2014 (1) TMI 1305 - AT - Income Tax

ITAT decision: Revenue's appeal partially allowed on software expenses, deduction disallowed for expenses lacking TDS.

The ITAT partially allowed the Revenue's appeal by upholding the addition on software expenses but disallowing the deduction for expenses without TDS ... Deletion on account of capitalization of software expenses -Held that:- The decision in ITO, COY WARD 1(2), NEW DELHI Versus ACL WIRELESS LTD. [2012 (12) TMI 732 - ITAT NEW DELHI] followed - CIT(A) has rightly observed that the expenditure in question was incurred as a matter of routine, for the business and commercial expediency of the assessee’s business, i.e., consultancy business - The CIT (A) has also declared that the capitalization of such expenses in preceding years was for the period prior to the commencement of the assessee’s business - Right from the commencement of the business of the assessee, the expenses started being claimed as revenue, every year – Decided against Revenue. Deduction made u/s 40(a)(ia) of the Act – TDS not deducted – Held that:- Merely because the assessee has reversed the entry of the expenditure claimed in one year in the subsequent year would be no ground for allowability of such expenditure in the year in which deduction is claimed - For allowability of the expenditure, the assessee has to establish that the expenditure was incurred during the year under consideration wholly and exclusively for the purpose of business - the assessee has not established how the expenditure is allowable in the year under consideration except arguing that the entry for the claim of expenditure has been reversed in the subsequent year –the order of the CIT(A) reversed - the expenditure was rightly disallowed by the Assessing Officer – Decided against Revenue. Deletion of capitalization of licence fee paid – Held that:- The assessee made the payment of license fee to M/s Nuance Communication, a Belgian company, as per the agreement for procuring license for use of its voice software and the agreement was operative for one year only - The above factual finding recorded by learned CIT(A) has not been controverted by the Revenue - Once the license fee was paid only for one year, by no stretch of imagination, it can be treated as capital expenditure – order of the CIT(A) upheld – Decided against Revenue. Issues:1. Deletion of addition on account of capitalization of software expenses.2. Allowance of deduction for expenses without TDS deduction and subsequent reversal.3. Deletion of addition on account of capitalization of license fee paid.Issue 1: Deletion of addition on account of capitalization of software expenses:The Revenue appealed against the deletion of an addition of Rs. 19,20,127 on account of capitalization of software expenses for the assessment year 2008-09. The ITAT found that this issue had been previously addressed in favor of the assessee by ITAT decisions in earlier years. The ITAT referred to cases from AY 2003-04 onwards where similar claims were allowed by the ITAT. The ITAT held that based on the consistent rulings in preceding years, there was no justification to interfere with the CIT(A)'s order. Therefore, the ITAT rejected Ground No.1 of the Revenue's appeal.Issue 2: Allowance of deduction for expenses without TDS deduction and subsequent reversal:The Revenue challenged the CIT(A)'s direction to allow a deduction of Rs. 88,87,668 for expenses where TDS was not deducted, but the entry was reversed in a subsequent year. The ITAT considered arguments from both sides. The Revenue contended that each year should be treated independently for expenditure assessment and that reversal of entry in a subsequent year should not impact the deduction claim in the initial year. The ITAT disagreed with the CIT(A) and held that the deduction for the expenditure was rightly disallowed by the Assessing Officer. However, to prevent double taxation, the ITAT directed the AO to verify if the reversed entry in the subsequent year should not be treated as income. Consequently, Ground No.2 of the Revenue's appeal was allowed.Issue 3: Deletion of addition on account of capitalization of license fee paid:The Revenue disputed the deletion of an addition of Rs. 10,79,660 for capitalization of license fee paid to a company for voice software usage. The ITAT observed that the license fee was paid for only one year as per the agreement, making it ineligible for capitalization. As the Revenue did not challenge the factual finding by the CIT(A), the ITAT upheld the CIT(A)'s decision on this point. Therefore, Ground No.3 of the Revenue's appeal was rejected.In conclusion, the ITAT partly allowed the Revenue's appeal by upholding the addition on software expenses but disallowing the deduction for expenses without TDS deduction and sustaining the deletion of the addition on the license fee payment. The decision was pronounced on 31st July 2013.