2015 (6) TMI 526 - AT - Income Tax

Tribunal allows assessee's appeal, recognizes expenses as revenue, dismisses Revenue's appeal

The Tribunal allowed the assessee's appeal on all grounds, recognizing the expenses on software purchase as revenue expenditure, allowing the bad debts ... Treatment of application software as revenue or capital expenditure - allowability of bad debts written off in books of account - application of section 14A to disallow expenditure relatable to exempt income - allowability of loan-raising expenditure as revenue expenditure under Section 37 - treatment of foreign exchange fluctuation loss as revenue expenditure under the mercantile system - admission of additional ground concerning tax credit and remand to Assessing Officer for verificationTreatment of application software as revenue or capital expenditure - Expenditure on application software is revenue in nature and allowable. - HELD THAT: - The Tribunal noted earlier appellate decisions in favour of the assessee for prior years and relied on the factual finding that the expenditure in the year under appeal related to application (off the shelf) software (not customized/ERP software). Distinguishing the Maruti Udyog decision (which concerned software of enduring/customized nature), the Tribunal followed Delhi High Court authority holding that expenditure on application software is revenue expenditure. On that basis the disallowance/depreciation adjustment made by the Assessing Officer and upheld by the CIT(A) was reversed.Ground allowing the claim for software expenditure as revenue is allowed.Allowability of bad debts written off in books of account - Bad debts written off in the assessee's books are allowable as deduction. - HELD THAT: - The Tribunal applied the Supreme Court precedent that writing off a debt in the books suffices for a claim under the relevant provision; it rejected the view that the debt must be finally ascertained irrecoverable (e.g., post BIFR conclusion). Given that the loan was advanced in the ordinary course of the assessee's business, classified as non performing, and actually written off in the books, the Tribunal held the write off entitled the assessee to the deduction despite the existence of security and the possibility of some recovery.Addition on account of bad debt write off is deleted; the bad debt claim is allowable.Application of section 14A to disallow expenditure relatable to exempt income - Disallowance of interest was deleted; the ad hoc 14A disallowance for administrative expenses was also not sustainable on the facts and was deleted. - HELD THAT: - On facts the Tribunal accepted the CIT(A)'s findings that the dividends related to investments made in earlier years out of internal accruals (not borrowed funds), and that the dividend amount was immaterial to overall income. The Tribunal followed the principle that s.14A disallowance requires satisfaction that expenditure was incurred 'in relation to' exempt income and that the AO must record cogent reasons before estimating such expenditure. As no reliable basis was shown for attributing interest to the exempt dividends, the interest disallowance was deleted. Further, absent any finding of actual expenditure in relation to the dividends and given the strategic nature and timing of the investments, a notional lump sum disallowance could not be sustained; the CIT(A)'s limited estimate was set aside and the assessee's ground allowing deletion was accepted.Disallowance of interest under s.14A deleted; the partial s.14A disallowance for administrative expenses was not justified and is deleted.Allowability of loan-raising expenditure as revenue expenditure under Section 37 - Expenditure incurred in raising loan funds is revenue in nature and allowable in the year it is incurred; it is not to be treated as deferred revenue expenditure absent specific statutory provision. - HELD THAT: - The Tribunal examined accounting practice and jurisprudence, concluding there is no general concept of 'deferred revenue expenditure' in the Income tax Act except where statute permits. Relying on precedents that revenue expenditure wholly and exclusively for business must be allowed in the year of incurrence (subject to exceptional cases where the assessee elects to spread expenditure), the Tribunal held the assessed disallowance was not justified. The Madras Industrial decision was distinguished as applying where spreading had been sought/accepted; here the assessee had incurred the expenses and they were not capital in nature. Accordingly the AO's action in sustaining the deferred revenue disallowance was set aside.Addition treating loan raising expenses as deferred revenue expenditure is deleted and the expenses are allowed in the year of incurrence.Treatment of foreign exchange fluctuation loss as revenue expenditure under the mercantile system - Notional foreign exchange fluctuation loss debited under the mercantile system is an allowable revenue expenditure. - HELD THAT: - The Tribunal accepted the assessee's consistent accounting policy of restating foreign currency liabilities at year end rates and bringing resulting exchange differences to profit and loss. Applying the mercantile system and relevant Supreme Court authority, the Tribunal held that such exchange loss