2020 (8) TMI 174 - AT - Income Tax

Nature of expenses - Expenses incurred on Enterprise Resource Planning ( ERP ) and software expenses - revenue or capital expenditure - HELD THAT - From the perusal of the material on record it can be seen that no benefit of an enduring nature has been derived by the assessee as result of said expenditure. The said expenditure has been incurred only for smooth working and for improving the functioning of the organization. The Assessing Officer ignored the fact that in today s fast changing technology where software becomes obsolete for smooth functioning of the business, the software needs to be replaced / upgraded by an assessee from time to time, the software, in any, case cannot also be said to result in any enduring benefit to the assessee to be considered and thus, it cannot be held as capital expenditure. The case laws referred by the Ld. AR supports the contentions of the assessee as expenditure incurred on computer software does not constitute enduring benefit to term the same as capital in nature. - Decided in favour of assessee. Disallowance under Section 14A - HELD THAT - Assessing Officer accepted the contention of the assessee that no expenditure has been incurred for earning the dividend income and therefore no disallowance under Section 14A was called for. Without appreciating this aspect, the Assessing Officer disallowed ₹ 3 lacs under section 14A of the Act on an ad-hoc basis, and while doing so the Assessing Officer has not established any nexus between the expenditure and earning of dividend income. The CIT(A) also failed to look into this aspect. Thus, Ground No. 2 is allowed.

Summary

Issues Involved:
1. Treatment of ERP and software expenses as capital or revenue expenditure.
2. Disallowance under Section 14A of the Income Tax Act.
3. Deduction of prior period expenses.
4. Allowance of depreciation based on revised depreciation chart.

Detailed Analysis:

1. Treatment of ERP and Software Expenses as Capital or Revenue Expenditure:
The primary issue was whether the expenses incurred on Enterprise Resource Planning (ERP) and software should be treated as capital expenditure or revenue expenditure. The assessee argued that the ERP expenses were for improving the efficiency of day-to-day business operations and did not result in any enduring benefit in the capital field. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated these expenses as capital expenditure, allowing depreciation on them. The Tribunal found that the ERP expenses did not confer any enduring benefit and were necessary for the smooth functioning of the business, especially given the fast-changing technology. Therefore, the Tribunal concluded that these expenses should be treated as revenue expenditure and allowed the appeal on this ground.

2. Disallowance under Section 14A:
The second issue was the disallowance of ?86,398 under Section 14A of the Income Tax Act, related to expenses incurred in earning exempt dividend income. The AO made an ad-hoc disallowance, which was reduced by the CIT(A) to 5% of the dividend income. The assessee contended that no actual expenditure was incurred in relation to the exempt income. The Tribunal agreed with the assessee, noting that the AO did not establish any nexus between the expenditure and the earning of dividend income. Consequently, the Tribunal allowed the appeal on this ground as well.

3. Deduction of Prior Period Expenses (A.Y. 2004-05):
For the assessment year 2004-05, the issue was whether the CIT(A) erred in not directing the AO to allow the deduction of ?2,87,484, which were expenses related to the relevant assessment year but debited in subsequent years. The Tribunal remanded this issue back to the CIT(A) for proper adjudication, ensuring that all relevant evidence is considered and the assessee is given a fair hearing.

4. Allowance of Depreciation Based on Revised Depreciation Chart (A.Y. 2004-05 and 2005-06):
The assessee also contested the non-allowance of depreciation based on a revised depreciation chart. For the assessment year 2004-05, the Tribunal remanded the issue back to the CIT(A) for proper adjudication. For the assessment year 2005-06, the Tribunal similarly remanded the issue back to the CIT(A) for a detailed review.

Conclusion:
The Tribunal allowed the appeals for the assessment years 2001-02, 2002-03, and 2003-04, finding in favor of the assessee on the treatment of ERP and software expenses and the disallowance under Section 14A. For the assessment years 2004-05 and 2005-06, the Tribunal partly allowed the appeals for statistical purposes, remanding the issues related to prior period expenses and revised depreciation charts back to the CIT(A) for further consideration.