2023 (2) TMI 1001 - AT - Income Tax

Deduction written off by the assessee as security deposit not recovered - AO did not allow the deduction on the ground that the security deposit was given for acquiring a capital asset and hence its part non-recovery could not be allowed as deduction - CIT(A) countenanced the assessment order on this point - HELD THAT - An admitted fact that the assessee paid a sum of Rs.15.00 lakh as security deposit to the licensor. As during the assessment year 2012-13 that the premises was prematurely got vacated by the licensor and the assessee used the premises for 3 months without paying any rent. Though it is claimed that some agreement was entered into with the licensor for allowing user of the premises for three more months free of rent, but no such agreement has seen the light of the day. This shows that the assessee used the premises for three months in the preceding assessment year without paying rent and the licensor deducted the equivalent amount of such rent from the security deposit at the time of its refund in the year under consideration. Thus, it is not a case of security deposit ceasing to be refundable and becoming loss, rather adjustment of security deposit against the period for which the assessee used the premises without paying any rent. Assessee cannot claim deduction in respect of non-refunded security deposit during the year under consideration as a business loss. Since the deduction by the licensor was in lieu of the rent for three months of the A.Y. 2012-13 for which the assessee used the premises without paying any rent, we direct to grant deduction to the assessee in the assessment for the preceding A.Y. 2012-13. Writing off towards software capital work-in-progress - assessee submitted that it was in the business of software development and was in the process of developing inhouse software modules named Axis QA Automation Framework /Axis ERP/ IntelX platform used for various applications - HELD THAT - On discontinuing the work on such modules, the amount capitalized towards salary of developer and computer rent allocated to developer, was claimed as deduction by writing off Rs.5.33 lakh. The detail of expenses written off has not been disputed by the AO. This shows that the assessee had capitalized certain revenue costs in respect of certain modules which it was trying to use in the software development business, but abandoned them during the year under consideration. Costs incurred earlier on such modules, which are otherwise of revenue nature, cannot be treated as capital expenditure, incapable of deduction on their write off. It is not a case where the assessee purchased certain plant and machinery or incurred certain capital costs which were capitalised earlier to work-in-progress account, and later on, on abandoning the same, it was claimed as deduction. Rather it is a case of incurring revenue expenditure, which was initially capitalized and now written off because of abandoning the modules, that were no more required in the software development business. In our considered opinion, is eligible for deduction. The ground is allowed. Disallowance on account of interest on late payment of TDS - assessee claimed deduction of this sum on late payment of TDS, which was disallowed by the AO. The same was approved in the first appeal - HELD THAT - As it is seen that the sum in question is interest paid to the Income-tax Department on late payment of TDS. Obviously, such an amount cannot be considered as allowable in terms of 40(a)(ii) in the hue of the judgment of Hon ble Madras High Court in CIT Vs. Chennai Properties and Investment Limited 1998 (4) TMI 89 - MADRAS HIGH COURT . Almost similar view has been taken by the Hon ble Jurisdictional High Court in CIT Vs. Ghatkopar Estate and Finance Corporation (P) Ltd. 1988 (11) TMI 74 - BOMBAY HIGH COURT - In view of the above judgments, we uphold the action of the authorities below in making and sustaining the disallowance.

Summary

Issues:
1. Deduction of security deposit not recovered
2. Writing off software capital work-in-progress
3. Disallowance of interest on late payment of TDS

Issue 1: Deduction of security deposit not recovered
The appeal concerns the disallowance of a deduction of Rs.9,45,000 by the assessee, written off as a security deposit not recovered. The assessee, engaged in IT services, entered into an agreement for premises lease, paying a security deposit of Rs.15.00 lakh. The licensor prematurely vacated the property, leading to a dispute resolved by allowing the assessee to use the premises rent-free for three months. The licensor refunded Rs.5,55,000 of the security deposit, but Rs.9,45,000 remained unrecovered. The AO disallowed the deduction, considering the security deposit as capital in nature. The ITAT held that the deduction was not allowable as a business loss but directed to grant it for the preceding assessment year, 2012-13, as an adjustment against rent not paid during that period.

Issue 2: Writing off software capital work-in-progress
The second issue pertains to the writing off of Rs.5,76,631 towards software capital work-in-progress. The assessee, in the software development business, wrote off a portion of capitalized expenses due to discontinuation of certain software modules. The AO denied the deduction, treating it as capital expenditure. The ITAT observed that the costs written off were revenue in nature, initially capitalized for developing modules later abandoned. It distinguished this case from capital costs write-offs, allowing the deduction of Rs.5.33 lakh as eligible expenditure incurred on abandoned modules, necessary for the software development business.

Issue 3: Disallowance of interest on late payment of TDS
The final issue concerns the disallowance of Rs.88,200 for interest on late payment of TDS. The AO disallowed the deduction, which was upheld in the first appeal. The ITAT supported the disallowance, citing relevant judgments that interest paid on late TDS payment is not allowable under section 40(a)(ii). Upholding the lower authorities' decision, the ITAT concluded that the sum paid as interest to the Income-tax Department cannot be considered an allowable deduction.

In conclusion, the ITAT partially allowed the appeal, directing the deduction of the security deposit for the preceding assessment year, recognizing the eligible expenditure on abandoned software modules, and upholding the disallowance of interest on late TDS payment based on relevant legal precedents.