2022 (6) TMI 1487 - AT - Income Tax

Nature of expenses - Allowability of Data Automation Expenses - CIT(A) deleted addition - assessee debited a sum treating it as revenue in nature - HELD THAT - As relying on own case own case for AYs 2010-11 2012-13 to 2014- 15 2022 (5) TMI 1645 - ITAT BANGALORE we uphold the order of the CIT(Appeals) in treating the data automation expenses as revenue expenditure.Therefore, the appeal of the revenue is dismissed. Deduction u/s. 80JJA - 30% additional wages paid to new workmen recruited/joined in the year 2006-07 - as per AO Section 80JJAA is applicable only to an industrial undertaking that has engaged in manufacture or production of article or thing and not applicable to IT/ITES/Software development companies as they are not engaged in manufacture or production of article or thing - HELD THAT - Respectfully following the decision of the jurisdictional High Court in assessee s own case for AY 2008-09 2021 (4) TMI 1049 - KARNATAKA HIGH COURT we hold that assessee is entitled for deduction u/s. 80JJA and delete the disallowance made in this regard wherein held software engineer in a software industry is a workman within the meaning of section 2(s) of the Industrial Disputes Act so long as the Software engineer does not discharge any supervisory role. The period of 300 days as mentioned under section 80JJAA of the Act could be taken into consideration both in the previous year and the succeeding year for the purpose of availing benefit under section 80JJAA. It is not required that the workman works for entire 300 days in the previous year. Thus software engineer being workman having satisfied the period of 300 days, the assessee is entitled to claim deduction under section 80JJAA. - Decided against revenue. Disallowance of expenses on discontinued capital project - Capital or revenue expenditure - HELD THAT - We notice that this issue was held against the assessee in its own case for the AY 2008-09 2020 (3) TMI 1195 - ITAT BANGALORE as held that damages though was in connection with a claim for not engaging the services of the contractor in future for other contracts cannot be regarded as having no nexus with the capital work in progress written off in the books of accounts of the Assessee and therefore to that extent the claim for deduction and cannot be allowed as deduction and were rightly held to be capital expenditure by the revenue authorities. We uphold the disallowance. The disallowance u/s. 40(a)(ia) of the Act is already allowed by the CIT(Appeals) and the question of double disallowance does not arise for the present year. Nature of expenses - Write-off of capital work-in-progress - Assessee incurred certain expenditure towards Cafetaria upgradation and breakout area upgradation and expenses incurred were in the nature of payments for planning, designing and architecture fees and as projects were closed and therefore the expenses towards the same were written off - AO treated the amount as an addition to the fixed asset i.e., building, and disallowed the entire amount claimed - HELD THAT - Invoices are raised for design planning and for part completion of the work. We see merit in the submissions of the ld. AR with regard to the key observations of the Hon ble Supreme Court in the case of Empire Jute Co. 1980 (5) TMI 1 - SUPREME COURT in classification of expenditure as revenue and capital - Thus we are of the considered view that the above expenditure written off towards discontinued project of Cafeteria and breakout area expansion does not bring any benefit of enduring nature to the assessee and hence it is allowable as a revenue expenditure u/s. 37 of the Act. This ground of the assessee is allowed. Disallowance of repairs maintenance expenditure - whether the expenditure was incurred in own premises or leased premises'? - HELD THAT - Details of invoices have not been looked into by the lower authorities, and in our view, this aspect needs to be examined by the revenue authorities for the purpose of deciding its allowability. We are also the view that the additional evidence filed by the assessee before the CIT(Appeals) goes to the root of the matter for deciding the issue and therefore we admit the additional evidence filed before the CIT(Appeals). Hence, we remit this issue back to the AO to examine the evidence submitted by the assessee. Disallowance of lease rentals paid on equipment and motor cars - HELD THAT -In the computation of total income of the assessee s that the assessee has added to the profit as per the P L A/c the finance charges on lease and reduced lease rentals paid. Therefore, whatever be the position with regard to the books of account in compliance with AS-19; as far as computation of the total income for the purpose of the Act is concerned, the assessee has made claim only for deduction on account of lease rentals paid. There is no basis for the Revenue authorities to come to a conclusion that the assessee has adopted a colourable device with a view to gain tax advantage. In this regard, we find that the AO as well as the CIT(A) have quoted various clauses of the lease agreement out of context, ignoring the main clause in the agreement which clearly lays down that the assessee is only a lessee and the lessor is the owner of the assets leased. In such a scenario, the conclusion of the Revenue authorities cannot be sustained. The assessee is entitled to claim deduction on account of lease rentals paid as it is a Revenue expenditure. Applicability of the provisions of section 40(a)(ia) - Hon ble High Court of Karnataka in assessee s own case on an identical issue for Assessment Year 2008-09 2021 (4) TMI 1049 - KARNATAKA HIGH COURT held that neither provisions of 194I nor 194C of the Act are attracted to lease financing of motor vehicles and therefore there could be no disallowance under section 40(a)(ia) of the Act. Applicability of provisions of section 40(a)(ia) of the Act in respect of lease rentals paid for lease of equipment is concerned, it is seen from the submission made by the Assessee before the CIT(A) that the Assessee has duly deducted tax at source on payment of lease rentals. On a perusal of the order of the Revenue authorities, we do not find any specific discussion on this issue - we deem it fit and proper to remand the question whether the lease rentals were subjected to TDS by the Assessee. Disallowance of profit on foreclosure of leased assets - HELD THAT - We are of the view that the profit on foreclosure of leased assets is purely a notional entry in compliance with the requirements of AS-19 and no income can be said to have accrued to the assessee by reason of such accounting treatment. As made clear by the Assessee that as per tax treatment for the purpose of the Act is concerned, the treatment accorded was that the Assessee was only a lessee of the assets and could neither gain or lose on foreclosure of the lease. Allowing lease rentals as a deduction, we have already held that the said expenditure is a revenue expenditure and therefore the entire premise on which the impugned addition has been made by the Revenue authorities does not survive. Hence, the addition made as above is directed to be deleted and ground No.7 is allowed. Disallowance of software development expenses - HELD THAT - Entire issue of disallowance in respect of software development expenses should be set aside for fresh examination by the AO in the light of the several contentions that were raised before the CIT(A), which were not considered in proper perspective by the CIT(A).The entire issue with regard to various aspects of the additions especially the additions under section 69C of the Act have be looked into afresh. The AO will afford opportunity of being heard to the assessee in the set aside proceedings. Nature of expenses - expenditure on information technology support services - HELD THAT - The deduction claimed should be allowed. The expenditure in question was purely a revenue expenditure and cannot be disallowed as capital expenditure. Disallowance of employee stock option expenses - HELD THAT - It is pertinent to mention that the accounts of the assessee had not been finalized as on 15.05.2009 and therefore this sum was claimed as a deduction. It is because of the wrong date given in the submission before the AO dated 18.12.2012 that the AO has taken the view that the invoices are not pertaining to previous year relevant to Assessment Year 2009-10. In the light of the evidence available on record, we are of the view that the disallowance made by the AO and sustained by the CIT(A) has to be deleted and a sum being a revenue expenditure pertaining to Assessment Year 2009-10 has to be allowed as a deduction. We hold and direct accordingly.

