2014 (6) TMI 316 - AT - Income Tax

Tribunal decisions on assessment reopening, software expenditure, deductions, and bad debts claim

Nagarjuna Agrichem Ltd. Versus Dy. Commissioner of Income-tax

The tribunal upheld the reopening of assessment under section 147, allowing software expenditure as revenue expenditure in the year incurred, directing ... Validity of reopening of assessment u/s 147 of the Act – Held that:- The AO has rightly reopened the assessment and the action of the CIT(A) in confirming the same is also proper – thus, there is no infirmity in the issue of notice u/s 148 of the Act – Relying upon Ess Kay Engineering Co. (P) Ltd. Vs. CIT [1997 (7) TMI 114 - SUPREME Court] - the reopening initiated by the AO is upheld – Decided against Assessee. Disallowance of expenditure incurred for license fee for the use of SAP in the company and other communication expenditure – Held that:- As it is one time expenditure and grant of licence is tied up to the payment made by the user, the same shall be allowed as revenue expenditure -CIT(A) has rightly came to a conclusion that expenditure is revenue in nature but that of deferred revenue - The expenditure is revenue in nature and AO has rightly considered as such at the time of original assessment – thus, the order of the CIT(A) is modified - AO is directed to allow entire expenditure as claimed – Decided partly in favour of Assessee. Disallowance of the claim u/s 35(2AB) of the Act – Held that:- The statutory formalities for getting approval u/s 35(2AB) are that application in Form No. 3CK and 3CL are to be submitted and an order of approval has to be obtained in Form No. 3CM from the prescribed authority - the assessee has not furnished Form No. 3CM for claiming weighted deduction u/s 35(2AB) - The AO has allowed this claim earlier without examining the allowability in the absence of certificates - there is justification for reopening of assessment – thus, the order of the CIT(A) is set aside and the matter is remitted back to the AO with a direction to allow weighted deduction u/s 35(2AB) as and when the assessee receives the approval under Form No. 3CM from the prescribed authority – Decided in favour of Assessee. Disallowance made u/s 35(1)(ii) of the Act - Claim made for weighted deduction – Held that:- The assessee filed list of payments i.e. payees list consisting of various Universities and Institutions for purpose of testing and sample note for approval from Central Rice Research Institute, Cuttack has been produced –revenue contented that the directions should be given to verify whether approval has been in accordance with the guidelines prescribed in Rules 5C and 5D or notified by the Central Government on proviso to Clause (2) – thus, the matter is remitted back to the AO to grant weighted deduction after verifying whether the approval has been obtained by the Universities/Institutions to whom payments have been made. Disallowance u/s 80HHC of the Act – Held that:- CIT(A) was of the view that deemed export sales are duly certified by the concerned agencies and fully documented – they are to be treated as part of the export turnover – there was no infirmity in the order of the CIT(A) – thus, the AO is directed AO to modify the calculation u/s 80 HHC after including the deemed export sales as part of export turnover. Claim of bad debts – Held that:- Following TRF Ltd. V. CIT, [2010 (2) TMI 211 - SUPREME COURT] - after the amendment of section 36(1)(vii) of the Act, w.e.f. April 1, 1989, in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable, it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee – Decided against Revenue. Issues Involved:1. Legality of reopening of assessment under section 147 of the Income Tax Act.2. Disallowance of software expenditure as capital expenditure.3. Disallowance of weighted deduction under section 35(2AB).4. Disallowance of weighted deduction under section 35(1)(ii).5. Disallowance of deduction under section 80HHC.6. Allowance of bad debts claim.Detailed Analysis:1. Legality of Reopening of Assessment under Section 147:The assessee argued that the reopening of assessment under section 147 was based on facts already available on file, constituting a change of opinion, which is not permissible. The CIT(A) held that the reopening was not merely based on an audit objection but also on additional information collected by the Assessing Officer (AO), which justified the reopening. The tribunal upheld the CIT(A)'s decision, stating that the AO had rightly reopened the assessment after collecting additional information that indicated certain income had escaped assessment.2. Disallowance of Software Expenditure as Capital Expenditure:The AO treated the software expenditure of Rs. 1,39,76,847/- as capital expenditure, allowing 60% depreciation on it. The CIT(A) held that the expenditure should be treated as deferred revenue expenditure spread over 25 years. The tribunal disagreed with the deferred revenue treatment and concluded that the expenditure should be allowed as revenue expenditure in the year it was incurred, directing the AO to allow the entire expenditure as claimed by the assessee.3. Disallowance of Weighted Deduction under Section 35(2AB):The AO disallowed the weighted deduction of Rs. 31,34,928/- claimed under section 35(2AB) due to the absence of necessary approvals in Form No. 3CM. The CIT(A) upheld the AO's decision. The tribunal set aside the CIT(A)'s order and directed the AO to allow the weighted deduction once the assessee furnishes the required approval in Form No. 3CM from the prescribed authority.4. Disallowance of Weighted Deduction under Section 35(1)(ii):The AO disallowed Rs. 79,78,975/- claimed as weighted deduction under section 35(1)(ii) due to the lack of proof of approvals for the institutions to which payments were made. The CIT(A) allowed the expenditure as a business expense under section 37(1) but denied the weighted deduction. The tribunal set aside the issue to the AO to verify the approvals of the institutions and grant the weighted deduction accordingly.5. Disallowance of Deduction under Section 80HHC:The AO recomputed the export turnover and disallowed Rs. 20,66,392/- claimed under section 80HHC. The CIT(A) included deemed export sales as part of the export turnover and directed the AO to modify the calculation. The tribunal upheld the CIT(A)'s decision and directed the AO to include deemed export sales in the export turnover for calculating the deduction under section 80HHC.6. Allowance of Bad Debts Claim:The AO disallowed the bad debts claim of Rs. 12,27,854/-, stating that there was no indication that the debt had become a non-performing asset. The CIT(A) allowed the claim, noting that the assessee had provided sufficient evidence of non-recovery. The tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in TRF Ltd. v. CIT, which stated that it is sufficient if the bad debt is written off as irrecoverable in the accounts of the assessee.Conclusion:Both the assessee's and the revenue's appeals were partly allowed for statistical purposes, with directions to the AO to re-examine certain issues based on the tribunal's findings. The tribunal provided detailed reasoning for each issue, ensuring compliance with the provisions of the Income Tax Act and relevant judicial precedents.