2017 (12) TMI 808 - AT - Income Tax

Addition u/s 14A - Held that - Disallowance as contemplated u/s 14A of the Act cannot exceed exempt income. Therefore, we direct the A.O. to restrict the disallowance worked out under Rule 8D(2)(iii) to the extent of exempt income earned by the assessee for the relevant period. Disallowance of amortization of software development expenses - assessee filed a rectification application u/s 154 seeking rectification of deletion made by the A.O. towards disallowance of amortization of software expenses as the CIT(A) has allowed the claim of the assessee with regard to depreciation on total block of assets - Held that - We find that the issue of amortization of software development expenses and depreciation on capital expenditure has been dealt by the CIT(A) in his appellate order and allowed relief to the assessee on both the counts. We further noted that the CIT(A) in his rectification order dated 09.12.2016 rectifying the said mistake had allowed relief only in respect of claim of depreciation on software expenditure and confirmed the addition made by the A.O. towards disallowance of amortization of software expenditure. Therefore, we are of the view that the ground raised by the Revenue challenging deletion made by the CIT(A) becomes infructuous and hence the same is dismissed.

Summary

Issues Involved:
1. Disallowance of expenditure incurred in relation to exempt income under Section 14A of the Income-tax Act, 1961.
2. Deletion of addition made on account of amortization of software expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure Incurred in Relation to Exempt Income under Section 14A:

The Revenue contested the Commissioner of Income-tax (Appeals) [CIT(A)]'s decision to delete the disallowance of ?25,65,496 under Section 14A. The Assessing Officer (A.O.) had disallowed this amount, arguing that the assessee used interest-bearing funds for investments yielding exempt income. The CIT(A), relying on the Supreme Court's judgment in CIT v. Walfort Share & Stock Brokers, held that the disallowance was unjustified as the assessee demonstrated that the investments were made from its own funds, not from interest-bearing funds. The Tribunal upheld the CIT(A)'s decision, noting that the assessee provided clear evidence showing that interest-bearing funds were used for capital assets and working capital, not for investments yielding exempt income. The Tribunal also noted that disallowance under Section 14A should not exceed the exempt income earned, citing the Delhi High Court's decision in Joint Investment Private Limited v. CIT. Consequently, the Tribunal directed the A.O. to restrict the disallowance to the extent of the exempt income earned by the assessee, which was ?4,000.

2. Deletion of Addition Made on Account of Amortization of Software Expenditure:

The Revenue also challenged the CIT(A)'s decision to delete the addition of ?73,71,048 made by the A.O. for amortization of software expenditure. The CIT(A) initially allowed the amortization, considering the software's life expectancy of more than five years. However, the CIT(A) later rectified this decision under Section 154, confirming the A.O.'s addition and allowing only depreciation on the software expenditure. The Tribunal found that the CIT(A) had already rectified the mistake and confirmed the addition made by the A.O., making the Revenue's ground of appeal infructuous. Therefore, the Tribunal dismissed this ground of appeal.

Conclusion:

The Tribunal partly allowed the Revenue's appeal, upholding the CIT(A)'s decision on the disallowance under Section 14A but dismissing the Revenue's appeal regarding the amortization of software expenditure due to the rectification order. The Tribunal emphasized the principle that disallowance under Section 14A should not exceed the exempt income earned by the assessee.