2019 (1) TMI 1536 - HC - Income Tax

Disallowance of brokerage payable - assessee follows the percentage method mandated under Accounting Standards 7 - AS-7 , and recognised under Section 145 - Held that - It is not disputed that for past years as well, the treatment given by the assessee was accepted by the Revenue. Furthermore, the project completion method which this Court alluded to in DLF Universal Ltd. 2015 (4) TMI 981 - DELHI HIGH COURT finds reflection as an approved method in the decision of the Supreme Court. Furthermore, this Court notices that as to what appropriate methods of treatment of expenditure in the hands of a particular business per se have to be adopted, is the subject matter of Accounting Standards. In the present case, after 2007, every builder must necessarily follow the percentage of completion method by following the AS-7. If the Revenue s arguments were to be accepted too, the expenditure which is clearly discernable and which may accrue in a particular year and even be paid has to necessarily be disallowed in substantial part and never proportionality granted. In such event, the likely result would be that for next succeeding year, the AO must find himself bound by previous determination and depend upon the balance amount paid. Given the statement in CIT v. Bilahari Investment Pvt. Ltd. 2008 (2) TMI 23 - SUPREME COURT that adoption of one or more methods and the implementation of it, is largely revenue neutral. This Court is of the opinion that no question of law arises on this aspect. Disallowance under Section 14A - Held that - Revenue appellate authorities noticed that for the concerned AY, the assessee did not indicate tax exempt income to attract the provision. Therefore, the decision in Cheminvest Ltd. v. CIT 2015 (9) TMI 238 - DELHI HIGH COURT clearly applied which the ITAT followed. No question of law, therefore, arises. Treatment of software expenditure claims - Held that - The Court is of the opinion that the findings of the CIT(A) and ITAT are pure findings of fact. Moreover, as held by the CIT(A), the AO did not even care to examine the terms of agreement which the assessee entered into with the service provider. As far as the software expenditure goes, the Court is of the opinion that the findings of fact rendered by the CIT(A) and ITAT cannot be faulted.

Summary

Issues:
1. Disallowance under Section 14A
2. Claim of expenses for software up-gradation and services
3. Payment of brokerage expenses
4. Payment made towards IBM and Bharti Airtel for computer maintenance and broadband services

Analysis:

Issue 1: Disallowance under Section 14A
The Revenue raised concerns regarding the disallowance under Section 14A of the Income Tax Act. The ITAT and CIT(A) found that the assessee did not indicate any "tax exempt" income for the relevant assessment year, as required by the provision. Following the decision in Cheminvest Ltd. v. CIT, it was concluded that no question of law arose in this regard.

Issue 2: Claim of Expenses for Software Up-gradation and Services
The Court found that the findings of the CIT(A) and ITAT regarding software expenditure claims were factual and sound. The AO failed to examine the terms of the agreement between the assessee and the service provider. Consequently, the Court upheld the decisions of the lower authorities on this issue, stating that no question of law arose.

Issue 3: Payment of Brokerage Expenses
The Revenue contested the disallowance of brokerage expenses by the AO. The CIT(A) reasoned that the brokerage expenses were selling costs and could not be capitalized with the cost of inventory. The Court referred to previous judgments and accounting standards to support the position that brokerage expenses were revenue expenditures and should be allowed in the year they were incurred. The ITAT affirmed the CIT(A)'s decision, emphasizing that the treatment of such expenses by the assessee had been consistent and acceptable to the Revenue in the past.

Issue 4: Payment to IBM and Bharti Airtel for Services
The Court did not address any specific legal issues related to payments made to IBM and Bharti Airtel for computer maintenance and broadband services. The judgment focused on the previous issues raised by the Revenue and the decisions made by the lower appellate authorities.

In conclusion, the Court dismissed the appeal, stating that no questions of law arose in the issues raised by the Revenue. The judgments of the CIT(A) and ITAT were upheld, emphasizing the importance of consistent treatment of expenses and adherence to accounting standards in determining allowable deductions.