Tribunal upholds disallowance of product dev. expenditure as capital; confirms disallowance under section 14A

The Tribunal upheld the disallowance of product development expenditure as capital expenditure, emphasizing the enduring business benefits provided by the acquired software. The decision cited ownership of software as a tangible asset justifying depreciation. Additionally, the Tribunal confirmed the disallowance under section 14A r.w. Rule 8D(2)(iii) for the assessment years 2009-10 and 2010-11, based on the application of Rule 8D(2)(ii) to dividends received from foreign subsidiary companies. The appeals of the assessee were dismissed, and the orders were pronounced on July 15, 2016, in Chennai.

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Issues:
1. Disallowance of product development expenditure as capital expenditure.
2. Disallowance made under section 14A r.w. Rule 8D(2)(iii) for the assessment years 2009-10 and 2010-11.

Analysis:
1. The first issue pertains to the disallowance of product development expenditure as capital expenditure. The Tribunal considered the previous case of the assessee for assessment years 2006-07, 2007-08, and 2008-09 where a similar issue was discussed. The Assessing Officer treated the expenditure as capital expenditure, allowing 15% depreciation, citing enduring benefit to the assessee. The Tribunal upheld this decision, emphasizing that the acquired software provided enduring business benefits, making the expenditure capital in nature. The Tribunal referred to the decision in the case of Tata Consultancy Services v. State of Andhra Pradesh, highlighting the ownership of software as a tangible asset justifying depreciation. Consequently, the Tribunal dismissed the appeal and confirmed the capital nature of the expenditure.

2. The second issue concerns the disallowance made under section 14A r.w. Rule 8D(2)(iii) for the assessment years 2009-10 and 2010-11. The CIT(A) confirmed the disallowance based on Rule 8D(2)(ii), stating that no interest expenditure directly related to exempt income. Although the interest payments were not from interest-bearing loans used for investments, the CIT(A) applied Rule 8D(2)(ii) to a portion of the dividends received from foreign subsidiary companies. The Tribunal agreed with the CIT(A), holding that Rule 8D(2)(iii) was applicable, and the assessee failed to demonstrate its inapplicability. Consequently, the Tribunal upheld the CIT(A)'s decision, dismissing the appeals of the assessee.

In conclusion, the Tribunal affirmed the disallowance of product development expenditure as capital expenditure and the application of Rule 8D(2)(iii) for the disallowance made under section 14A for the relevant assessment years. The appeals of the assessee were dismissed, and the orders were pronounced on July 15, 2016, in Chennai.

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