2022 (11) TMI 319 - HC - Income Tax

Depreciation on software - AO has disallowed depreciation on the ground that the supplier of software had informed that the balance payment was not received by them for the reason of non replacement of software version with the latest version - HELD THAT - It is not in dispute that the software was acquired on 23.3.2012 and the period before the expiry of the financial year namely, 31.3.2012 was less than 180 days. It is not in dispute that the assessee is a consulting engineer and has acquired the software for his use. The letter written by the supplier that the payment was withheld for not updating the software, in our view is not sufficient cause to disallow the depreciation because an engineer who purchases a software can continue to use the existing version till its updation. Sri Dilip is right in his submission that since the period of use is less than 180 days, the assessee shall be entitled for only 30% depreciation. This position of fact and law is not disputed by Sri Annamalai. So far as the expenditure is concerned, AO has rejected the same by merely recording that the assessee had not satisfactorily explained the business expediency. It is trite that the AO cannot sit in the arm chair of a businessman and decide what expenditure is expedient. The genuineness of the vouchers is not in dispute. It is for an assessee to decide from time to time the expenditure that he finds it expedient to make in order to promote his business. Therefore, in our view, on both aspects, the assessee s case merits consideration. Appeal is allowed.

Summary

Issues:
1) Depreciation disallowance on computer software.
2) Disallowance of business development expenses.

Depreciation Disallowance on Computer Software:
The appeal challenged the disallowance of depreciation on software and business development expenses for the assessment year 2012-2013. The AO, CIT(A), and ITAT had upheld the disallowances. The supplier's letter stating non-receipt of payment for software update was cited as the reason for disallowance. The appellant argued that the software was not updated by the supplier, justifying the non-payment. The High Court noted that the duration of software use was less than 180 days, entitling only 30% depreciation. The Court held that the reason for withholding payment due to lack of software update was insufficient to disallow depreciation, as the engineer could use the existing version until updated.

Disallowance of Business Development Expenses:
Regarding the disallowed business development expenses, the AO rejected the expenditure citing lack of business expediency explanation. The appellant argued that the AO cannot question the expediency of expenditure, only its genuineness. Citing the S.A.Builders case, the Court emphasized that the AO cannot decide what expenditure is expedient for the business. The Court held that the genuineness of vouchers was not in dispute, and the appellant had the right to decide the expediency of expenses to promote the business. Consequently, the Court allowed the appeal, answering substantial questions of law in favor of the assessee and against the revenue, disposing of the appeal without costs.