2024 (6) TMI 1446 - AT - Income Tax

Software development expenses - revenue or capital expenditure - HELD THAT - The issue has already been decided in the assessee s own case by the co-ordinate bench of the Tribunal 2024 (5) TMI 1544 - ITAT CHENNAI by following the decision of the Tribunal we dismiss the ground by upholding the decision of the ld.CIT(A) of software development expenditure as capital asset and allowing the deprecation on the same @ 60%. The corresponding ground stand dismissed. Recovery of Bad-Debt written off in the books of amalgamating Companies - HELD THAT - Admittedly this issue is covered against the assessee by the order of Tribunal in earlier years. In latest decision in 2024 (5) TMI 1544 - ITAT CHENNAI held that after amalgamation the assessee has all the rights as well as liabilities of amalgamating company which were transferred to it. Such recoveries of bad-debts were nothing but business receipts for assessee and therefore assessable in its hands. Respectfully following the same we dismiss the grounds urged by assessee in other three A.Ys. i.e. 2015-16 2016-17 2017-18 also. Rate of depreciation on UPS - assessee claimed depreciation on UPS system @60% - AO restricted the same to 15% - HELD THAT - We find that this issue has been decided by Tribunal in assessee s favour. In for the A.Y. 2012-13 to 2014-15 2024 (5) TMI 1544 - ITAT CHENNAI the Tribunal confirmed first appellate order which allowed depreciation of 60%. Disallowance u/s.14A r.w. Rule 8D - HELD THAT - Tribunal in assessee s own case 2024 (5) TMI 1544 - ITAT CHENNAI for the A.Y. 2012-13 to 2014-15 accepted the propositions of Ld. AR. Following consistent stand of Tribunal we direct Ld. AO to verify whether assessee s own funds are sufficient enough to cover the investment. If so interest disallowance would not be justified. Further the indirect disallowance of 0.5% should be computed only on those investments which have yielded exempt income during the year. Method of recognizing income on hire purchase contracts - HELD THAT - We find that this issue is covered by the latest order of Tribunal 2024 (5) TMI 1544 - ITAT CHENNAI as considered the decision of Hon ble High Court of Madras in assessee s own case as directed Ld. AO to tax the interest income on EMI method or ESM method which was consistently being followed by the assessee and allow consequential relief in accordance with law. Considering the same similar directions were issued by Tribunal. Since facts are pari-materia the same in this year the Assessing Officer and the Ld.CIT(A) have already affirmed the income offered to tax to the tune is in consistency with the method of income followed in hire purchase finance charges as correct. In our considered view the claim of the assessee for a reduction from total income of Rs. 510.90 lacs which was brought to tax in the earlier years is not acceptable and therefore the ground of the assessee is dismissed. Inclusion of Notional Income related to NPA as income for the A Y 2011-12 - HELD THAT - As assessee stated that the action of assessing officer will be appropriate only if uniformly the income is assessed for all the years. Since the department is still pursuing before the High Court for earlier years contending that notional income on the basis of contract should be assessed. If that stand is upheld then the same amount cannot be taxed in the year of receipt. We have perused the issue and we consider that there is no reason to interfere in the decision of lower authorities and dismiss the ground of the assessee. Disallownace of Pooja Expense - HELD THAT - Profits declared customer base and employees of the assessee company the amount of expenditure spent forpooja expenses as a commercial expediency to the business and claiming such expenditure is reasonable. The amount spent towards Pooja expenses is a miniscule compare to the turnover and profits of the assessee. Considering the decision of the high court of P H in the case of Atlas cycle Industries Ltd 1980 (10) TMI 19 - PUNJAB AND HARYANA HIGH COURT the claim of pooja expenses claimed by the assessee cannot be denied as inadmissible expenditure. Therefore we are of the considered view that the said expenditure is spent by the assessee company is a commercial expediency and claiming the same as business expenditure cannot be termed as personal in nature and hence appeal of the assessee is allowed by dismissing the decision of by the lower authorities. Hence the assessee succeeds in this ground and allowed. Disallowance of presentation to employees / customers - amount spent