2022 (9) TMI 152 - AT - Income Tax

Disallowance u/s 36 (1) (iii) - interest expenditure - as submitted the assessee is following the percentage completion method, the above interest should form part of work in progress and as soon as part of revenue is offered for taxation assessee is entitled to claim the same in that proportion deduction of the same - HELD THAT - As decided in assessee own case for assessment year 2014 15 2020 (4) TMI 842 - ITAT MUMBAI we confirm the order of the learned CIT A in deleting the disallowance of ₹ 2,241,160,000/ . Accordingly, ground number 1 and 2 of the appeal of the AO is dismissed. Disallowance of expenses u/s 14 A of the act invoking the provisions of rule 8D - HELD THAT - Undisputed fact shows that there is no exempt income and during the year by the assessee. If there is no exempt, income naturally there cannot be any disallowance u/s 14 A of the act because no expenditure has been incurred on any exempt income during the year. Further the reliance placed by the learned departmental representative on the amendment made by the finance act 2022 applies prospectively as held in PCIT versus Era infrastructure private limited 2022 (7) TMI 1093 - DELHI HIGH COURT . In view of this we do not find any infirmity in the order of the learned CIT A in deleting the disallowance u/s 14 A of the act. Accordingly, ground number 3 of the appeal of the learned AO is dismissed. Nature of expenditure - expenses towards software - revenue or capital expenditure - AO held it to be a capital expenditure - alternative plea of the assessee was adjudicated and depreciation was allowed at the rate of 60% - HELD THAT - The assessee has incurred ERP expenditure and license fees for the software. Case of Raychem RPG Ltd 2011 (7) TMI 953 - BOMBAY HIGH COURT covers the issue as decided this issue also in favour of the assessee and hold that this expenditure is revenue expenditure - Decided in favour of assessee. Claim of the assessee u/s 80GGB - assessee has given a donation to three different parties - HELD THAT - Assessee has produced all the receipts except in case of ₹ 6,534,000 paid to Bharatiya Janta party. The transaction is demonstrated through the bank account of the assessee. In any way, the donation paid in cash is as such not allowable under that Section. The provision of Section 80GGB also speaks about the contribution is defined in Section 293A of the companies act 1956. As assessee has shown that the amount is of contribution paid by account payee cheque, merely because receipt is not available it cannot be denied. Therefore, we set-aside this issue to the file of the learned assessing officer to examine the claim of the assessee with respect to ₹ 6,534,000/ contribution made the political party by the assessee by examination of the bank account of assessee and assessee is directed to prove that same is contribution in terms of provisions of Section 293A of the companies act. Accordingly, ground number 2 of the appeal is set-aside to the file of the learned assessing officer to decide it afresh.

Issues Involved:
1. Disallowance of interest expenditure under Section 36(1)(iii).
2. Treatment of software expenditure as capital or revenue expense.
3. Limitation of deduction under Section 80GGB for donations to political parties.
4. Disallowance under Section 14A for exempt income.
5. Deduction under Section 80IB.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenditure under Section 36(1)(iii):
The assessee claimed interest expenditure of Rs. 2,241,160,000 as a revenue expense under Section 36(1)(iii), arguing that the interest was incurred for stock-in-trade, not a capital asset. The Assessing Officer (AO) disallowed this, stating it should be capitalized as part of the project cost and allowed only when the corresponding income is offered for taxation. The CIT(A) deleted the disallowance, referencing the Bombay High Court decision in Lokhandwala Construction Inds Ltd, where interest on loans for stock-in-trade was allowed as a deduction. The ITAT upheld the CIT(A)'s decision, noting the assessee's consistent accounting method and the binding nature of the Lokhandwala ruling.

2. Treatment of Software Expenditure as Capital or Revenue Expense:
The AO treated the software expenditure of Rs. 35,977,997 as a capital expense, allowing depreciation at 25%. The CIT(A) upheld this but allowed depreciation at 60% as an alternative plea. The ITAT, referencing the Bombay High Court decision in Raychem RPG Ltd, held that software expenditure, being for ERP licenses and not forming part of profit-making apparatus, should be treated as a revenue expense. The ITAT directed the AO to allow the full deduction and withdraw the depreciation granted.

3. Limitation of Deduction under Section 80GGB for Donations to Political Parties:
The assessee claimed a deduction of Rs. 116,534,000 for donations to political parties. The AO allowed only Rs. 10 crores due to lack of receipts for the entire amount. The CIT(A) allowed an additional Rs. 1 crore based on available receipts. The ITAT set aside the issue to the AO to verify the donation of Rs. 6,534,000 to Bharatiya Janata Party through the bank account, directing the assessee to prove the contribution under Section 293A of the Companies Act.

4. Disallowance under Section 14A for Exempt Income:
The AO disallowed Rs. 15,553,306 under Section 14A, invoking Rule 8D, despite no exempt income being earned by the assessee during the year. The CIT(A) deleted the disallowance. The ITAT upheld the CIT(A)'s decision, referencing the Delhi High Court ruling in PCIT vs. Era Infrastructure Pvt Ltd, which held that disallowance under Section 14A is not applicable if no exempt income is earned.

5. Deduction under Section 80IB:
The assessee's claim for deduction under Section 80IB was disallowed by the AO due to lack of substantiation. The assessee did not press this ground before the CIT(A), and it was dismissed.

Conclusion:
The ITAT dismissed the appeal filed by the AO and allowed the appeal of the assessee with specific directions. The interest expenditure was allowed as a revenue expense, the software expenditure was treated as a revenue expense, and the issue of the donation deduction was remanded to the AO for verification. The disallowance under Section 14A was deleted, and the deduction under Section 80IB was not contested further.

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