2016 (7) TMI 1052 - AT - Income Tax

Tax Appeal Success: Interest subsidy not taxable, expenses disallowed overturned.

Deputy Commissioner of Income-tax, Circle-2, Kolkata Versus M/s. Pricewaterhouse Coopers Pvt. Ltd. and Vica-Versa

The assessee's appeal regarding the taxability of interest subsidy received under the West Bengal Incentive Scheme was allowed, as the subsidy was treated ... Taxability of interest subsidy received - Held that:- Keeping in view the objects of the West Bengal Incentive Scheme 2000 and various judicial precedents relied upon we hold that the interest subsidy is to be treated as capital receipt. Consequentially the assessee need not reduce the same from the cost of the asset for the purpose of claiming depreciation. Disallowance made towards lease rental payment - CIT(A) deleted the addition - Held that:- In the facts and circumstances of the case, we find that the ld CITA had rightly appreciated the alternative argument of the assessee that the lease rentals (net of interest element) would have to be allowed as deduction. We find no infirmity in the order of the ld CITA in this regard. - Decided against revenue Disallowance made towards credit card expenses - CIT(A) deleted the addition - Held that:- The materials available on record including the paper book filed by the assessee in this regard containing the sample copies of credit card bills and invoices vide pages 26 to 43 of paper book together with the complete details of expenses incurred thereon. From the perusal of the said details and the various arguments advanced by the ld AR, we are convinced that the said expenditures were incurred wholly and exclusively for the purpose of business of the assessee as they are related to staff training expenses, continuing education programme expenses, expenses on technoforecast (international journals) and recruitment expenses - Decided against revenue Disallowance made on account of foreign currency loss - CIT(A) deleted the addition - Held that:- We find that the issue is squarely covered by the decision of the Hon’ble Supreme Court in the case of Woodward Governor of India P Ltd vs CIT reported in (2009 (4) TMI 4 - SUPREME COURT ) in favour of the assessee. The revenue was not able to bring any contrary decision in this regard. Disallowance made on account of software expenses - CIT(A) deleted the addition - Held that:- We find that the ld CIT-A had given categorical findings with regard to each and every disallowance made by the ld AO. We also find from the evidences filed in the paper book, the expenditure incurred are only towards licence fees paid on an annual basis / quarterly basis for specific usage of the software for a certain period of time. Hence we find lot of force in the argument of the ld AR that there is no enduring benefit derived by the assessee in the capital field warranting capitalization of the said expenditure. - Decided against revenue Disallowance of bad debts - CIT(A) deleted the addition - Held that:- We find that the revenue had not disputed the fact that the debts were offered to tax as income in the earlier years and some portion of the same debts were treated as irrecoverable and were written off in the books of accounts of the assessee. We find that the issue is squarely covered by the decision of the Hon’ble Supreme Court in the case of TRF Ltd [2010 (2) TMI 211 - SUPREME COURT ] wherein it was held that post 1.4.1989, the assessee is not required to establish that the debt had indeed become bad and deduction shall be granted on write off of the same subject to fulfillment of condition prescribed in section 36(2) of the Act. - Decided against revenue Disallowance on account of write off of service tax - Held that:- We find that the assessee had not even claimed the write off of service tax in its books of accounts by way of charge to profit and loss account. We find that the ld AO had merely made this addition without understanding the accounting treatment of the assessee vis a vis its income tax return. We find that there is no basis for the ld AO for making this addition as the profit and loss account is not at all hit by the said write off of service tax portion. Hence we hold that the ld CITA had rightly deleted the addition.