2016 (3) TMI 872 - AT - Income Tax

Tribunal grants assessee's appeals, allows 50% depreciation on Iris Cameras, deletes franchisee fees disallowance.

Krishna Infotech, Hyderabad Versus DCIT, Circle-1, Rajahmundry

The Tribunal allowed the appeals filed by the assessee for both assessment years, directing the Assessing Officer to allow depreciation on Iris Cameras at ... Disallowance of excess depreciation claimed on Iris Cameras - Held that:- The Iris recognition system, the software to be used for the purpose and the grabber card are supplied by the Government for the use of Iris recognition system to be used only for the purpose of issue of various types of ration cards. The assessee categorically stated that this camera cannot be used in normal course of business and it can be used only for the specified purpose of capturing Iris. The assessee taken this contract for the first time and after completion of the project he did not enter into any other contract of similar type. The cameras become obsolete once the work is over. We find force in the argument of the assessee for the reason that on perusal of details, we find that the assessee has used this cameras supplied by the principals for the specified purpose of execution of its work contract. As per the agreement, the software used for capturing Iris should be returned to the principals. Therefore, we are of the opinion that the Iris camera without the aid of software is obsolete and it cannot be used in the normal course of business. The assessee has rightly claimed 50% depreciation over a period of two years. Hence, we direct the A.O. to allow the depreciation as claimed by the assessee. - Decided in favour of assessee TDS u/s 194J - disallowance of franchisee fees u/s 40(a)(ia) on non TDS - A.O. was of the opinion that the payment of franchisee fees is in the nature of technical fees - CIT(A) held that the assessee was right in not deducting TDS as the payment was not made during the relevant financial year, however, held that the amount is not allowable u/s 37 of the Act, as the subject payment was not pertaining to the financial year under consideration - Held that:- The assessee filed a paper book containing the copy of agreement entered into with the Software echnology Group of India Limited, wherein find that the agreement was entered on 18.4.1999 and ended on 17.4.2005. As per clause 3.9 of the agreement, it was specifically mentioned that the date of termination of the agreement is 17.4.2005. We further noticed that the clause 7 of agreement provides for termination of agreement. As per clause 8 of the agreement, it was specifically mentioned that the date of termination of the agreement is as per clause 3.9 of the agreement i.e. on 17.4.2005. Therefore, we are of the opinion that the CIT(A) was recorded incorrect findings of the facts to state that the agreement was terminated on 17.4.2006 and hence the impugned amount was not eligible for deduction for the year under consideration. the fact clearly shows that the assessee debited the impugned amount during the previous year relevant to assessment year 2006-07. Though the subject payment was made in the financial year 1999-2000, the assessee charged the amount to the P&L account during the financial year 2006-07, since the agreement was terminated and business was closed during the financial year 2005-06 relevant to assessment year 2006-07. Though, the expenditure has been paid in earlier years and considered as prior period expenditure, still it can be claimed as expenditure deductible for the year under consideration as long as it was incurred for business purpose. When the prior period expenditure/liability claimed as business expenditure for the relevant assessment year, the point to be considered is whether the claim was ascertained and crystallized during the year under consideration or not. In the present case on hand, the assessee proved that the subject agreement was terminated during the financial year 2005-06 and he has not claimed the expenditure in earlier years. Therefore, we are of the opinion that the CIT(A) was not correct in disallowed the franchisee fees u/s 37 of the Act. - Decided in favour of assessee Issues Involved:1. Disallowance of excess depreciation claimed on Iris Cameras.2. Disallowance of franchisee fees under section 40(a)(ia) of the Income Tax Act.Issue-wise Detailed Analysis:1. Disallowance of Excess Depreciation Claimed on Iris Cameras:The primary issue is whether the CIT(A) was correct in confirming the disallowance of excess depreciation claimed by the assessee on Iris Cameras. The assessee claimed depreciation at 50% on Iris Cameras, considering them as sophisticated equipment used for a specific purpose under a contract with the District Collector, Government of Andhra Pradesh. The assessee argued that these cameras, used for capturing Iris images for photo ID ration cards, would become obsolete after the contract period as they cannot be used for any other purpose.The Assessing Officer (A.O.) contended that the Iris Cameras were akin to normal digital cameras and eligible for only 15% depreciation under the general block of plant and machinery. The CIT(A) upheld the A.O.'s view, stating that the Iris Cameras were hardware components similar to digital cameras.Upon review, the Tribunal found that the Iris Cameras were indeed sophisticated equipment that required specific software to function, which had to be returned after the contract. The Tribunal concluded that without the software, the Iris Cameras would be obsolete and could not be used for any other purpose. Therefore, the Tribunal directed the A.O. to allow the depreciation at 50% as claimed by the assessee, recognizing the unique and limited use of the Iris Cameras.2. Disallowance of Franchisee Fees Under Section 40(a)(ia) of the Income Tax Act:The second issue concerns the disallowance of franchisee fees amounting to Rs. 4,49,990/- under section 40(a)(ia) of the Act due to non-deduction of TDS. The A.O. treated the franchisee fees as fees for technical services, which required TDS under section 194J. Since the assessee did not deduct TDS, the A.O. disallowed the amount.The CIT(A) found that the payment of franchisee fees was made in the financial year 1999-2000 and not during the relevant financial year. Thus, there was no liability for TDS in the assessment year 2006-07. However, the CIT(A) disallowed the franchisee fees under section 37, arguing that the expense was not justified in the subject previous year as the franchise agreement had terminated.The Tribunal reviewed the agreement and found that the franchise agreement terminated on 17.4.2005, not 17.4.2006 as recorded by the CIT(A). The Tribunal noted that the franchisee fees were incurred for the business purpose and were charged to the profit & loss account upon termination of the agreement in the financial year 2005-06. The Tribunal emphasized that section 37 allows for general deductions if the expenditure is incurred exclusively for business purposes, regardless of when the payment was made. Consequently, the Tribunal directed the A.O. to delete the disallowance of franchisee fees, recognizing the expense as legitimate and incurred for business purposes.Conclusion:The Tribunal allowed the appeals filed by the assessee for both assessment years, directing the A.O. to:1. Allow the depreciation on Iris Cameras at 50% as claimed by the assessee.2. Delete the disallowance of franchisee fees under section 40(a)(ia) and recognize the expense under section 37 of the Act.Pronouncement:The above order was pronounced in the open court on 19th February 2016.