towards gifts and compliments given to the customers and employees on the special occasions like marriage opening ceremonies and anniversaries - HELD THAT - Considering the huge turnover Profits declared customer base and employees of the assessee company the amount of expenditure spent on account giving gifts and compliments to employees and customers as a commercial expediency to the business and claiming such expenditure is reasonable. Therefore the said expenditure is spent by the assessee company is a commercial expediency and claiming the same as business expenditure cannot be termed as personal in nature and hence appeal of the assessee is allowed by dismissing the decision of disallowing the same by the lower authorities. Hence the assessee succeeds in this ground and allowed. Rate of Depreciation on Commercial vehicles - assessee claimed higher depreciation of 50% on leased vehicles - AO rejected the claim on the ground that the assessee was involved in the business of finance and leasing and the accelerated depreciation was not available to them - HELD THAT - CIT(A) allowed the claim of the assessee by considering item no. 3(via) as inserted in New Appendix-1 (Table of Rates at which depreciation is admissible). w.e.f. 01-04-2009 stating AO erred in disallowing the depreciation claimed by the appellant. AO is directed to allow depreciation at the higher rate of 50% for the new motor vehicles acquired between 1.1.2009 and 30.09.2009 and used for the purposes of their business - Decided in favour of assessee. Loss on sale of repossessed assets allowed as expenditure - HELD THAT - Assessee is into business of financing for purchase of assets to customers and in case of default in repayment such assets are repossessed as per the terms of agreement and or sold to the third parties. If the amount realized on sale of repossessed assets falls short of the principal amount outstanding it results in a loss which is nothing but a bad debt which has been written off in the books as loss on sale of repossessed assets . Since assets are treated as stock in trade the resulting on disposal of the same is a trading loss and an admissible business deduction as a bad debt written off u/s. 36(1)(vii) of the Act. We are inclined to uphold the decision of the ld.CIT(A) of deleting the disallowance of expenditure by the AO and direct the AO to verify the correctness of the claim of loss on sale of repossessed assets and allow the expenditure in accordance with law. Therefore this ground of the revenue is dismissed. Depreciation on Computer Software @60% - AO restricted the depreciation to 25% and thereby made a disallowance - HELD THAT - no infirmity in the order of the ld.CIT(A) in deleting the disallowance of depreciation made by the AO. The admissibility of depreciation @60% for computers including computer software has been clearly mentioned inentry no. 5 under the head machinery and plant of the table of the rates at which the depreciation is admissible (new appendix-I u/r. 5 of the I.T. Rules 1962). This issue has already been endorsed in the case of ACIT vs TNQ Books and Journals Pvt Ltd. 2016 (6) TMI 1493 - ITAT CHENNAI - Thus we hold that allowing the appeal of the assessee for claiming the depreciation at 60% by the ld.CIT(A) is in accordance with law and does not require interference. Disallowance of Bad and doubtful debts - HELD THAT - We find that this issue has been settled in assessee s favour by coordinate bench in its order 2024 (5) TMI 1544 - ITAT CHENNAI for the A.Y. 2012-13 to 2014-15. The coordinate bench dismissed revenue s appeal. Nature of expenses - Non Compete fees - revenue or capital expenditure - HELD THAT - As relying on Guffic cum P ltd 2011 (3) TMI 6 - SUPREME COURT and Carborandum Universal Ltd 2012 (10) TMI 178 - MADRAS HIGH COURT non-compete fee paid by the assessee is allowable expenditure u/s. 37(1) of the Act and hence the ground of the revenue is dismissed. Business Origination Cost - AO has disallowed such expenditure treating it as capital in nature since it results in increased effectiveness and efficiency of the business - HELD THAT - We find that this issue has been dealt with by tribunal in 2024 (5) TMI 1544 - ITAT CHENNAI as chose to follow the decision of Taparia Tools Pvt. Ltd. 2015 (3) TMI 853 - SUPREME COURT where in it was held that normally revenue expenditure incurred in a particular year has to be allowed in that year and if the assessee claims the full expenditure department could not deny the same. Finally the claim was allowed. Therefore this issue is covered in Assessee s favour.

