2025 (3) TMI 293 - AT - Income Tax

Disallowance on account sponsoring of education expenses for persons specified u/s 40A(2)(b) - AO observed that the amount incurred towards education of son and daughter of the Director of the assessee company was not incurred wholly and exclusive for the purpose of business and there was no any nexus between foreign education incurred on behalf of the children of the Director of the assessee company and the business of the company and disallowed u/s 37 HELD THAT - AR relied upon judgment passed in the case of Ras Information Technologies (P) Ltd. 2010 (7) TMI 670 - KARNATAKA HIGH COURT in which held that once the expenses incurred is not a capital expenditure or an expenditure incurred for personal expenses of the assessee or the said expenditure is for which is not an offence or is not prohibited by law and was not spent in adventuring in any souvenir brochure tract pamphlet or like published by a political party the assessee is entitled to the benefit of deduction u/s 37 of the Act. In other words the money spent by an assessee either in sponsoring a student or towards educational expenses of a student in a discipline in which the assessee is carrying on its business is a valid expenditure and is entitled to deduction. On the basis of foregoing discussion and established principle of law this ground deserves to be allowed in the favour of assessee. Disallowance on account of write-off of advances for the purpose of lease hold improvements - In similar facts said issue already been decided in the favour of assessee in assessee / appellant s case for the AY 2004-05 position in law is well as settled as far as the provisions of section 36(1)(vii) read with section 36(2) of the Act is concerned. After 1/4/1989 it is not necessary for the assessee to establish that the debt in fact has become irrevocable. It is enough if the bad debt is written off as irrecoverable in the accounts of the assessee subject to the provisions of section 36(2) that such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year. Disallowance u/s 14A - AO computed disallowance u/s 14A applying Rule 8D of the Rules - CIT(A) rejected the same and recomputed disallowance applying proportionate method was submitted back to the Ld. AO for re-computation of disallowance with a direction to not to apply Rule 8D and in compliance thereof the Ld. AO vide order recomputed the disallowance as per the proportionate method and on the grounds of consistency the proportionate method should be accepted as the correct method for computation of disallowance u/s 14A of the Act. CIT(A) upheld the computation of AO but granted partial relief by excluding interest expenditure exclusively incurred by the Appellant on loans which were specifically availed for acquisition of aircraft on which taxable income was earned and accordingly restricted the disallowance. AR contended that the disallowance u/s 14A r/w rule 8D is required to be recomputed by taking into account in the Average Value of investments - as submitted that disallowance should have been restricted to amount of dividend income earned during the relevant previous year - HELD THAT - Fact situation mentioned hereinbefore and by following binding judicial precedents in order to resolve dispute in proper perspective remitting this issue back in the file of the AO for the consideration afresh in accordance with the prevailing laws and passed order as per law after providing effective opportunity of being heard to the assessee. Disallowing the excess depreciation of computer peripherals - @ 15% OR @ 60% - HELD THAT - Hon ble High Court while deciding appeal preferred by Revenue in the case of CIT vs. Birala Soft Ltd. 2011 (12) TMI 608 - DELHI HIGH COURT observed that the question raised in the present appeal is whether the computer peripherals like CD writer Printer Network Cable Switches Isolators etc. has decided against Revenue and in favour of the assessee in view of the decision in CIT vs. BSES Rajdhani Powever Ltd. 2010 (8) TMI 58 - DELHI HIGH COURT Revenue assails above order before Hon ble Apex Court by way of Special Leave to appeal which came to be dismissed 2014 (2) TMI 1343 - SC ORDER On the basis of fact situation mentioned hereinbefore that UPS is integaral part of computer and so entitled to depreciation @ 60% and we do not see any infirmity in the order of the Ld. CIT(A) on this issued and hence ground rasied by Revenue is liable to be dismissed. Addition as made on account of duty credit scripts but not utilized ignoring the material fact that the duty credit was offered for taxation by the assessee - HELD THAT - Fact situation emerged from above discussion leads us to conclude that ground raised by Revenue is liable to dismissed as no anything contrary brought on record by Revenue to deviate from the observation and findings expressed by the Ld. CIT(A) and hence we inclined to dismiss this ground.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the disallowance of education expenses for persons specified under section 40A(2)(b) of the Income-tax Act, 1961, was justified.
• Whether the disallowance of write-off of advances for leasehold improvements was appropriate.
• The correct application of Section 14A of the Income-tax Act regarding disallowance of expenditure related to exempt income, specifically the method for calculating disallowance under Rule 8D.
• The appropriate rate of depreciation for computer peripherals and whether they qualify for higher depreciation rates.
• The tax treatment of duty credit scripts received but not utilized, and whether they should be included in taxable income.

