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2014 (11) TMI 171 - AT - Income TaxClassification of expenses - Capital or Revenue expenditure - Software expenditure Held that - The system software did not form part of the profit-making apparatus of the assessee, that the business of the assessee was that of manufacturing of piston ring, casting ring etc., that Software was an enterprise resource and it facilitated the assessee s trading operations or enabled the management to conduct the assessee s business more efficiently or more profitably - But, it would not make the software a profit-making apparatus - So, the expenditure incurred by the assessee has to be held to be revenue expenditure following the decision in CIT Versus Raychem RPG Ltd. 2011 (7) TMI 953 - Bombay High Court Decided in favour of assessee. Disallowance u/s 40A(3) Held that - The assessee had made a payment to one of the employees, who had bank account and her salary and other emoluments were deposited in that account - the assessee auditor of the company in his report has specifically mentioned that the amount was paid in violation of the provisions of section 40A(3), the assessee had not produced any evidence before the auditor or the AO to prove that the payments were covered by the exceptions mentioned in Rule 6DD of the Rules - the assessee had not proved that exceptional and unavoidable circumstances existed thus, the order of the FAA is upheld Decided against assessee. Adhoc disallowance @ 20% of the miscellaneous expenses(ME) Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the addition made by the AO under the head ME is to be set aside as there was no scope for making ad hoc disallowance Decided in favour of assessee. Expenses incurred for business purposes disallowed Held that - FAA had specifically directed the AO to allow the expenditure in the earlier AY, if same was not already allowed in that year - the expenditure was incurred for business purposes and has to be allowed in one of the years - It is not uncommon business practice that in some cases bills are received in subsequent year for a particular item - But, that does not mean that the assessee is not entitled to claim the expenditure only because it is following mercantile system of accounting - the expenditure claimed by the assessee has to be allowed in the year Decided in favour of assessee. Calculation of claim made u/s 80HHC Held that - The assessee had not furnished the details of the miscellaneous income before the AO or the FAA, that FAA culled out necessary details and had decided the issue on merits, that he had partly allowed the issue of sale of scrap in favour of the assessee, that he had followed the decision with regard to the benefits of ₹ 92.79 lakhs - the order of the FAA does not suffer from any legal infirmity Decided against assessee. Interest expenses on investment disallowed Held that - The AY involved is prior to 2008-09 and as per the decision in GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT the provisions of section 14A r.w.r.8D cannot be invoked for making proportionate disallowance - reasonable disallowance could be made in earlier AYs - disallowance sustained by the FAA i.e.5% of the exempt income is reasonable and does not need interference Decided against revenue.
Issues Involved:
1. Disallowance of computer software expenses as capital expenditure. 2. Disallowance of cash payments under Section 40A(3). 3. Ad-hoc disallowance of miscellaneous expenses. 4. Disallowance of prior period expenditure. 5. Calculation of claim under Section 80HHC. 6. Disallowance of interest expenses on investment. Detailed Analysis: 1. Disallowance of Computer Software Expenses as Capital Expenditure: The assessee contested the disallowance of Rs. 11,71,200 incurred on computer software expenses, which the AO treated as capital in nature. The CIT(A) upheld this view, referencing ITAT decisions in Maruti Udyog Ltd., Escorts Ltd., and Amway India Enterprises, which classified ERP software as a capital asset providing enduring benefits. However, the Tribunal found that the ERP software did not form part of the profit-making apparatus but facilitated business operations, thus treating the expenditure as revenue in nature. This decision was influenced by the Bombay High Court judgment in Raychem RPG Ltd. 2. Disallowance of Cash Payments under Section 40A(3): The AO disallowed Rs. 13,606, being 20% of cash payments exceeding Rs. 20,000, as reported by the Tax Auditor. The CIT(A) upheld this disallowance, noting that the payments were not covered under Rule 6DD exceptions. The Tribunal agreed, emphasizing that the assessee failed to prove 'exceptional and unavoidable circumstances' for making cash payments, thus affirming the CIT(A)'s decision. 3. Ad-hoc Disallowance of Miscellaneous Expenses: The AO made an ad-hoc disallowance of Rs. 15 lakhs out of Rs. 1.43 crores claimed as miscellaneous expenses, citing lack of clarity on the nature of expenses. The CIT(A) reduced this disallowance to 20%, referencing the Tribunal's decision in the assessee's case for AY 2001-02. The Tribunal, however, followed its decisions for AY 2003-04 and AY 2004-05, which deleted similar ad-hoc disallowances, and decided this ground in favor of the assessee. 4. Disallowance of Prior Period Expenditure: The AO disallowed Rs. 7,18,162 as prior period expenses, which the assessee claimed were billed in the current year. The CIT(A) directed the AO to verify if these expenses were allowed in AY 2001-02 and to allow them if not already done. The Tribunal supported this view, emphasizing that such expenses should be allowed in one of the years, and allowed this ground for statistical purposes. 5. Calculation of Claim under Section 80HHC: The AO recalculated the deduction under Section 80HHC, including export benefits and miscellaneous income in total turnover and excluding 90% of miscellaneous income from business profits. The CIT(A) partially upheld this, excluding liabilities written back and Octroi refund from business profits but including sale of finished goods scrap. The Tribunal found no legal infirmity in the CIT(A)'s order and decided this ground against the assessee, referencing the Tribunal's decision for AY 2004-05. 6. Disallowance of Interest Expenses on Investment: The AO disallowed Rs. 72.56 lakhs, attributing it to interest-bearing funds used for non-business investments. The CIT(A) restricted this disallowance to 5% of the exempt income, following the Bombay High Court's decision in Godrej & Boyce Mfg Co. Ltd. The Tribunal upheld this reasonable disallowance, rejecting the AO's appeal. Conclusion: The Tribunal partly allowed the assessee's appeal and dismissed the AO's appeal, delivering a comprehensive judgment addressing each issue with detailed legal reasoning and references to relevant case laws.
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