Summary

1. ISSUES PRESENTED and CONSIDERED

The primary issues considered in this judgment are:

• Whether software development expenses should be treated as capital or revenue expenditure.
• The treatment of recovery of bad debts written off in the books of amalgamating companies.
• The appropriate rate of depreciation on UPS and commercial vehicles.
• Disallowance under Section 14A read with Rule 8D of the Income Tax Act.
• The method of recognizing income on hire purchase contracts.
• Inclusion of notional income related to Non-Performing Assets (NPA) as income.
• Disallowance of expenses related to pooja and presentations to employees/customers.
• Loss on sale of repossessed assets.
• Depreciation on computer software.
• Disallowance of bad debts.
• Non-compete fees as revenue expenditure.
• Business origination cost.

2. ISSUE-WISE DETAILED ANALYSIS

Software Development Expenses:

The Tribunal considered whether software development expenses should be treated as capital or revenue expenditure. The relevant legal framework involved the Income Tax Act provisions regarding capital and revenue expenditure. The Tribunal upheld the decision of the CIT(A) that software development expenses should be capitalized, allowing depreciation at 60%. This decision was consistent with earlier Tribunal orders in the assessee's case.

Recovery of Bad Debts:

The issue involved the taxability of amounts recovered from bad debts written off in the books of amalgamating companies. The Tribunal referred to Section 41(4) and Section 41(1) of the Act. It held that post-amalgamation, the assessee inherits the rights and liabilities of the amalgamating company, making such recoveries taxable as business receipts. This position was consistent with prior Tribunal decisions.

Depreciation on UPS and Commercial Vehicles:

The Tribunal considered whether the depreciation rate on UPS should be 60% and on commercial vehicles 50%. It was decided that UPS systems qualify for 60% depreciation as per earlier Tribunal rulings. For commercial vehicles, the Tribunal upheld the CIT(A)'s decision allowing 50% depreciation, aligning with statutory provisions and Supreme Court precedents.

Disallowance under Section 14A r.w. Rule 8D:

The Tribunal examined disallowance related to exempt income. It accepted the assessee's argument that no interest disallowance is warranted if own funds exceed investments. The Tribunal directed the AO to verify this and compute the disallowance on investments yielding exempt income, consistent with prior decisions.

Income Recognition on Hire Purchase Contracts:

The Tribunal dealt with the method of recognizing income on hire purchase contracts, emphasizing consistency with the EMI method or ESM method as per the Madras High Court's direction. The Tribunal dismissed the assessee's claim for reduction of income taxed in earlier years.

Notional Income on NPA:

The Tribunal upheld the lower authorities' decision to reject the deduction of notional income related to NPAs, considering the ongoing departmental appeal on the matter.

Pooja and Presentation Expenses:

The Tribunal allowed the deduction of pooja expenses and expenses on presentations to employees/customers as business expenditures, considering them customary and commercially expedient, following the High Court's precedent in Atlas Cycle Industries Ltd.

Loss on Sale of Repossessed Assets:

The Tribunal upheld the CIT(A)'s decision that losses on repossessed assets are trading losses, deductible as bad debts under Section 36(1)(vii), following the Delhi High Court's ruling in Citicorp Maruthi Finance Ltd.

Depreciation on Computer Software:

The Tribunal confirmed the CIT(A)'s decision allowing 60% depreciation on computer software, consistent with statutory provisions and prior Tribunal decisions.

Disallowance of Bad Debts:

The Tribunal dismissed the revenue's appeal against the CIT(A)'s decision allowing bad debt deductions, consistent with prior Tribunal rulings.

Non-Compete Fees:

The Tribunal upheld the CIT(A)'s decision treating non-compete fees as revenue expenditure, following the Supreme Court's ruling in Guffic Chem P Ltd. vs. CIT.

Business Origination Cost:

The Tribunal allowed the deduction of business origination costs as revenue expenditure, aligning with the Supreme Court's decision in Taparia Tools Pvt. Ltd. vs. JCIT.

3. SIGNIFICANT HOLDINGS

Software Development Expenses:

"The Tribunal dismisses the grounds urged by the assessee, upholding the decision of the CIT(A) treating software development expenditure as a capital asset."

Recovery of Bad Debts:

"Such recoveries of bad debts were nothing but business receipts for assessee and therefore, assessable in its hands."

Depreciation on UPS and Commercial Vehicles:

"The Tribunal confirms the first appellate order allowing depreciation of 60% on UPS and 50% on commercial vehicles."

Disallowance under Section 14A r.w. Rule 8D:

"If own funds are sufficient to cover the investment, interest disallowance is not justified."

Pooja and Presentation Expenses:

"Considering the decision of the high court of P&H, the claim of pooja expenses claimed by the assessee cannot be denied as inadmissible expenditure."

Business Origination Cost:

"The commission paid to the dealers/marketing agents is a revenue expenditure, deductible in the year incurred."

The Tribunal's decisions reflect a consistent application of legal principles and precedents, ensuring equitable treatment of similar issues across multiple assessment years.