2015 (6) TMI 526 - AT - Income Tax

Disallowance of expenditure incurred for purchase of application software - Held that - In the present case, the A.O. had noted in the assessment order that expenditure was incurred on application software and, therefore, assessee cannot be said to have incurred expenditure on customized software. In the case law of CIT (A) Vs Asahi India Safety Glass Ltd. 2011 (11) TMI 2 - DELHI HIGH COURT relied upon by Ld. A.R. the Hon ble Court has held that expenditure incurred on application software is a revenue expenditure. In the present case as noted by A.O. the expenditure was incurred on application software. Therefore, respectfully following the Hon ble Delhi High Court, we hold the expenditure incurred on application software to be revenue in nature - Decided in favour of assessee. Disallowance of Bad Debts - A.O. and Ld. CIT(A) has not allowed the claim of assessee holding that deduction is allowed in respect of bad debts which is written off as irrecoverable in the accounts and not in respect of any debt which may be written off in its accounts - Held that -CIT(A) has held that only when proceedings in BIFR are concluded in the case of Grapco and after recovering whatever is recovered , the dues of assessee can be ascertained. However from the order of TRF Ltd. VSs CIT 2010 (2) TMI 211 - SUPREME COURT , we find that Hon ble Apex Court has held that for a claim of bad debt, the assessee has to only establish that debt has been written off and it was not necessary to establish that debt has become irrecoverable. Admittedly, the debt has been written off as noted in the assessment order itself and the loan was given in ordinary course of regular business activities of the assessee. Therefore, as per the Hon ble Supreme Court decision, the action of writing off of debt was sufficient to claim the loss. In the judgements relied upon by Ld. A.R., the Hon ble Supreme Court had remitted back the claim of bad debt to A.O. as in that case, the facts of writing off of debt was not examined by A.O. However, in the present case, the debt has actually been written off therefore, relying upon the ratio of judgement of Hon ble Supreme Court, we hold that the claim of assessee in respect of bad debt written off is allowable - Decided in favour of assessee. Disallowance u/s 14A - Held that - CIT(A) has held that out of internal accruals of s.248 crores for the year ended 31.03.1996, and ₹ 253 crores in the year ended 31.03.1997, the assessee had made investment of ₹ 34.99 crores and ₹ 46.93 crores in these two years, which means that the figures of internal accruals for two years was six times more than the figure of investments in these two years. Therefore, relying upon the decision of ACIT Vs Eicher Ltd. 2006 (1) TMI 183 - ITAT DELHI-C Ld. CIT(A) has rightly held that disallowance on account of interest was not applicable to the assessee. Disallowance u/s 14A - A.O. has made addition on a lump sum basis without noting down incurring of any expenditure @ 25% of dividend income whereas Ld. CIT(A) has restricted the disallowance to the extent of 5% of gross total income - Held that - Both the authorities have not made any finding of fact of incurring of any expenditure in this respect. Hon ble Punjab & Haryana High Court in the case of Hero Cycles Ltd. 2009 (11) TMI 33 - PUNJAB AND HARYANA HIGH COURT has held that disallowance u/s 14A requires finding of incurring of expenditure and where it is found that for earning exempt income, no expenditure has been incurred, disallowance u/s 14A cannot be made. Thus without recording of finding of fact as to the incurring of some expenditure, disallowance made by A.O. and partly confirmed by Ld. CIT(A) is not justified. Moreover, we find hat dividends were received from the group companies wherein the investment was made as a strategic investment and not for the purpose of earning dividend and since these are strategic investments there is no chance of incurring of any expenditure on day to day basis. - Decided in favour of asseessee. Disallowance of expenditure incurred by assessee for raising loan by treating the same as deferred revenue expenditure - Held that - There is no dispute about the fact that assessee had incurred the expenditure and the expenses are not of capital nature, therefore, as per section 37 of Act, these are allowable in the year in which such expenditure has been incurred. The A.O. had relied upon the judgement of Madras Industrial Corpn. 1997 (4) TMI 5 - SUPREME Court for disallowing a part of expenditure. However, in the judgement of Madras Industrial Investment, the Hon ble Court had held that expenditure can be spread over a period of time provided the assessee decides to do so and therefore, from the above judgement it can be concluded that right to claim deferred revenue expenditure is given to assessee and not to revenue. - Decided in favour of assessee. Disallowance of notional foreign exchange fluctuation loss - Held that - As noted by A.O. in his assessment order the loss on account of foreign exchange fluctuation has occurred on account of working capital loans in foreign exchange and therefore, the loss claimed is allowable u/s 37(1) of the Act. See CIT Versus M/s Woodward Governor India P. Ltd. 2009 (4) TMI 4 - SUPREME COURT - Decided in favour of assessee.

