2016 (7) TMI 325 - AT - Income Tax

TDS u/s 194C - Addition u/s 40(a)(ia) - expenses incurred on the purchase of software related to computers whereas assessee has claimed the same as computers maintenance expenses - Held that - We find that AO has made the assessment u/s. 144 of the Act by disallowing the expense claimed by assessee under head computer and software maintenance on the ground that no documentary evidence in support of such expenses were furnished. However, Ld. CIT(A) has deleted the addition by holding that provision of TDS are not applicable to this transactions as the expense was incurred for the purchase of software. In remand report AO submitted that payment made to M/s Shilpi Software and M/s Financial Technologies (India) Ltd. were subject to TDS and same has not been complied with. However, the bills submitted on its perusal, we find that these expenses have been incurred towards the purchase of software and as such no service was involved. Therefore, in our considered view, that such transactions were out of purview of TDS provision. The assessee has also submitted the ledger copy of computer and software maintenance which is at page 276 of the assessee s paper book where the payment details through banking channel has also been placed. Therefore, the genuineness of the expense cannot be doubted. Accordingly, in our considered view, we uphold the order of Ld. CIT(A) and this ground of Revenue s appeal is dismissed. Capital expenditure incurred for purchase of software expense - CIT(A) has treated the same as revenue in nature and deleted the same - Held that - We find that expense incurred on account of maintenance of computer and software or update them do not create any asset of enduring benefit but merely assist the assessee to carry out its activities in the manner desired by statutory regulator. As such, we find that no fixed asset is coming into existence out of the expense incurred for the purchase of software. Hence, in our considered view, the issue of capitalizing the same expense does not arise and we uphold the order of Ld. CIT(A). Addition on account of bogus sundry creditors - Held that - From the facts of the case, we find that once the purchase/ sales claimed by assessee had accepted by AO then corresponding sundry creditors/ debtors claimed by assessee cannot be doubted. In the instant case, AO has not accepted the purchase/sales as claimed by assessee without bringing any relevant fact but the corresponding credit has been disallowed. Therefore, in view of the facts of the present case, the addition made by AO on account of bogus sundry creditor is not sustainable in law. CIT(A) is justified in deleting the additions made by the AO. Therefore, we uphold the order of Ld. CIT(A) as correct and in accordance with the law. It is ordered accordingly. Hence, appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Applicability of Section 40(a)(ia) of the Income Tax Act, 1961.
2. Classification of software purchase expenses as capital or revenue expenditure.
3. Validity of sundry creditors and their treatment under Section 68 of the Income Tax Act.
4. Admissibility of new evidence under Rule 46A of the Income Tax Rules, 1962.

Issue-wise Detailed Analysis:

1. Applicability of Section 40(a)(ia) of the Income Tax Act, 1961:
The Revenue contended that the Commissioner of Income Tax (Appeals) [CIT(A)] erred in deleting the addition made by the Assessing Officer (AO) under Section 40(a)(ia) on account of expenses incurred on the purchase of software, which the assessee claimed as computer maintenance expenses. The AO had disallowed these expenses due to the absence of documentary evidence during the assessment proceedings. The CIT(A) deleted the addition, noting that the payments were for the purchase of software and not under any contractual obligation requiring tax deduction at source (TDS) under Section 194C. The Tribunal upheld the CIT(A)'s decision, stating that the transactions were for the purchase of software, thus outside the purview of TDS provisions.

2. Classification of Software Purchase Expenses as Capital or Revenue Expenditure:
The Revenue argued that the CIT(A) incorrectly classified the expenses for purchasing software as revenue expenditure instead of capital expenditure. The Tribunal found that the expenses incurred on maintaining or updating software did not create any asset of enduring benefit but merely assisted the assessee in carrying out its activities as required by the statutory regulator. Consequently, the Tribunal upheld the CIT(A)'s decision, treating the expenses as revenue in nature. The Tribunal relied on the judgment of the Hon’ble Madras High Court in CIT vs. Southern Roadways Ltd., which held that expenses for upgrading existing systems to improve efficiency without creating a new asset are revenue expenditures.

3. Validity of Sundry Creditors and Their Treatment Under Section 68:
The Revenue challenged the CIT(A)'s deletion of the addition made by the AO on account of bogus sundry creditors. The AO had treated the sundry creditors as unexplained cash credits under Section 68 due to the lack of documentary evidence. The CIT(A) deleted the addition, noting that the AO had not provided sufficient opportunity to the assessee to submit details and that the sundry creditors were trade creditors related to the assessee's share broking business. The Tribunal upheld the CIT(A)'s decision, emphasizing that once the purchases and sales were accepted, the corresponding sundry creditors could not be doubted. The Tribunal cited various case laws, including ITO v. Smt. Umadevi Shankarappa Thimmaiah and CIT v. Pancham Das Jain, which supported the view that trade creditors arising from genuine transactions should not be treated as unexplained cash credits.

4. Admissibility of New Evidence Under Rule 46A:
The Revenue contended that the CIT(A) admitted new evidence without recording the reasons for its admission, violating Rule 46A(2) of the IT Rules, 1962, and without giving the AO a reasonable opportunity to examine the new evidence. The Tribunal found that the CIT(A) had admitted the new evidence after obtaining a remand report from the AO, thus complying with Rule 46A. Consequently, the Tribunal dismissed this ground of the Revenue's appeal.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all grounds. The expenses for software purchase were correctly treated as revenue expenditure, the sundry creditors were found to be genuine trade creditors, and the new evidence was admitted in compliance with Rule 46A. The Tribunal's order was pronounced in the open court on 05/07/2016.