2012 (6) TMI 85 - AT - Income Tax

Appeal success on interest reimbursement for A.Y. 2005-06; R&D expenditure treatment upheld for A.Y. 2007-08

The Tribunal allowed the appeal for A.Y. 2005-06, deleting the disallowance of interest reimbursement under Section 40(a)(ia) as the reimbursement was ... TDS u/s 194A on Interest - Disallowance of re-imbursement of interest u/s.40(a)(ia) - payment of interest through the parent company - As per the language used by the Parliament what is contemplated is the ‘interest in the form of income’. In the present case the argument of the assessee is that it is only reimbursement of the interest payment in respect of the funds utilised by the assessee towards borrowing facility of it’s parent company. - held that:- the assessee is under no statutory obligation to deduct the tax at source u/s.194A of the Act and, hence, there is no justification to invoke the provisions of sec.40(a)(ia) of the Act in making the disallowance. R&D expenditure - Software Solutions - capital expenditure or revenue expenditure - held that:- without supporting evidence it is very difficult to accept the plea of the assessee in respect of the nexus of the said expenditure with the development of the software and also to arrive at a conclusion whether the same can be treated as a revenue expenditure being recurring in nature. - Decided against the assessee. Issues Involved:1. Disallowance of interest reimbursement under Section 40(a)(ia) of the Income Tax Act, 1961 for A.Y. 2005-06 and A.Y. 2007-08.2. Disallowance of R&D expenditure for A.Y. 2007-08.Detailed Analysis:1. Disallowance of Interest Reimbursement under Section 40(a)(ia) of the Income Tax Act, 1961A.Y. 2005-06:- Background: The assessee, engaged in software development, trading, and services, took over a banking division from its parent company, Onward Technologies Ltd. (OTL). The assessee reimbursed interest costs to OTL for funds utilized, which were borrowed by OTL from banks.- Assessment: The Assessing Officer (A.O.) disallowed the interest reimbursement of Rs.1,41,12,002/- under Section 40(a)(ia) for non-deduction of tax at source as per Section 194A. The assessee argued that the reimbursement was on an actual basis and not income for OTL, thus not requiring TDS.- Appeal: The CIT (A) upheld the disallowance, treating the reimbursement as interest income for OTL.- Tribunal Decision: The Tribunal held that the reimbursement was not 'income' but an actual cost sharing. The interest paid was to the bank through OTL, and hence, no TDS was required under Section 194A. The disallowance under Section 40(a)(ia) was deleted.A.Y. 2007-08:- Background: Similar to A.Y. 2005-06, the assessee reimbursed Rs.91,36,748/- to OTL.- Assessment and Appeal: The A.O. and CIT (A) disallowed the reimbursement under Section 40(a)(ia) for non-deduction of TDS.- Tribunal Decision: Following the reasoning for A.Y. 2005-06, the Tribunal deleted the disallowance, holding that the reimbursement did not constitute income requiring TDS under Section 194A.2. Disallowance of R&D Expenditure for A.Y. 2007-08- Background: The assessee capitalized Rs.2,93,13,061/- as R&D expenditure in its books but claimed it as revenue expenditure in the income computation statement. The A.O. disallowed the claim, treating it as capital expenditure without allowing depreciation.- Appeal: The CIT (A) upheld the disallowance but directed the A.O. to consider the assessee's application under Section 154 for depreciation.- Tribunal Decision: The Tribunal noted the lack of evidence supporting the claim that the expenditure was revenue in nature. It upheld the CIT (A)'s decision to treat the expenditure as capital but did not interfere with the directions to the A.O. regarding the Section 154 application for depreciation. The Tribunal confirmed the order of the CIT (A) and dismissed the appeal on this issue.Conclusion:- The appeal for A.Y. 2005-06 was allowed, deleting the disallowance of interest reimbursement under Section 40(a)(ia).- The appeal for A.Y. 2007-08 was partly allowed, deleting the disallowance of interest reimbursement but upholding the treatment of R&D expenditure as capital with directions for considering depreciation.