constitutes an expenditure under Section 37 and is not merely a contingent or notional item to be disallowed. Therefore the CIT(A)'s deletion of the AO's disallowance was upheld.Addition disallowing the foreign exchange fluctuation loss is deleted; the loss is allowable.Admission of additional ground concerning tax credit and remand to Assessing Officer for verification - An additional ground alleging short/non grant of tax credit in the assessment is admitted and directed to the Assessing Officer for verification and action as per law. - HELD THAT: - The Tribunal allowed admission of the additional ground (notwithstanding a procedural irregularity in an earlier unsigned order) because non admission would cause irreparable harm to the assessee and the matter is record based. The Revenue raised no objection. The Tribunal directed the AO to verify the tax credit claimed in the return and to allow it as per law, admitting the ground for statistical purposes and remitting the factual verification to the AO.Additional ground admitted; AO directed to verify and allow tax credit if supported by law and record.Final Conclusion: The Tribunal allowed the assessee's appeals overall: expenditure on application software, bad debts written off, loan raising expenses, and foreign exchange loss were held allowable; s.14A disallowances (interest and notional administrative allocation) were not sustained; an additional ground relating to tax credit was admitted and remitted to the Assessing Officer for verification and action in accordance with law. The Revenue's appeals are dismissed. Issues Involved:1. Disallowance of expenses on purchase of software.2. Disallowance of bad debts written off.3. Disallowance under Section 14A for interest and administrative expenses related to tax-free dividend income.4. Disallowance of deferred revenue expenditure.5. Disallowance of provision for foreign exchange loss.Detailed Analysis:1. Disallowance of Expenses on Purchase of Software:The assessee claimed expenses on the purchase of software as revenue expenditure, which was disallowed by the AO, treating it as capital expenditure. The CIT(A) upheld the AO's decision, citing the case of Maruti Udyog Ltd., where software was considered a capital asset. However, the Tribunal found that the software in question was application software, not customized software, and followed the Delhi High Court's precedent in CIT v. Asahi India Safety Glass Ltd., which treated such expenses as revenue expenditure. Hence, the Tribunal allowed the assessee's claim.2. Disallowance of Bad Debts Written Off:The AO disallowed the bad debts written off by the assessee, arguing that the debt had not become irrecoverable as the loanee was not declared a BIFR company, and recovery proceedings were pending. The CIT(A) upheld this view. However, the Tribunal referred to the Supreme Court's decision in TRF Ltd. v. CIT, which held that a debt written off in the books of accounts is sufficient for claiming bad debt deduction. The Tribunal allowed the assessee's claim, noting that the debt was written off in the books and the loan was given in the ordinary course of business.3. Disallowance under Section 14A:The AO disallowed interest and administrative expenses related to earning tax-free dividend income under Section 14A. The CIT(A) deleted the interest disallowance and restricted the administrative expenses disallowance to 5% of the gross dividend income. The Tribunal upheld the CIT(A)'s decision, noting that the investments were made from internal accruals and not borrowed funds. The Tribunal also emphasized that without a specific finding of fact regarding the incurrence of expenses, disallowance under Section 14A is not justified, referencing the case of Hero Cycles Ltd. v. CIT.4. Disallowance of Deferred Revenue Expenditure:The AO disallowed the deferred revenue expenditure claimed by the assessee, treating it as capital expenditure. The CIT(A) upheld the AO's decision, relying on the Supreme Court's decision in Madras Industrial Investment Corporation Ltd. v. CIT, which allowed spreading expenditure over a period if the assessee chooses to do so. The Tribunal, however, noted that there is no concept of deferred revenue expenditure under the Income Tax Act except under specific provisions like Section 35D. The Tribunal allowed the assessee's claim, citing various judgments, including CIT v. Casio India Ltd., which held that revenue expenditure should be allowed in the year it is incurred.5. Disallowance of Provision for Foreign Exchange Loss:The AO disallowed the provision for foreign exchange loss, treating it as notional and contingent. The CIT(A) deleted the disallowance, recognizing the loss as arising from restating foreign currency liabilities at the balance sheet date. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's decision in CIT v. Woodward Governor India (P) Ltd., which allowed such losses as revenue expenditure under Section 37(1).Conclusion:The Tribunal allowed the assessee's appeal on all grounds, recognizing the expenses on software purchase as revenue expenditure, allowing the bad debts written off, restricting disallowance under Section 14A, and allowing the deferred revenue expenditure and provision for foreign exchange loss. The Revenue's appeal was dismissed.