Summary

Issues Involved:

1. Disallowance of expenses on purchase of software.
2. Disallowance of bad debts written off.
3. Disallowance under Section 14A for interest and administrative expenses related to tax-free dividend income.
4. Disallowance of deferred revenue expenditure.
5. Disallowance of provision for foreign exchange loss.

Detailed Analysis:

1. Disallowance of Expenses on Purchase of Software:

The assessee claimed expenses on the purchase of software as revenue expenditure, which was disallowed by the AO, treating it as capital expenditure. The CIT(A) upheld the AO's decision, citing the case of Maruti Udyog Ltd., where software was considered a capital asset. However, the Tribunal found that the software in question was application software, not customized software, and followed the Delhi High Court's precedent in CIT v. Asahi India Safety Glass Ltd., which treated such expenses as revenue expenditure. Hence, the Tribunal allowed the assessee's claim.

2. Disallowance of Bad Debts Written Off:

The AO disallowed the bad debts written off by the assessee, arguing that the debt had not become irrecoverable as the loanee was not declared a BIFR company, and recovery proceedings were pending. The CIT(A) upheld this view. However, the Tribunal referred to the Supreme Court's decision in TRF Ltd. v. CIT, which held that a debt written off in the books of accounts is sufficient for claiming bad debt deduction. The Tribunal allowed the assessee's claim, noting that the debt was written off in the books and the loan was given in the ordinary course of business.

3. Disallowance under Section 14A:

The AO disallowed interest and administrative expenses related to earning tax-free dividend income under Section 14A. The CIT(A) deleted the interest disallowance and restricted the administrative expenses disallowance to 5% of the gross dividend income. The Tribunal upheld the CIT(A)'s decision, noting that the investments were made from internal accruals and not borrowed funds. The Tribunal also emphasized that without a specific finding of fact regarding the incurrence of expenses, disallowance under Section 14A is not justified, referencing the case of Hero Cycles Ltd. v. CIT.

4. Disallowance of Deferred Revenue Expenditure:

The AO disallowed the deferred revenue expenditure claimed by the assessee, treating it as capital expenditure. The CIT(A) upheld the AO's decision, relying on the Supreme Court's decision in Madras Industrial Investment Corporation Ltd. v. CIT, which allowed spreading expenditure over a period if the assessee chooses to do so. The Tribunal, however, noted that there is no concept of deferred revenue expenditure under the Income Tax Act except under specific provisions like Section 35D. The Tribunal allowed the assessee's claim, citing various judgments, including CIT v. Casio India Ltd., which held that revenue expenditure should be allowed in the year it is incurred.

5. Disallowance of Provision for Foreign Exchange Loss:

The AO disallowed the provision for foreign exchange loss, treating it as notional and contingent. The CIT(A) deleted the disallowance, recognizing the loss as arising from restating foreign currency liabilities at the balance sheet date. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's decision in CIT v. Woodward Governor India (P) Ltd., which allowed such losses as revenue expenditure under Section 37(1).

Conclusion:

The Tribunal allowed the assessee's appeal on all grounds, recognizing the expenses on software purchase as revenue expenditure, allowing the bad debts written off, restricting disallowance under Section 14A, and allowing the deferred revenue expenditure and provision for foreign exchange loss. The Revenue's appeal was dismissed.