2015 (8) TMI 976 - AT - Income Tax

Revenue appeals dismissed, assessee appeal allowed. Tribunal upholds CIT decisions on expenditure nature.

The appeals by the Revenue were dismissed, and the appeal by the assessee was allowed. The Tribunal upheld the CIT(Appeals) decisions on all issues, ... Website development expenditure - Revenue v/s capital expenditure - Held that:- Undisputedly the Assessing Officer while treating the claimed Revenue expenditure as capital in nature has not examined properly as to whether the expenditure brought into existence any asset/s, or the usage period of the expenditure is of enduring nature. In absence of such verification by the Assessing Officer, we fully concur with the finding of the Learned CIT(Appeals) that the Assessing Officer was not justified in denying the claimed expenditure incurred on software/website development as Revenue expenditure. - Decided against revenue. Legal and professional consultancy expenditure - Revenue v/s capital expenditure - Held that:- This expenditure was held to be capital in nature by the Assessing Officer on the ground that the said expenditure was for development of website and the expenditure was of enduring nature. The submission of the assessee on the other hand remained that the expenditure was not for new project nor of enduring nature and it was incurred for the services rendered by the major consultant on day to day basis. In absence of rebuttal of these submissions of the assessee by the department, we are of the view that the Learned CIT(Appeals) has rightly treated the claimed expenditure as Revenue in nature on the basis that the Assessing Officer has treated the same as capital in nature without examining the material aspects of the claim as to whether the expenditure brought into existence any asset/s or the used period of the expenditure. - Decided against revenue. Computer repair/maintenance expenditure - Revenue v/s capital expenditure - Held that:-CIT(Appeals) has rightly deleted the disallowance with this finding that expenditure incurred on computer repair/maintenance are revenue in nature. The same is upheld.- Decided against revenue. Disallowance of deduction claimed u/s 36(1)(vii) on account of bad debts written off - CIT(A) deleted addition - Held that:- CIT(Appeals) has allowed the claimed deduction with this finding that after calling for the details required, if the Assessing Officer was satisfied that the amounts in question were offered for taxation in the earlier years and the accounts of the debtors were written off as claimed by the AR, no disallowance was called for. See TRF Ltd. vs. CIT (2010 (2) TMI 211 - SUPREME COURT) & Vijaya Bank vs. CIT [2010 (4) TMI 46 - SUPREME COURT ]. Under the facts, the issue is covered in favour of the assessee Disallowance of expenditure incurred on subscription fees paid to Internet Online Association - CIT(A) deleted addition - Held that:- The amount in question has been paid to Internet & Online Association Professional for subscription of web portal. Considering the nature of the business of the assessee, we are of the view that the Learned CIT(Appeals) has rightly treated the nature of the claimed expenditure as Revenue and has accordingly deleted the disallowance made by the Assessing Officer - Decided in favour of the assessee Disallowance of expenditure on marketing rights - holding the same to be prior period expenditure, hence, not allowable in the present year - Held that:- The authorities below have not disputed the genuineness of the above expenditure and their only finding is that the said expenditure pertains to previous assessment year i. E. 2004-05. We are of the view that when tax rate for the assessment years 2004-05 and 2005-06 is the same, the approach of the authorities below on the issue is not appreciable and it is also contrary to the established position of the law that year of crystallization of the liability is more important for the purpose of assessment of income in that year. We thus while setting aside the orders of the authorities below direct the Assessing Officer to allow the claimed expenditure during the year. - Decided in favour of the assessee Issues Involved:1. Whether the expenditure on website development should be treated as Revenue or capital expenditure.2. Whether the expenditure on legal and professional/consultancy should be treated as Revenue or capital expenditure.3. Whether the expenditure on computer repair/maintenance should be treated as Revenue or capital expenditure.4. Whether the deduction claimed under sec. 36(1)(vii) of the Act on account of bad debts written off was justified.5. Whether the expenditure on subscription fees paid to Internet Online Association should be treated as Revenue or capital expenditure.6. Whether the disallowance of expenditure on marketing rights as prior period expenditure was justified.Detailed Analysis:Issue No. 1: Expenditure on Website DevelopmentThe assessee claimed Rs. 81,43,440 in AY 2004-05 and Rs. 1,00,69,946 in AY 2005-06 as revenue expenditure on website development. The Assessing Officer (AO) treated this expenditure as capital in nature, but the CIT(Appeals) agreed with the assessee and allowed it as revenue expenditure. The CIT(Appeals) found that the expenditure was incurred to update the website and was not of a permanent character. The expenditure was necessary to keep the services operational and to keep pace with technological developments. The CIT(Appeals) relied on several precedents, including CIT vs. India Visit. Com (P) Ltd. and CIT vs. Varinder Agro Chemicals Ltd., which supported the treatment of such expenditure as revenue in nature. The Tribunal upheld the CIT(Appeals) decision, emphasizing that the AO had not properly examined whether the expenditure brought into existence any asset or had an enduring benefit.Issue No. 2: Expenditure on Legal and Professional/ConsultancyThe AO disallowed Rs. 1,25,14,127 in AY 2004-05 and Rs. 44,43,704 in AY 2005-06, treating them as capital expenditure. The CIT(Appeals) found that the expenditure was for day-to-day services rendered by consultants and was not for a new project or of enduring nature. The Tribunal upheld the CIT(Appeals) decision, noting that the AO had not examined whether the expenditure brought into existence any asset or had an enduring benefit.Issue No. 3: Expenditure on Computer Repair/MaintenanceThe AO disallowed Rs. 74,74,316 in AY 2004-05 and Rs. 23,39,424 in AY 2005-06, treating them as capital expenditure. The CIT(Appeals) allowed these expenditures as revenue in nature. The Tribunal upheld the CIT(Appeals) decision, relying on the same rationale and precedents cited in Issue No. 1.Issue No. 4: Deduction on Account of Bad Debts Written OffThe AO disallowed the deduction under sec. 36(1)(vii) of the Act, citing insufficient details. The CIT(Appeals) allowed the deduction, noting that the necessary details were provided, and the amounts were written off as irrecoverable in the accounts. The Tribunal upheld the CIT(Appeals) decision, citing precedents such as TRF Ltd. vs. CIT and Vijaya Bank vs. CIT, which support the allowance of bad debts written off in the accounts.Issue No. 5: Expenditure on Subscription Fees to Internet Online AssociationThe AO disallowed Rs. 10 lacs, treating it as capital expenditure. The CIT(Appeals) allowed it as revenue expenditure, noting that it was related to the business operations of the assessee. The Tribunal upheld the CIT(Appeals) decision, considering the nature of the business and the necessity of the expenditure for ongoing operations.Issue No. 6: Disallowance of Expenditure on Marketing Rights as Prior Period ExpenditureThe CIT(Appeals) upheld the AO's disallowance of Rs. 1,00,48,790 as prior period expenditure. The assessee argued that the expenditure was incurred in the current year and should be allowed. The Tribunal found that the expenditure was genuine and related to the current year, noting that the tax rate was the same for both years. The Tribunal directed the AO to allow the expenditure in the current year, citing precedents such as Bharat Earth Movers vs. CIT and Sourasthra Cement Ltd. vs. CIT.Summary:The appeals preferred by the Revenue were dismissed, and the appeal preferred by the assessee was allowed. The Tribunal upheld the CIT(Appeals) decisions on all issues, emphasizing the necessity of proper examination of the nature of expenditures and the established legal precedents supporting the treatment of such expenditures as revenue in nature.