2. ISSUE-WISE DETAILED ANALYSIS

Education Expenses Disallowance

• Legal Framework and Precedents: Section 40A(2)(b) of the Income-tax Act, 1961, deals with expenses incurred for specified persons. The court referenced previous judgments, including those from the Delhi High Court and Karnataka High Court, which addressed similar issues.
• Court's Interpretation and Reasoning: The court found that the expenses for the education of the director's children were not incurred wholly and exclusively for business purposes, as required by Section 37(1). The education was deemed personal, with no direct business nexus.
• Key Evidence and Findings: The court noted the lack of a direct connection between the education expenses and the business activities of the company.
• Application of Law to Facts: The court upheld the disallowance, concluding that the expenses were personal and not business-related.
• Treatment of Competing Arguments: The court considered the arguments regarding the potential future value of the educated individuals to the company but found them insufficient to justify the expenses as business-related.
• Conclusions: The disallowance of education expenses was upheld.

Write-off of Advances for Leasehold Improvements

• Legal Framework and Precedents: The court referenced the provisions of the Income-tax Act regarding capital and revenue expenditures.
• Court's Interpretation and Reasoning: The court agreed with the lower authorities that the advances were capital in nature and not allowable as revenue expenditure.
• Key Evidence and Findings: The court noted that the advances were for capital outlay, specifically leasehold improvements.
• Application of Law to Facts: The court concluded that the write-off was a capital loss and not deductible as a business expense.
• Treatment of Competing Arguments: The court considered the argument that the advances were business-related but found them to be capital expenditures.
• Conclusions: The disallowance of the write-off was upheld.

Disallowance under Section 14A

• Legal Framework and Precedents: Section 14A of the Income-tax Act and Rule 8D of the Income-tax Rules govern the disallowance of expenses related to exempt income. The court referenced judgments from the Supreme Court and High Courts regarding the application of Rule 8D.
• Court's Interpretation and Reasoning: The court noted that Rule 8D is prospective and should not apply to assessment years before 2008-09. The court also emphasized the need for consistency in the method of disallowance calculation.
• Key Evidence and Findings: The court considered the company's previous methods of calculating disallowance and the investments involved.
• Application of Law to Facts: The court remanded the issue for recalculation, emphasizing the need to consider only those investments that yielded exempt income.
• Treatment of Competing Arguments: The court acknowledged the arguments for using a consistent method and the need to exclude investments that did not yield exempt income.
• Conclusions: The court remanded the issue for recalculation in line with established legal principles.

Depreciation of Computer Peripherals

• Legal Framework and Precedents: The court referenced judgments from the Delhi High Court regarding the classification of computer peripherals as integral parts of computer systems.
• Court's Interpretation and Reasoning: The court agreed that computer peripherals qualify for higher depreciation rates as integral parts of computer systems.
• Key Evidence and Findings: The court noted that peripherals like UPS are essential for computer operation.
• Application of Law to Facts: The court upheld the higher depreciation rate for computer peripherals.
• Treatment of Competing Arguments: The court considered the argument that peripherals should have a lower depreciation rate but found them integral to computer systems.
• Conclusions: The court upheld the allowance of higher depreciation rates for computer peripherals.

Duty Credit Scripts

• Legal Framework and Precedents: The court referenced Section 28 of the Income-tax Act and judgments from the Supreme Court regarding the tax treatment of duty credit scripts.
• Court's Interpretation and Reasoning: The court agreed with the lower authority that duty credit scripts do not constitute real income unless utilized.
• Key Evidence and Findings: The court noted the lack of evidence showing the utilization of duty credit scripts during the year.
• Application of Law to Facts: The court concluded that the duty credit scripts did not result in taxable income for the year.
• Treatment of Competing Arguments: The court considered the argument that the scripts should be taxed but found no basis for this without utilization.
• Conclusions: The court upheld the exclusion of duty credit scripts from taxable income.

3. SIGNIFICANT HOLDINGS

• Core Principles Established: The judgment reinforced the principle that expenses must be wholly and exclusively for business purposes to qualify for deductions under Section 37(1). It also emphasized the prospective application of Rule 8D and the need for consistency in calculating disallowances under Section 14A.
• Final Determinations on Each Issue: The court upheld the disallowance of education expenses and write-offs for leasehold improvements, remanded the Section 14A disallowance for recalculation, upheld higher depreciation rates for computer peripherals, and excluded duty credit scripts from taxable income.