable because the percentage of the employees leaving their employment will be minimal and in such an event, the assessee is duty bound to reverse the entry in the following year. Since, the provisions made are ascertained figures, the dis- allowance made by the AO and confirmed by the two authorities is perverse and unsustainable. Entitlement to tax credit withheld in the US and Canada - as argued assessee has availed of deduction u/s 10A. Therefore, the assessee is not entitled to the benefit under DTAA - HELD THAT - As noticed that the AO has assessed the income of the assessee - assessee is liable to pay tax on the said income. If the argument of Revenue that the assessee has availed of deduction u/s 10A is to be accepted, the assessee's income will have to be re-computed and after giving deduction u/s 10A, if the assessee becomes liable to pay tax, he must be entitled to tax credit. As brought to the notice of this court that section 10A deduction has been allowed by this court 2022 (10) TMI 1186 - KARNATAKA HIGH COURT - In view of our findings, notwithstanding section 10A deduction, the assessee shall be entitled for tax credit (See Wipro Ltd v. Dy. CIT 2015 (10) TMI 826 - KARNATAKA HIGH COURT ). Accordingly, this question is answered in favour of the assessee.

Summary

Issues:
1. Deduction under section 10A of the Income-tax Act for Assessment Year 2003-04.
2. Disallowance based on non-challenge of Commissioner of Income-tax's order for Assessment Year 1998-99.
3. Capital nature of expenses for Microsoft licenses.
4. Disallowance of provision for expenses.
5. Treatment of foreign exchange fluctuation loss in deduction under section 80HHE.
6. Entitlement to credit of taxes withheld in USA and Canada.

Analysis:
1. The appellant challenged the disallowance of deduction under section 10A for Assessment Year 2003-04 despite satisfying all conditions. The Tribunal upheld the disallowance, referencing previous years. The High Court noted precedents and allowed the appeal, emphasizing the appellant's eligibility for the deduction.
2. The Tribunal upheld the disallowance based on non-challenge of the Commissioner's order for a previous year. The High Court found this issue irrelevant and focused on other questions raised by the appellant.
3. The dispute over the capital nature of expenses for Microsoft licenses was resolved by analyzing the subscription fee as an annual charge, not a capital expenditure. Precedent cases were cited to support this argument, leading to a favorable decision for the appellant.
4. The disallowance of a provision for expenses was contested by the appellant, providing detailed explanations and quantifications. The High Court reviewed the evidence and allowed the provision, emphasizing that the expenses were ascertained liabilities, contrary to the Revenue's arguments.
5. The Tribunal's failure to address the treatment of foreign exchange fluctuation loss in deduction under section 80HHE was noted. However, this issue did not impact the final decision as it was deemed irrelevant to the appeal.
6. The denial of tax credit for taxes withheld in the US and Canada was challenged by the appellant. The Assessing Officer's reasoning was scrutinized, and the High Court ruled in favor of the appellant, highlighting the entitlement to tax credit despite availing deduction under section 10A. Precedents were cited to support this decision.

In conclusion, the High Court allowed the appeal, setting aside the previous orders and ruling in favor of the appellant on questions 1 to 4 and 6, while deeming question 5 irrelevant. The judgment provided detailed analysis and legal reasoning for each issue raised, ensuring a comprehensive review of the appellant's claims and the Revenue's arguments.