2024 (12) TMI 1054 - AT - Income Tax

Nature of expenses - software expenses related to the website portal - HELD THAT - As decided in own case 2018 (2) TMI 730 - ITAT MUMBAI CIT(a) allowed the appeal of the assessee by following the earlier allowed for A.K. 2007-08 which has attained finality. We have observed that order of Ld. CIT(A) is correct and does not suffer from any infirmity as it has been passed after considering the facts of the case in the light of the similar issue decided in A.Y. 2007-08 which attained finality. Also on merit the issue has been correctly decided as the expenses are of revenue nature and therefore we are inclined to uphold the same. Addition on valuation of inventory by accepting the LIFO method followed by the assessee - CIT(A) deleted addition - HELD THAT - Issue stands covered by the decision of Hon'ble High Court in assessee s own case 2012 (2) TMI 739 - BOMBAY HIGH COURT that was rendered for A.Y. 1997-98 as considering the fact that LIFO method was consistently upheld by this Tribunal from A.Y. 1982-83, consistent view which has been taken by the Tribunal is to accept the LIFO method. This is an accepted method for valuation of stock. The method has been regularly followed by the Assessee. This is not a case where the AO was not satisfied with the completeness of the accounts of the Assessee or where the method of accounting has not been regularly followed or does not comply with the accounting standards. This is not a case where the AO was not satisfied with the completeness of the accounts of the assessee or where the method of accounting has not been regularly followed or does not comply with the accounting standards. Respectfully following the earlier years order, the AO is not justified in applying FIFO method for valuation of inventory. Ground is allowed. Disallowance u/s. 14A r.w.r. 8D of the rules - assessee made suo moto disallowance in respect of the exempt income earned during the year under consideration - HELD THAT - Disallowance under Rule 8D (2) (ii) was made without having regards to the accounts of the assessee for the year under consideration. The disallowance therefore recomputed by the AO under Rule 8D (2)(ii) deserves to be deleted respectfully following the decision of Reliance Utilities Pvt. Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT Disallowance made under the third limb of Rule 8D (2), section 14A (2) makes it a mandate to apply the formula as per rule 8D for the year under consideration. AO disallowed 0.5% of investment. However we restrict the disallowance under the third limb of Rule 8D (2) to such investments that yielded exempt income for the year under consideration. See Cheminvest Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT and Corrrtech Energy Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT We also direct the AO to consider the fact that, in the event the disallowance computed as per the directions herein above is less than the disallowance u/s. 14A may be restricted to the suo moto disallowance made by the assessee.

Summary

Issues Involved:

1. Applicability of Section 14A and Rule 8D for disallowance of expenditure related to tax-free income.
2. Classification of software expenses as revenue or capital expenditure.
3. Valuation of inventory using FIFO method.

Detailed Analysis:

1. Applicability of Section 14A and Rule 8D:

The primary issue was whether the disallowance under Section 14A of the Income Tax Act, 1961, read with Rule 8D, was justified. The assessee argued that there was no direct and proximate nexus between the expenditure incurred and the tax-free income earned, hence Section 14A should not apply. The assessee also contended that it had sufficient own funds, and no borrowings were used for investments, thus no interest should be disallowed under Section 14A. The assessee had made a suo moto disallowance, which the Assessing Officer (AO) rejected without recording dissatisfaction with the assessee's computation. The Tribunal held that the AO must record dissatisfaction with the assessee's disallowance before invoking Rule 8D. The Tribunal found that the AO failed to record such dissatisfaction and directed that the disallowance be computed only on investments yielding exempt income, following the decisions in Cheminvest Ltd. vs. CIT and CIT vs. Corrtech Energy Ltd. The Tribunal partly allowed the assessee's appeal for statistical purposes.

2. Classification of Software Expenses:

The revenue challenged the deletion of the addition related to software expenses treated as capital expenditure by the AO. The Tribunal noted that this issue was previously decided in favor of the assessee by the coordinate bench and the Bombay High Court, which held that the software expenses related to website/portal were of revenue nature. The Tribunal upheld the CIT(A)'s decision, finding no infirmity, and dismissed the revenue's ground.

3. Valuation of Inventory Using FIFO Method:

The revenue also contested the deletion of the addition on valuation of inventory using the FIFO method. The Tribunal observed that the LIFO method had been consistently accepted by the authorities in the assessee's case since Assessment Year 1982-83. The Tribunal noted that the CIT(A) had followed the consistent view taken by the Tribunal and the Bombay High Court, which upheld the LIFO method as a valid accounting practice. The Tribunal found no reason to interfere with the CIT(A)'s decision and dismissed the revenue's ground.

Conclusion:

The Tribunal upheld the CIT(A)'s decision in favor of the assessee regarding software expenses and inventory valuation. It partly allowed the assessee's appeal concerning disallowance under Section 14A, directing a restricted computation based on investments yielding exempt income. The revenue's appeal was dismissed, and the assessee's appeal was partly allowed for statistical purposes.