2023 (4) TMI 88 - AT - Income Tax

TDS credit on sale of software patches and modules - credit of Tax Deducted at Source claimed during the year under consideration in respect of Tax Deduction at Source pertaining to earlier years which were denied during the assessments of the respective years - HELD THAT - As per provisions of section 199 of the Act, tax deducted at source and paid to government exchequer is treated as payment of tax on behalf of the person for whom TDS was made. Rule 37BA(3) further clarifies that credit for TDS shall be given for assessment year for which such income is assessable. In the case of Supreme Renewable Energy Vs. ITO 2008 (8) TMI 432 - ITAT MADRAS-C the Tribunal following the decision in the case of CIT vs. Karnal Co-Op Sugar Mills Ltd. 1999 (4) TMI 7 - SC ORDER held that when the interest income is incidental to the acquisition and installation of an asset and not directly liable for tax, assessee is entitled for the credit of the TDS from the interest income which has been duly received by the Government. Thus we are of the considered view that the assessee is eligible for TDS credit earlier not allowed to the assessee - Decided in favour of assessee.

Summary

Issues:
The judgment involves the disallowance of credit for Tax Deducted at Source (TDS) amounting to Rs. 73,31,953 claimed during the year under consideration in respect of TDS pertaining to earlier years which were denied during the assessments of the respective years.

Issue 1: Disallowance of TDS Credit
The appellant, engaged in providing customised software, completed the development of software patches and modules during the year under consideration. The appellant consistently reduced the revenue earned from such patches and modules from the cost incurred on software development. The appellant claimed credit for TDS, which was denied in earlier assessment years as the income was reduced from the capitalized cost. The appellant claimed disallowed tax credit during the current year as the software development was complete and the costs were transferred to intangible assets.

Arguments by Appellant
The appellant argued that the software was completed in the relevant assessment year and was capitalized as an intangible asset. The Assessing Officer (AO) rejected the claim based on accounting standard (AS7) requirements for revenue recognition. The appellant contended that AS7 did not apply as they were in the business of software development, not construction. The appellant maintained that the revenue was accounted for, even if not credited to the Profit and Loss Account, as per Rule 37BA. They highlighted that TDS provisions are for tax collection, not charging, and the revenue from software would be taxed in subsequent years.

Arguments by Department
The Department defended the CIT(A)'s decision based on consistency with earlier years. They argued that since the facts remained unchanged, the appeal should be dismissed. The Department emphasized that the AO had previously rejected the method of recognizing profit from software patches and modules.

Decision
The Tribunal noted that the appellant consistently reduced revenue from software development costs. In the current assessment year, the software was fully developed and ready for generating income, and revenue was reduced from the cost of the software. The Tribunal found that TDS had been deducted on the sale of software patches, but credit was denied as the income was not disclosed separately but reduced from the development cost. Considering the provisions of section 199 of the Act and relevant case law, the Tribunal held that the appellant was entitled to TDS credit previously disallowed. The appeal was allowed in favor of the appellant.

Conclusion
The Appellate Tribunal ITAT Mumbai allowed the appeal by the assessee, directing the credit of Tax Deducted at Source amounting to Rs. 73,31,953 which was disallowed in earlier assessment years. The Tribunal held that the appellant was entitled to the TDS credit based on the facts of the case and relevant legal principles.