Summary

Issues Involved:
1. Deletion of Data Automation Expenses by CIT(A).
2. Deduction under Section 80JJAA of the Income Tax Act.
3. Disallowance of expenses on discontinued capital projects.
4. Write-off of capital work-in-progress.
5. Disallowance of repairs and maintenance expenditure.
6. Disallowance of lease rentals paid on equipment and motor cars.
7. Disallowance of profit on foreclosure of leased assets.
8. Disallowance of software development expenses.
9. Disallowance of information technology support services.
10. Disallowance of employee stock option expenses.
11. Miscellaneous and procedural issues.

Detailed Analysis:

1. Deletion of Data Automation Expenses by CIT(A):
The Tribunal upheld the CIT(A)'s decision to treat Data Automation Expenses as revenue expenditure based on previous Tribunal decisions in the assessee's own case for AYs 2008-09, 2010-11, and 2012-13 to 2014-15. The Tribunal noted that the expenditure was for the right to use software and did not result in any asset coming into existence.

2. Deduction under Section 80JJAA of the Income Tax Act:
The Tribunal followed the Karnataka High Court's decision in the assessee's own case for AY 2008-09, which held that software engineers are "workmen" under the Industrial Disputes Act and that the deduction under Section 80JJAA is allowable even if the employees did not complete 300 days in the first year of employment but did so in subsequent years. The Tribunal directed to allow the deduction for AY 2009-10.

3. Disallowance of Expenses on Discontinued Capital Projects:
The Tribunal upheld the disallowance of Rs. 7,419,000 related to expenses on a discontinued capital project, following its previous decision for AY 2008-09. The Tribunal noted that the expenses were capital in nature and related to a capital work-in-progress.

4. Write-off of Capital Work-in-Progress:
The Tribunal allowed the assessee's claim for the write-off of Rs. 1,246,021 towards discontinued projects, concluding that the expenses did not bring any enduring benefit and should be treated as revenue expenditure under Section 37 of the Act.

5. Disallowance of Repairs and Maintenance Expenditure:
The Tribunal remanded the issue back to the AO for re-examination, including the admission of additional evidence submitted by the assessee. The Tribunal emphasized the need for a detailed examination of the invoices and the nature of the expenses.

6. Disallowance of Lease Rentals Paid on Equipment and Motor Cars:
The Tribunal allowed the deduction of lease rentals as revenue expenditure, rejecting the AO's treatment of the expenses as capital in nature. The Tribunal also remanded the issue of TDS compliance on lease rentals back to the AO for verification.

7. Disallowance of Profit on Foreclosure of Leased Assets:
The Tribunal deleted the addition of Rs. 5,570,701, holding that the profit on foreclosure of leased assets was a notional entry due to accounting standards and did not result in actual income.

8. Disallowance of Software Development Expenses:
The Tribunal remanded the issue back to the AO for fresh examination, directing a detailed review of the reconciliation provided by the assessee and the applicability of Section 69C for unexplained expenditure.

9. Disallowance of Information Technology Support Services:
The Tribunal allowed the deduction of IT support services expenses as revenue expenditure, following its previous decision in the assessee's own case for AY 2010-11. The Tribunal concluded that the expenses were for the right to use software and did not result in any capital asset.

10. Disallowance of Employee Stock Option Expenses:
The Tribunal deleted the disallowance of Rs. 1,419,397, noting that the expenses pertained to AY 2009-10 and were supported by invoices dated before the finalization of accounts for that year.

11. Miscellaneous and Procedural Issues:
- The Tribunal noted that the CIT(A) directed the AO to verify and allow the claim under Section 40(a)(i) and the disallowance of miscellaneous expenses, which the assessee did not contest.
- The Tribunal held that the levy of interest under Sections 234B and 234D is consequential.
- The Tribunal did not address the initiation of penalty proceedings under Section 271(1)(c) as it is not a subject matter of the quantum appeal.

Conclusion:
The Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal, providing detailed directions for re-examination and verification on several issues.