2023 (6) TMI 28 - AT - Income Tax

Disallowance of deduction on investment written off - capital loss or revenue loss - HELD THAT - We find identical issue had come up before the Tribunal in assessee s own case for the A.Y 2009-10 restored the issue to the file of the AO. We deem it proper to restore the issue to the file of the AO with a direction to decide the issue for the present year in the light of the direction of the Tribunal for A.Y 2009-10 at the earliest. While doing so, AO shall keep in mind the various decisions relied on by assessee including that of the in the case of Patnaik Co. 1986 (7) TMI 6 - SUPREME COURT AO shall give due opportunity of being heard to the assessee and decide the issue as per fact and law. First issue raised by the assessee in the ground of appeal is treated as allowed for statistical purposes. Disallowance of purchase of software - revenue or capital expenditure - assessee submitted that the software purchases debited to P L A/c pertain to license fee for the year only and hence cannot be disallowed treating it as a capital expenditure - AO did not accept the contention of the assessee on the ground that the assessee had not produced the bills/invoices for the items it pertains - HELD THAT - Since the assessee in the instant case has filed all the relevant details along with supporting bills/invoices, during the assessment proceedings itself, therefore, respectfully following the decision of Danfos Industries (P) Ltd ( 2021 (9) TMI 1151 - MADRAS HIGH COURT ), we hold that the CIT (A) NFAC is not justified in confirming the disallowance treating the software expenditure as capital in nature. The order of the CIT (A) NFAC is set aside and the AO is directed to allow the expenditure debited in the P L A/c under the head software purchases. Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of investment written off as revenue expenditure.
2. Disallowance of software purchase as revenue expenditure.
3. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.

Summary:

Disallowance of Investment Written Off as Revenue Expenditure:
The assessee company, engaged in IT-enabled services, claimed a deduction of Rs. 3,60,72,141/- for investment written off in its wholly-owned subsidiary, treating it as a revenue expenditure. The Assessing Officer (AO) disallowed the claim, treating it as a capital loss, not allowable under section 37 of the Income Tax Act. The CIT (A) upheld the AO's decision, stating that the investment was capital in nature and did not meet the conditions for write-off. The Tribunal noted that similar issues were restored to the AO for re-examination in the assessee's case for A.Y. 2009-10. Following judicial precedents, the Tribunal restored the issue to the AO for re-examination, directing the AO to consider the binding decisions of the Supreme Court and various High Courts.

Disallowance of Software Purchase as Revenue Expenditure:
The AO disallowed Rs. 9,02,037/- claimed by the assessee for software purchases, treating it as capital expenditure due to the absence of supporting bills/invoices. The CIT (A) upheld the AO's decision. The Tribunal found that the assessee had submitted the relevant details and bills during the assessment proceedings. The Tribunal, following the decision of the Hon'ble Madras High Court in the case of CIT vs. Danfos Industries (P) Ltd, held that software expenditure is revenue in nature. The Tribunal set aside the CIT (A)'s order and directed the AO to allow the expenditure.

Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal dismissed the ground related to the initiation of penalty proceedings under section 271(1)(c) as premature at this juncture.

Conclusion:
The appeal filed by the assessee was partly allowed for statistical purposes, with the issues related to the disallowance of investment written off and software purchase expenditure restored to the AO for re-examination.