2012 (12) TMI 240 - AT - Income Tax

Tribunal partially allows appeal, adjusts disallowances, sets limit on Section 14A, remands expense issue.

The Tribunal partly allowed the appeal, deleting the disallowances related to leave encashment provision and software license fees, while restricting the ... Disallowance of provision for Leave encasement on actuarial basis Sec.43B(f) - Whether clause (f) of Section 43B is arbitrary, unconscionable and dehorse - Assessee is following mercantile system of accounting and the provision for leave encashment was made on actuarial basis – Held that:- Following the decision in case of Bharat Earth Movers (2000 (8) TMI 4 - SUPREME COURT) and Exide Industries Limited (2007 (6) TMI 175 - CALCUTTA HIGH COURT) held that leave encashment is not a contingent liability if the provision is made on some scientific basis. Therefore disallowance made by AO is not justified. In favour of assessee Disallowance u/s 14A – Expense incurred in relation to earn exempt income – Held that:- As concluded from the facts of the case as well as that of the A.Y 2006-07, no disallowance is called for u/s 14A out of interest expenditure because own funds of the assessee were many times more than the amount invested in shares. Some disallowance is justified out of administrative expenses. A.O. is directed to restrict the disallowance u/s 14A to ₹ 1 lac. Issue partly allowed Software license fees – Capital or revenue in nature – Assessee has paid license fees for user of Finance, Purchasing, Order Management and Manufacturing users – Held that:- The most important test is the functional test and if it is found that the function being carried out with the help of the software is such which can be said to be a part of profit making apparatus of the assessee then the same has to be considered as capital expenditure and if it is only for increasing the organizational efficiency, the same cannot be treated as forming part of the profit making apparatus of the assessee company and should be treated as revenue expenditure. Software will help the assessee in increasing the efficiency but the same cannot be treated as forming part of profit making apparatus of the assessee company and, therefore, the expenditure on this software cannot be treated as capital expenditure. In favour of assessee Disallowance u/s 40(a)(ia) - Reimbursement of expenses of C&F agents – Held that:- if bills for reimbursement of expenditure have been raised by the commission agent separately, TDS was not required to be deducted for reimbursement and as a consequence, section 40(a)(ia) is not applicable with regard to such reimbursement. A.O. shall decide this issue afresh and pass necessary order. Issue remand back to AO Issues Involved:1. Disallowance of provision for leave encashment under Section 43B.2. Disallowance under Section 14A read with Rule 8D.3. Disallowance of software license fees as capital expenditure.4. Disallowance under Section 40(a)(ia) for reimbursement of expenses to clearing and forwarding agents.Issue-wise Detailed Analysis:1. Disallowance of Provision for Leave Encashment under Section 43B:The appellant contested the disallowance of Rs. 8,58,452/- made for leave encashment provision, arguing it was based on actuarial calculations and should be allowed on an actual payment basis. The Assessing Officer (A.O.) disallowed the provision by invoking clause (f) of Section 43B. The appellant cited the Supreme Court decision in Bharat Earth Movers and the Calcutta High Court judgment in Exide Industries Ltd., which held that such disallowance was unjustified. The Tribunal noted that the Calcutta High Court had deemed clause (f) of Section 43B arbitrary and invalid. Consequently, the Tribunal ruled that the disallowance made by the A.O. under clause (f) of Section 43B could not be sustained and deleted the disallowance.2. Disallowance under Section 14A read with Rule 8D:The appellant challenged the disallowance of Rs. 4,61,160/- under Section 14A, arguing that there was no nexus between the investment and borrowed funds. The A.O. noted the appellant's significant investments in shares and substantial interest expenses, leading to the disallowance. The Tribunal referred to its earlier decision in the appellant's case for the assessment year 2006-07, where it was held that no disallowance was justified out of interest expenditure due to the appellant's sufficient own funds. The Tribunal confirmed that no disallowance was warranted out of interest expenditure for the current year as well. However, it found some disallowance justified for administrative expenses, restricting it to Rs. 1,00,000/-.3. Disallowance of Software License Fees as Capital Expenditure:The appellant argued that the software license fees of Rs. 20,47,000/- paid for Oracle products should be treated as revenue expenditure. The A.O. had treated the expenditure as capital in nature, citing its enduring benefit. The Tribunal referred to the Special Bench decision in Amway India Enterprise, emphasizing the functional test. It concluded that the software expenditure was for increasing organizational efficiency, not forming part of the profit-making apparatus, and thus should be treated as revenue expenditure. The Tribunal deleted the disallowance of Rs. 20,47,000/-.4. Disallowance under Section 40(a)(ia) for Reimbursement of Expenses to Clearing and Forwarding Agents:The appellant contended that the reimbursement of Rs. 10,34,388/- to clearing and forwarding agents was not subject to TDS and thus should not be disallowed under Section 40(a)(ia). The Tribunal noted the absence of details regarding whether the reimbursement matched the exact expenses incurred by the agents and whether separate bills were raised. It remanded the matter back to the A.O. for fresh consideration, directing the appellant to provide relevant bills and establish that the reimbursement was exact and separately billed. The Tribunal allowed this ground for statistical purposes.Conclusion:The Tribunal partly allowed the appeal, deleting the disallowances related to leave encashment provision and software license fees while restricting the disallowance under Section 14A to Rs. 1,00,000/-. The issue of reimbursement of expenses was remanded back to the A.O. for fresh adjudication.