2013 (9) TMI 149 - AT - Income Tax

Tax Tribunal Decision: Partial win for assessee on various claims, AO to reassess interest disallowance.

HSBC Securities and Capital Markets (India) P. Ltd. Versus Assistant Commissioner of Income-tax

The Tribunal partly allowed the assessee's appeal, restricting disallowance under section 14A to Rs. 2 lakhs, allowing bad debts in full, treating ... Disallowance u/s 14A - Held that:- In the assessment year 2001-02, the dividend income was only ₹ 4,91,884 and an amount of ₹ 24,594 was disallowed and was so confirmed by the Income-tax Appellate Tribunal. However, in the later years based on the fact that amount of dividend was earned from only one company to an extent of ₹ 3.30 crores, the coordinate Bench considered that it was reasonable to estimate disallowance at ₹ 2.00 lakhs as the assessee has not borrowed any funds, nor there is any finding that any interest is attributable to earning the dividend income. The facts are similar in this year and large amount of dividend was earned from one company alone. In view of this, respectfully following the decision of the co-ordinate Benches in the assessment years 2004-05 and 2005-06, the disallowance is restricted to an amount of ₹ 2.00 lakhs - Decided partly in favour of assessee. Bad debts – Section 36(1)(vii) - Assessment Year 1990-1991 and Assessment Year 1993-1994 - Prior to 1st April, 1989, every assessee had to establish, as a matter of fact, that the debt advanced by the assessee had, in fact, become irrecoverable. That position got altered by deletion of the word “established”, which earlier existed in Section 36(1)(vii) of the Income Tax Act, 1961 – held that - in the present case, the Assessing Officer has not examined whether the debt has, in fact, been written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer’s account is credited, thus, closing the account of the customer. In the case of Companies, the provision is deducted from Sundry Debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee – matter remanded for de novo consideration - Following decision of T. R. F. Ltd. v. CIT [2010 (2) TMI 211 - SUPREME COURT] - Decided in favour of assessee. Disallowance u/s 37 - Held that:- Considering the nature of the expenditure as seen from annexure-A to the submissions before the Commissioner of Income-tax (Appeals), even though the expenditure may give an enduring benefit, since no asset has been created by paying licence fees for utilisation of the software, we are of the opinion that the expenditure is allowable as revenue expenditure. The principles laid down in the above cases relied on by the assessee supports the above contentions. Accordingly the Assessing Officer is directed to allow the claim of licence fee on software expenditure claim of ₹ 21,51,151 as revenue expenditure and consequently withdraw the depreciation allowed on the said amount - Decided in favour of assessee. Disallowance of penalty u/s 37 of the Act - Business expenditure - Held that:- Penalty/payments made by the Assessee to the Stock Exchange for violation of their regulation, being risk management oriented, are not an account of an offence which is prohibited by law.Hence, the invocation of explanation to section 37 is not justified. See CIT v. The Stock and Bond Trading Company [2011 (10) TMI 172 - BOMBAY HIGH COURT] - Decided against the Revenue. Depreciation on software - 25% or 60% - Held that:- Assessee has purchased specific software which was not supplied along with the computer. Therefore, the purchase of specific software for use in the business cannot be included as part of computers and since there is no specific item of computer software in the depreciation schedule for the impugned assessment year 2002-03 - AO is correct in treating the computer software as a licence and allowing depreciation at 25 per cent. - The reliance by the assessee on the depreciation schedule in the later year cannot help its case as the said 60 per cent. on computer software has become part of the depreciation schedule from the assessment year 2003-04 onwards. - Decided against assessee. Issues Involved:1. Disallowance under section 14A.2. Claim of bad debts/loss.3. Claim of software expenses.4. Disallowance of interest under section 36(1)(iii).5. Penalty levied by the stock exchange.6. Allowance of software expenditure as revenue expenditure.7. Depreciation on computer software at 60% vs. 25%.Detailed Analysis:1. Disallowance under section 14A:The assessee claimed a dividend income of Rs. 3,53,85,721 as exempt under section 10(33). The Assessing Officer (AO) disallowed 5% of the dividend income as expenditure attributable to earning such tax-free income, amounting to Rs. 16,69,286. The Commissioner of Income-tax (Appeals) [CIT(A)] confirmed this disallowance. However, the Tribunal noted that in subsequent years, a lump sum disallowance of Rs. 2 lakhs was considered reasonable. Given similar facts, the Tribunal restricted the disallowance to Rs. 2 lakhs, partly allowing this ground.2. Claim of bad debts/loss:The assessee claimed bad debts totaling Rs. 3,35,73,999, including amounts written off from Team Asia Greaves Semiconductor Ltd., Williamson Tea Holdings PLC, and bad delivery debtors. The AO disallowed these claims, but CIT(A) allowed Rs. 71,942 related to an advance to an employee. The Tribunal, referencing the Supreme Court decision in T. R. F. Ltd. v. CIT and the Bombay High Court decision in CIT v. Shreyas S. Morakhia, directed the AO to allow the entire amount as bad debts, noting that post-April 1, 1989, it is sufficient if the debt is written off as irrecoverable in the books.3. Claim of software expenses:The assessee spent Rs. 21,59,151 on software licenses, claiming it as revenue expenditure. The AO treated it as capital expenditure, allowing 25% depreciation and adding Rs. 16,19,363. CIT(A) upheld this view partially. The Tribunal, considering various judicial precedents, concluded that since no asset was created and the expenditure was for license fees, it should be treated as revenue expenditure. The AO was directed to allow the claim and withdraw the depreciation.4. Disallowance of interest under section 36(1)(iii):The AO disallowed Rs. 26,77,452 as interest on interest-free advances to group companies, stating these were out of borrowed funds. CIT(A) deleted the disallowance, noting the assessee had sufficient capital and reserves. The Tribunal restored the issue to the AO to re-examine the facts, particularly the nexus between borrowed funds and advances, and to consider the commercial expediency as per the Supreme Court's decision in S. A. Builders Ltd. v. CIT (Appeals).5. Penalty levied by the stock exchange:The AO disallowed Rs. 1,15,663 paid to the stock exchange for violation of byelaws, treating it as non-deductible under section 37(1). CIT(A) allowed the deduction, stating stock exchanges are not statutory authorities and the payments were for technical violations, not offenses. The Tribunal upheld CIT(A)'s decision, referencing the Bombay High Court's ruling in CIT v. Angel Capital and Debit Market Ltd. that such payments are allowable business expenditures.6. Allowance of software expenditure as revenue expenditure:The Revenue contested CIT(A)'s allowance of Rs. 4,34,400 as revenue expenditure out of Rs. 21,51,151. The Tribunal, having already decided that the entire software expenditure is revenue in nature, upheld CIT(A)'s decision.7. Depreciation on computer software at 60% vs. 25%:The assessee claimed 60% depreciation on software costing Rs. 40,60,000, which the AO restricted to 25%, treating it as an intangible asset. The Tribunal noted that for the assessment year 2002-03, there was no specific heading for software in the depreciation schedule. Since the software was not supplied with the computer, it was correctly treated as a license, and 25% depreciation was appropriate. The Tribunal dismissed the cross-objection, affirming the AO's decision.Conclusion:The assessee's appeal was partly allowed, and the Revenue's appeal was partly allowed for statistical purposes. The cross-objection by the assessee was dismissed. The Tribunal directed the AO to re-calculate interest under sections 234B, 234C, and 234D, and to re-examine the disallowance of interest under section 36(1)(iii) with fresh consideration.