2015 (1) TMI 510 - AT - Income Tax

Depreciation on computers, software and peripherals - 25% OR 60% - Held that - We are of the considered view that router and switches can be classified as a computer Hardware when they are used along with a computer and when their functions are integrated with a computer . In other words, when a device is used as part of the computer in its functions, then it would be termed as a computer. Thus following the decision of the coordinate bench in assessee s own case direct the AO to allow depreciation @ 60% as claimed by assessee. - Decided in favour of assessee. Disallowance of expenditure u/s 40(a)(ia)- non deduction of tax at source u/s 194C - Held that - Disallowance u/s 40(a)(ia) may not be made by the AO for the amounts/payments which have already been paid before the end of the relevant accounting year, out of the amounts disallowed which have been upheld by the CIT (A). - Decided Partly in favour of assessee for statistical purposes. Disallowance of prior period expenses - Held that - Merit in the alternative contention of the assessee inasmuch as if an amount of ₹ 2,11,34,759 out of total amount of ₹ 2,38,85,000 was already offered to tax in the earlier years, the prior period adjustment made in that behalf by the assessee, on account of the concerned parties declining to make the payments due to discrepancies in the billing, the same should be allowed as deduction as bad debts. We therefore, set aside the impugned order of the CIT(A) and direct the Assessing Officer accordingly to restrict the disallowance made. - Decided partly in favour of assessee.

Issues Involved:
1. Disallowance of depreciation on computer accessories.
2. Disallowance of expenditure under Section 40(a)(ia) for non-deduction of tax at source.
3. Disallowance of expenditure on the ground that it does not pertain to the year under account.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Computer Accessories:
The assessee, a company engaged in multiple businesses, filed a return declaring a business loss for AY 2005-06. The Assessing Officer (AO) disallowed depreciation on computer accessories, limiting it to 25% instead of the 60% claimed by the assessee. The CIT (A) upheld the AO's decision, stating that accessories like printers, scanners, modems, and routers do not form an integral part of the computer system and should be considered as 'plant and machinery.' The ITAT, however, referred to its earlier decisions in the assessee's own case and the Special Bench decision in DCIT vs. Datacraft India Limited, which held that such accessories, when used as part of the computer system, are eligible for depreciation at 60%. Consequently, the ITAT directed the AO to allow depreciation at 60% on these items.

2. Disallowance of Expenditure Under Section 40(a)(ia) for Non-Deduction of Tax at Source:
The AO disallowed Rs. 45,16,04,175/- under Section 40(a)(ia), stating that the assessee did not deduct tax at source under Section 194C for payments made to sister concerns and other parties for TV serials/programs production. The CIT (A) upheld this disallowance. The ITAT, however, referred to the Special Bench decision in the case of Merilyn Shipping & Transport Ltd, which held that Section 40(a)(ia) applies only to amounts 'payable' and not to amounts already 'paid.' Therefore, the ITAT directed the AO not to disallow the amounts that had already been paid before the end of the relevant accounting year.

3. Disallowance of Expenditure on the Ground That It Does Not Pertain to the Year Under Account:
The AO disallowed Rs. 1,00,71,880/- on the ground that it did not pertain to the year under account. The CIT (A) upheld this disallowance. The assessee argued that the amount related to excess billing in earlier years, which was rectified upon clients' complaints by issuing credit notes. The ITAT referred to its earlier decision for AY 2007-08, where it allowed similar claims as bad debts since the amounts were offered to tax in earlier years. Following this precedent, the ITAT deleted the disallowance.

Separate Judgments:
The ITAT delivered separate judgments for AY 2005-06 and AY 2006-07 but followed consistent reasoning and precedents in both cases. For AY 2006-07, the ITAT reiterated its stance on the issues of disallowance under Section 40(a)(ia) and prior period expenses, directing the AO to follow the same principles as applied in AY 2005-06.

Conclusion:
The ITAT's comprehensive analysis and reliance on precedents resulted in the partial allowance of the assessee's appeals for both AY 2005-06 and AY 2006-07, providing relief on the issues of depreciation on computer accessories, disallowance under Section 40(a)(ia), and prior period expenses.

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