2013 (11) TMI 169 - AT - Income Tax

Tribunal Orders Fresh Examination on Software Issue, Upholds Assessee's Position on 'Unearned Income' and Non-Resident Payments

The Tribunal directed a fresh examination by the Assessing Officer for the software expenditure issue, while upholding the CIT(A)'s decisions in favor of ... Disallowance of Expenditure on Software for Own Use - Whether the CIT(A) erred in deleting the addition made by the assessing officer towards expenditure on software for own use, relying upon CIT v. Southern Roadways Ltd. [2006 (10) TMI 82 - MADRAS HIGH COURT ] - Held that:- It would be in the interest of justice that the case the issue was restored back to the file of the Assessing Officer, who shall redecide it in accordance with law after affording adequate opportunity of hearing to the assessee - An expenditure can neither be held as revenue nor capital in nature - What was required was a pragmatic approach considering the nature, purpose of expenses incurred along with other relevant factors, which were to be subjectively considered - then only the endless issue can be adjudicated upon in the correct perspective - When we proceed to deal with the findings of the Assessing Officer as well as CIT(A) in the instant case, it was found that the Assessing Officer had not recorded any finding, qua the usage and utility of the software in question and he had simply held that the assessee can claim depreciation @ 25%. Disallowance of Unearned Income - Whether the CIT(A) erred in deleting the addition made by the assessing officer towards 'unearned income' – Following CIT vs. Dinesh Kumar Goel [2010 (10) TMI 287 - Delhi High Court] - Mercantile system of accounting – Fees for full course of package received in advance – Service to be rendered in next financial year – income not recognized unless service rendered – Income does not accrue - There was hardly any strife between the parties about the amount received qua ‘unearned income’ and payment made by the assessee without deducting tax at source - Per Revenue, the assessee’s unearned income was liable to be taxed and the payments made was royalty which requires tax deduction at source which was disputed by the assessee - decided in favor of assessee. Applicability of TDS provisions - Payment made by the assessee to foreign entities - Held that:- Following CIT Vs. Smt. Godavari Devi Saraf [1977 (9) TMI 24 - BOMBAY High Court] - After going through the operative portion, there was no iota of doubt that the payments in question made by the assessee cannot be subjected to the applicability of TDS provisions contained in the “Act” -Therefore, in view of the same and in order to maintain consistency - A perusal of the above findings makes it clear that the applicability of section 9 of the “Act” vis-à-vis the concept of royalty was duly considered and decided against the Revenue. In the course of hearing, the Revenue though has disputed the facts of the case, but merely on the basis of bald assertions, we are unable to accept the same. Issues Involved:1. Deletion of addition towards expenditure on software for own use.2. Deletion of addition towards 'unearned income.'3. Deletion of addition made under section 40(a)(i) for payments to non-residents without TDS.Issue-wise Detailed Analysis:1. Deletion of Addition Towards Expenditure on Software for Own Use:The Revenue's appeal contested the deletion of Rs.3,12,21,000/- by the CIT(A), who relied on the Hon'ble Madras High Court's decision in CIT v. Southern Roadways Ltd. (288 ITR 15). The Assessing Officer had classified the software expenditure as capital in nature and restricted depreciation to 25%, treating it as general plant, machinery, and technical know-how. The CIT(A) deleted this addition without discussing the material factual aspects involved. The Tribunal noted that the Assessing Officer did not record any findings about the usage and utility of the software and simply held it as capital expenditure. Since both the Assessing Officer and CIT(A) did not adequately address the factual aspects, the Tribunal restored the issue back to the Assessing Officer for a fresh decision in accordance with the law, ensuring adequate opportunity for hearing to the assessee.2. Deletion of Addition Towards 'Unearned Income':The Revenue challenged the deletion of Rs.27,68,83,000/- towards 'unearned income' by the CIT(A), who relied on the Chennai Tribunal's order in ITA No.1954/Mds/2007 (Slfy e-learning Ltd.). The Assessing Officer had added this amount as trading receipt taxable in the relevant previous year. The CIT(A) deleted the addition, following the decision in the assessee's own case for the preceding assessment year, where the Tribunal had decided in favor of the assessee. The Tribunal upheld the CIT(A)'s findings, noting that the same issue had been consistently decided in the assessee's favor in earlier years, and there was no distinguishing feature pointed out by the Revenue. Therefore, the Tribunal affirmed the CIT(A)'s decision, holding that the unearned income was not taxable in the current year.3. Deletion of Addition Made Under Section 40(a)(i) for Payments to Non-Residents Without TDS:The Revenue contested the deletion of Rs.21,52,68,531/- by the CIT(A), who held that the payments to non-residents were neither royalty nor fees for technical services, relying on the CIT(A)-XI's order in the assessee's own case. The Assessing Officer had treated these payments as royalty, necessitating TDS, and disallowed the expenditure under section 40(a)(i). The CIT(A) deleted the addition, following the decision in the assessee's case for the preceding assessment year. The Tribunal upheld the CIT(A)'s findings, noting that the same issue had been consistently decided in the assessee's favor in earlier years. The Tribunal observed that payments for connectivity services did not constitute royalty or fees for technical services and thus were not subject to TDS provisions. Therefore, the Tribunal affirmed the CIT(A)'s decision, holding that the payments were not liable for TDS.Conclusion:The Tribunal accepted the appeal for statistical purposes regarding the software expenditure issue, directing a fresh examination by the Assessing Officer. However, the Tribunal dismissed the Revenue's appeals concerning 'unearned income' and payments to non-residents without TDS, upholding the CIT(A)'s decisions based on consistent findings in the assessee's favor in earlier years.