2020 (6) TMI 695 - AT - Income Tax

Disallowance of prior period expenses and foreign exchange fluctuation - disallowance of write off of earnest money deposit - HELD THAT - We find merit in the claim of the assessee that one more opportunity be granted to the assessee to substantiate its above claim considering the undisputed fact that all the documents were lost by the assessee in a major fire and procuring evidence to substantiate its claim therefore was a very difficult process. We, therefore, consider it fit to grant one more opportunity to the assessee to procure all possible evidences to substantiate its aforestated claim of prior period expenses and foreign exchange fluctuation in assessment year 2011-12 and write off of earnest money deposit in assessment year 2012-13. We, therefore, restore the issue back to the AO to consider the issue afresh after giving due opportunity of hearing to the assessee. Disallowance of depreciation on technical know- how - HELD THAT - We are unable to fathom what the Revenue was attempting to do on the issue Revenue has not disputed the genuineness of the claim of expenses. It is not the Revenue s case that the impugned expenses were bogus. What it has only done is that it has treated the R D expenditure incurred by the assessee as revenue in nature as opposed to capital treated by the assessee. Accordingly, it has resulted in allowing the entire claim of the expenses incurred in the impugned year and disallowing the claim of depreciation on the opening value of WDV of the same. We do not find any justification in this exercise of the Revenue. In all the past years the assessee has been consistently following this method of accounting and has also been allowed the same in scrutiny assessment u/s 143(3) for the preceding two years also - Revenue by this exercise has put the assessee at a loss when otherwise its claim of earlier years were allowable in entirety as per the Revenue itself in the year of incurring the expenditure only as against the assessee claiming only depreciation on the same. No justification or merit in this exercise of the Revenue and direct, therefore, that the entire expenses be treated as capital in nature and depreciation be allowed on the same. The addition made, therefore, on account of depreciation in both the years is directed to be deleted - Appeals of the assessee are partly allowed for statistical purposes.

Summary

Issues:
- Disallowance of prior period interest, exchange rate fluctuation, and depreciation on technical know-how for assessment year 2011-12.
- Disallowance of earnest money deposit written off and depreciation on technical know-how for assessment year 2012-13.

Analysis:
1. The appeals were filed against the CIT(A)'s orders regarding disallowances made by the AO for the assessment years 2011-12 and 2012-13. The assessee's premises suffered a fire incident, destroying all relevant documents. The disallowances were upheld due to lack of evidence.

2. For the assessment year 2011-12, disallowances included prior period interest, exchange rate fluctuation, and depreciation on technical know-how. The assessee failed to substantiate these claims due to the loss of documents in the fire. The AO disallowed these amounts, which were confirmed by the CIT(A).

3. In the assessment year 2012-13, disallowances were related to earnest money deposit written off and depreciation on technical know-how. The assessee explained these write-offs as irrecoverable deposits and capital expenditure on R & D, respectively. However, due to the lack of evidence post-fire incident, these disallowances were upheld.

4. The assessee argued that the disallowances were unjustified as the fire incident made it impossible to provide evidence. The AO and CIT(A) rejected the explanations, leading to the disallowances. The assessee requested another opportunity to procure evidence post-fire.

5. The Tribunal acknowledged the difficulties faced by the assessee post-fire and granted one more opportunity to substantiate the claims of prior period expenses, exchange rate fluctuation, and earnest money deposit write-offs. The issue was restored back to the AO for reconsideration.

6. Regarding the disallowance of depreciation on technical know-how, the Tribunal found the Revenue's treatment of R & D expenses as revenue in nature unjustified. The Revenue had allowed these expenses in previous years as capital expenditure. The Tribunal directed the entire expenses to be treated as capital, allowing depreciation on the same and deleting the disallowances made by the AO.

7. Ultimately, the Tribunal partly allowed both appeals for statistical purposes, granting the assessee another opportunity to substantiate certain claims and directing the deletion of disallowances related to depreciation on technical know-how.