- Decided against revenue Disallowance on account of recruitment expenses - Held that:- We are in complete agreement with the ld AR that no enduring benefit is obtained by the assessee pursuant to incurrence of recruitment expenses paid to recruitment agency for appointing two members for the senior position in the assessee company. The recruitment is an on-going process and does not bring into existence any capital asset. Under these facts and circumstances we do not find any reason to interfere with the order of the ld CITA in this regard in deleting the addition - Decided against revenue. Issues Involved:1. Taxability of interest subsidy received by the assessee.2. Disallowance of lease rental payment.3. Disallowance of credit card expenses.4. Disallowance of foreign currency loss.5. Disallowance of software expenses.6. Disallowance of bad debts.7. Disallowance of write-off of service tax.8. Disallowance of recruitment expenses.Issue-wise Detailed Analysis:1. Taxability of Interest Subsidy:The primary issue in the assessee's appeal was whether the interest subsidy of Rs. 86,90,000 received under the West Bengal Incentive Scheme, 2000 should be treated as a capital receipt or revenue receipt. The assessee argued that the subsidy was for setting up a new unit and should be treated as a capital receipt, citing the purpose test from the Supreme Court's decision in CIT vs Ponni Sugars & Chemicals Ltd (306 ITR 392). The Tribunal agreed with the assessee, holding that the subsidy was intended to accelerate industrial development and should be treated as a capital receipt, not chargeable to tax.2. Disallowance of Lease Rental Payment:The revenue's appeal involved the disallowance of Rs. 38,24,645 towards lease rental payments. The AO had disallowed depreciation on leased cars, but the CIT(A) allowed the lease rentals as a deduction. The Tribunal upheld the CIT(A)'s decision, stating that the alternative argument of the assessee to allow lease rentals (net of interest element) was valid.3. Disallowance of Credit Card Expenses:The AO disallowed Rs. 74,137 incurred through credit card payments, arguing they were not wholly and exclusively for business purposes. The CIT(A) deleted the disallowance after considering the evidence that the expenses were for business-related activities like staff training and seminars. The Tribunal upheld the CIT(A)'s decision, finding the expenses to be business-related.4. Disallowance of Foreign Currency Loss:The AO disallowed a foreign currency loss of Rs. 4,33,760, arguing it should be borne by the associated enterprises. The CIT(A) deleted the disallowance, citing the Supreme Court's decision in Woodward Governor India P Ltd vs CIT (312 ITR 254) that such losses are allowable. The Tribunal upheld the CIT(A)'s decision, finding no contrary evidence from the revenue.5. Disallowance of Software Expenses:The AO disallowed Rs. 48,28,899 as capital costs out of the software expenses claimed by the assessee. The CIT(A) allowed the expenses as revenue expenditure, noting they were for annual or quarterly renewals and did not result in an enduring benefit. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenses were for annual license fees and technical support, not capital in nature.6. Disallowance of Bad Debts:The AO disallowed Rs. 1,36,38,982 claimed as bad debts, arguing the assessee had not proven the debts had become bad. The CIT(A) deleted the disallowance, citing the Supreme Court's decision in TRF Ltd (323 ITR 397) that post-1989, it is sufficient if bad debts are written off in the books of accounts. The Tribunal upheld the CIT(A)'s decision, noting the revenue did not dispute the debts were offered to tax in earlier years.7. Disallowance of Write-off of Service Tax:The AO disallowed Rs. 5,96,525 written off as service tax, arguing the assessee failed to explain the book entries. The CIT(A) deleted the disallowance, noting the write-off did not affect the profit and loss account. The Tribunal upheld the CIT(A)'s decision, finding no basis for the AO's addition.8. Disallowance of Recruitment Expenses:The AO disallowed Rs. 20,51,000 paid to recruitment agencies, arguing it was capital in nature as it resulted in acquiring an enduring human resource asset. The CIT(A) deleted the disallowance, citing various judicial precedents that recruitment expenses are revenue in nature. The Tribunal upheld the CIT(A)'s decision, agreeing that no enduring benefit in the capital field was obtained.Conclusion:- The appeal of the assessee in ITA No. 2033/Kol/2013 for AY 2003-04 is allowed.- The appeals of the revenue in ITA No. 1521/Kol/2013 for AY 2003-04 and ITA No. 1523/Kol/2013 for AY 2005-06 are dismissed.