2024 (7) TMI 886 - AT - Income Tax

Disallowance of claim of depreciation on computer software - depreciation @60% or @25% - HELD THAT - The software is guiding the hardware and also an integral part of the hardware. Considering the order of the co-ordinate bench in assessee s own case 2019 (5) TMI 689 - ITAT MUMBAI in our considered view the assessee has rightly claimed deprecation @60%. Disallowance of sales promotion expenses - whether AS-7 will be applicable in case of assessee or not? - HELD THAT - As per the documents we perused that the assessee is purely a civil construction developer and running the project at Mulund. The AS-7 is purely effective for the contractor in construction not for developers. We respectfully followed the judgement of co-ordinate bench of ITAT Mumbai Bench in the case of Layer Exports P Ltd 2016 (10) TMI 1024 - ITAT MUMBAI So the question of capitalizing the project cost of sale promotion is unjustified. We set aside the appeal order on this issue and the addition is deleted. Addition of share premium u/s 56(2)(viib) - assessee at a higher rate allotted the share - AO determined the share at Rs. 4.38 per share whereas the valuer made the valuation made at Rs. 69.41 per share and that the valuation report was not furnished to AO during the course of assessment proceedings - HELD THAT - The assessee completed the valuation during the transfer of shares from intercompany adjustment. Rule 11UA was duly followed and assessee completed the valuation in NAV with a rate of 69.41 per share. On the other hand the revenue had calculated without rejecting the valuation report of the merchant banker duly placed by the assessee at the time of assessment proceedings. The issue was duly resolved by the Ld.AR by inviting our attention where the proof is attached that the assessee placed the valuation report before the Ld. AO. The change of method of valuation cannot be done by Ld.AO. We fully relied on the order of PNP Maritime Services (P.) Ltd 2024 (7) TMI 393 - ITAT MUMBAI Shanta Blankets (P.) Ltd 2024 (4) TMI 836 - ITAT DELHI The Ld.AR relied on the decision in the case of BLP Vayu (Project-1) P. Ltd 2023 (6) TMI 209 - ITAT DELHI From talking tour from this order no addition can be made under section 56(2)(viib) of the Act in case of genuine commercial transaction in absence of any amount of unaccounted money of the assessee relied on Cinestaan Entertainment Pvt. Ltd 2021 (3) TMI 239 - DELHI HIGH COURT . Both the revenue authorities have not rejected the valuation report duly prepared under rule 11UA of the Rule. Addition made by the Ld.Assessing Officer is hereby deleted. Erroneous action of the Ld.AO calculating the total tax payable by the assessee taking into consideration of loss assessed under the head PGBP - We direct the Ld.AO to recompute the computation and give the effect accordingly.

Summary

Issues Involved:
1. Non-admission of additional evidence.
2. Violation of principles of natural justice.
3. Disallowance of claim of depreciation on computer software.
4. Disallowance of sales promotion expenses.
5. Addition of share premium under Section 56(2)(viib) of the Act.
6. Error in computation of total income and total tax liability.

Issue-wise Detailed Analysis:

1. Non-admission of Additional Evidence:
The assessee did not press this ground during the appeal, so it was not considered further.

2. Violation of Principles of Natural Justice:
The assessee did not press this ground during the appeal, so it was not considered further.

3. Disallowance of Claim of Depreciation on Computer Software:
The assessee argued that it purchased software and claimed depreciation at 60%, which the AO reduced to 25%, treating the software as an intangible asset. The assessee cited a previous ITAT ruling in its favor, which allowed 60% depreciation on software integral to hardware. The Tribunal found that the software purchased by the assessee was indeed integral to the hardware and followed the precedent set in the assessee's own case and other similar cases, allowing the depreciation claim at 60%. The addition of Rs. 84,40,051/- was deleted.

4. Disallowance of Sales Promotion Expenses:
The assessee argued that the sales promotion expenses were revenue expenditures as per the "guidance note on accounting of real estate transactions" by ICAI and should not be capitalized under AS-7, which applies to contractors, not developers. The Tribunal agreed, citing previous rulings that developers should not capitalize such expenses. The addition of Rs. 94,98,268/- was deleted.

5. Addition of Share Premium under Section 56(2)(viib) of the Act:
The assessee argued that it followed the DCF method for share valuation, which was not accepted by the AO, who used the NAV method instead. The Tribunal noted that the AO cannot change the method of valuation chosen by the assessee under Rule 11UA. The valuation report by the merchant banker was valid, and the AO's method was incorrect. The Tribunal cited several precedents supporting the DCF method and genuine commercial transactions. The addition of Rs. 1,85,00,600/- was deleted.

6. Error in Computation of Total Income and Total Tax Liability:
The Tribunal directed the AO to recompute the total income and tax liability correctly, considering the correct figure of loss under 'PGBP'.

Conclusion:
The appeal of the assessee was allowed, and the Tribunal ruled in favor of the assessee on all pressed grounds, deleting the additions and directing a recomputation of income and tax liability. The order was pronounced on 05th July 2024.