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2014 (7) TMI 588 - AT - Income TaxEnhancement of disallowance u/s 14A of the Act Held that - The phraseology of section 14A(2) of the Act lends credence to the proposition that the empowerment of the AO to invoke rule 8D of the Rules, is subject to fulfillment of the condition that the AO records a satisfaction about the correctness of the claim of the assessee in respect of expenditure incurred in relation to the exempt income, having regard to the accounts of the assessee the decision in GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT - invoking of rule 8D of the Rules for the purposes of computing the disallowance u/s 14A of the Act is neither automatic and nor can be triggered merely because assessee has earned an exempt income - the fact situation is covered by the former i.e. sub-section (2) of section 14A of the Act because the assessee has specified a sum as expenditure incurred in relation to income which does not form part of the total income under the Act - the AO was not competent to take recourse to the rule 8D of the Rules unless he records a finding that he was not satisfied with the correctness of the claim of the assessee in respect to the expenditure incurred in relation to earning of the exempt income, having regard to the account of the assessee. The AO was obligated to record a satisfaction with regard to the incorrectness of assessee s claim, having regard to the accounts of the assessee, a requirement which is quite clear from a perusal of section 14A(2) of the Act - the reasoning advanced by the AO is based on mere surmises and conjectures and is not in compliance with the requirements of section 14A(2) of the Act - the AO has not recorded an objective satisfaction in regard to the correctness of the claim of the assessee which is a mandatory requirement of section 14A(2) of the Act and therefore, his action of invoking rule 8D of the Rules in order to compute the disallowance is untenable thus, the order of the CIT(A) is set aside and the AO is directed to retain the disallowance u/s 14A of the Act Decided in favour of Assessee. Computer Software Expenses - Capital expenditure OR Revenue expenditure Held that - The decision in CIT vs. Raychem RPG Ltd. 2011 (7) TMI 953 - Bombay High Court followed - where the software acquired by the assessee did not form part of the profit-making apparatus such expenditure was liable to be allowed as revenue expenditure - the amount is to be allowed as a revenue expenditure and the balance of ₹ 1,67,05,040/- be treated as capital expenditure - The AO is directed to re-work the disallowance Decided partly in favour of Assessee. Various expenses incurred u/s 40(a)(ia) of the Act Held that - The decision in assessee s own case for the earlier assessment year has been followed, it has been held that the assessee did not deduct any tax at source on payments Relying upon Bharat Forge Ltd. Versus Addl. Commissioner of Income Tax 2013 (11) TMI 1263 - ITAT PUNE - no tax was required to be deducted u/s 194J of the Act in relation to the payment of Director Sitting Fees - the phraseology used in Section 40(a)(ia) of the Act clearly removes from its purview cases where tax has been short-deducted - the provisions of Section 40(a)(ia) of the Act are not attracted as this is a case of short-deduction of tax at source under Section 194C of the Act and not a case of non-deduction of tax at source - The disallowance out of Die Repairs and Motor Rewinding Expenses is set-aside thus, no disallowance u/s 40(a)(ia) of the Act is merited with respect to the expenditure incurred in relation to Testing and Inspection, Misc. Hire Charges, Die Repairs and Motor Rewinding Expenses Decided in favour of Assessee.
Issues Involved
1. Disallowance under Section 14A of the Income Tax Act. 2. Classification of 'Computer Software Expenses' as capital or revenue expenditure. 3. Disallowance under Section 40(a)(ia) of the Income Tax Act. Issue-wise Detailed Analysis 1. Disallowance under Section 14A of the Income Tax Act The assessee contested the enhancement of disallowance under Section 14A from Rs. 30,23,852/- to Rs. 1,16,40,000/-. The company, engaged in manufacturing and power generation, declared dividend income of Rs. 26,05,53,164/- as exempt under Section 10(35). The assessee allocated Rs. 30,23,852/- as expenditure related to this exempt income. However, the Assessing Officer (AO) increased the disallowance to Rs. 1,16,40,000/- without recording the mandatory satisfaction under Section 14A(2) regarding the incorrectness of the assessee's computation. The Tribunal referenced the Bombay High Court's judgment in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT and similar cases, emphasizing that the AO must record an objective satisfaction before invoking Rule 8D. The Tribunal concluded that the AO failed to comply with Section 14A(2) requirements and directed the AO to retain the disallowance at Rs. 30,23,852/-. 2. Classification of 'Computer Software Expenses' as Capital or Revenue Expenditure The assessee claimed Rs. 1,92,58,207/- under 'Computer Software Expenses' as revenue expenditure, which the CIT(A) classified as capital expenditure. The details included expenses on software licenses, servers, and network components. The assessee cited the Bombay High Court's judgment in CIT vs. Raychem RPG Ltd., arguing that software not forming part of the profit-making apparatus should be treated as revenue expenditure. The Tribunal accepted that Rs. 1,44,17,040/- and Rs. 22,88,000/- spent on Transvalor SA and UG NX Software, respectively, were capital expenditures. However, the remaining Rs. 25,53,167/- related to facilitating business operations was allowed as revenue expenditure. The AO was directed to rework the disallowance accordingly. 3. Disallowance under Section 40(a)(ia) of the Income Tax Act The AO disallowed Rs. 56,78,560/- under Section 40(a)(ia) for non-deduction of tax at source, which the CIT(A) upheld. This included Rs. 4,15,000/- for Director Sitting Fees and Rs. 47,27,902/- for various expenses. The Tribunal, referencing its earlier decision in the assessee's case for AY 2007-08, held that no tax was required to be deducted for Director Sitting Fees under Section 194J. For the remaining amount, it was noted that the AO's disallowance was based on short deduction of tax, not non-deduction. The Tribunal cited precedents indicating that Section 40(a)(ia) applies only to non-deduction cases, not short-deduction. Consequently, the Tribunal directed the deletion of the disallowance for both Director Sitting Fees and the other expenses. Conclusion The appeal was partly allowed: - The disallowance under Section 14A was limited to Rs. 30,23,852/-. - Rs. 25,53,167/- of the 'Computer Software Expenses' was treated as revenue expenditure, and the balance as capital expenditure. - The disallowance under Section 40(a)(ia) was deleted in full.
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