2023 (9) TMI 1212 - AT - Income Tax

Nature of expenses - software expenses - Revenue or capital expenditure - HELD THAT - Revenue has failed to controvert the fact that the assessee has merely got the license to use the software for its daily business requirement and has never owned the same and the assessee has paid on yearly basis. When the expenses for taking software was used for business purpose on yearly rent basis it has not given any enduring benefit to the assessee nor any capital has been created, CIT(A) has rightly treated these expenses as revenue expenditure as such we find no scope to interfere into the impugned findings returned by the Ld. CIT(A). So ground No.1 is determined against the Revenue. Addition u/s 36(10)(iii) - AO has computed the notional interest @ 10.19% being average cost of borrowing u/s 36(10)(iii) on the ground that the assessee has used interest bearing fund for giving loans and deposits to the associated concerns without interest and for giving advances to its supplier which resulted in excess interest burden on the assessee - CIT(A) deleted the addition by thrashing the facts in the light of the decision rendered in case of Reliance Utilities and Power Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT - HELD THAT - When the interest free advances given by the assessee to its suppliers were far less than interest free funds available with the assessee in the form of share capital reserves and surplus, by applying the decision rendered in case of Reliance Utilities and Power Ltd. (supra) made by the AO is not sustainable in the eyes of law. So the Ld. CIT(A) has rightly deleted the disallowance. Refund of excess Dividend Distribution Tax ('DDT') paid - application for raising additional ground in its cross objection - HELD THAT - Since it is a legal ground the assessee is entitled to raise the same at any stage of the proceedings in view of the law laid down in case of National Thermal Power Co. Ltd 1996 (12) TMI 7 - SUPREME COURT However, during the course of argument the Ld. A.R. for the assessee has fairly conceded that the issue raised vide this ground has already been decided against the assessee by the Special Bench of the Tribunal passed in case of Total Oil India Pvt. Ltd. 2023 (4) TMI 988 - ITAT MUMBAI (SB) as held where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder(s), which attracts Additional Income Tax (Tax on Distributed Profits) referred to in Sec. 115-O of the Act, such additional income tax payable by the domestic company shall be at the rate mentioned in Section 115-O of the Act and not at the at the rate of tax applicable to the non-resident shareholder(s) as specified in the relevant DTAA with reference to such dividend income. Decided against assessee.

Summary

Issues Involved:
1. Deletion of disallowance of software expenses.
2. Deletion of disallowance of notional interest.
3. Deduction in respect of education cess and secondary and higher education cess.
4. Refund of excess Dividend Distribution Tax (DDT) paid.

Summary:

Issue 1: Deletion of disallowance of software expenses

The AO disallowed software expenses claimed by the assessee, treating them as capital expenditure. The CIT(A) deleted the disallowance, treating the expenses as revenue in nature. The Tribunal upheld the CIT(A)'s decision, noting that the assessee used the software on a yearly license basis, which did not provide any enduring benefit or create capital. The Tribunal cited previous decisions, including the Bombay High Court in CIT vs Raychem RPG Ltd., supporting the treatment of such expenses as revenue expenditure.

Issue 2: Deletion of disallowance of notional interest

The AO disallowed notional interest of Rs. 3,19,18,958/- on the grounds that the assessee used interest-bearing funds for interest-free advances. The CIT(A) deleted the disallowance, finding that the assessee had sufficient interest-free funds to cover the advances. The Tribunal upheld this decision, referencing the Bombay High Court's ruling in Reliance Utilities & Power Ltd., which presumes that investments are made from interest-free funds if available.

Issue 3: Deduction in respect of education cess and secondary and higher education cess

The assessee's cross objections regarding the deduction of education cess and secondary and higher education cess under Section 37(1) of the Act were not pressed during the hearing and were thus dismissed.

Issue 4: Refund of excess Dividend Distribution Tax (DDT) paid

The assessee raised a legal ground for the refund of excess DDT paid, arguing for a beneficial tax rate under the India-Singapore Tax Treaty. However, the Tribunal noted that the Special Bench in Total Oil India Pvt. Ltd. vs. CIT & ors. had decided against such a refund, ruling that the DDT rate should be as per Section 115-O of the Act, not the DTAA rate. Consequently, this cross objection was also dismissed.

Conclusion:

Both the Revenue's appeal and the assessee's cross objections were dismissed. The Tribunal upheld the CIT(A)'s decisions on the deletion of software expenses and notional interest disallowances, while dismissing the cross objections on education cess and DDT refund.