2016 (11) TMI 254 - AT - Income Tax

ITAT overturns disallowances, emphasizes expense substantiation

Binary Semantics Ltd. Versus ITO Ward 3 (3), New Delhi

The ITAT allowed the appeal, overturning the disallowances related to expenses incurred at the Software Technology Park of India and the purchase of ... Allowability of charges paid to Software Technology Park of India, Noida - prior period expenditure - applicability of sec 35D - Held that:- The annual charges of STPI were ₹ 4 lacs which were claimed in four equal quarterly installments. There was some dispute of ₹ 3 Lacs charges of earlier year which were also settled/paid in current year. ₹ 1 lac paid on 13.07.2002, paid on 14.08.2002 and payable as on 31.03.2003 is the charges for the FY 2002-03 i.e. previous year in question hence expenses for current year only not registration or prior period expenses. ₹ 1 lac paid on 15.04.2002, ₹ 1 lac on 15.05.2002 and ₹ 1 lac paid on 25.07.2002 are for the FY 2001- 02. These were pending and not expended in earlier years as there was some dispute between assessee & STPI, which was resolved in current year and payment and expenses booked. Since it was settled in current year and crystallized in current year, it is expended in current year by the assessee. The said payments are in cheque and there is no necessity for further verification of the same. The service charges charged by STPI are routine in nature & every software exporter has to pay to STPI. It does not attract provisions of Section 35D of the Act. Bogus purchase of certain software - Held that:- The purchase of the software from the Gigaware Software Solutions for ₹ 3,35,625/-, the Ld. AR submitted its bank statements to that extent before the Assessing Officer. Thus the finding recorded by the CIT(A) that the bank account was not produced is incorrect. It is noted that the assessee has produced the relevant documents at the time of the Assessment proceedings. Thus the finding given by the CIT(A) as well as by the Assessing Officer that the relevant documents were not produced is incorrect. Issues:1. Disallowance of expenses related to Software Technology Park of India.2. Disallowance of expenses for purchase of software from Gigaware Software Solutions.Analysis:1. The appellant challenged the disallowance of expenses related to Software Technology Park of India (STPI). The Assessing Officer disallowed &8377; 5,60,000 for registration charges, citing Section 35D of the Income Tax Act, 1961. The CIT(A) upheld the disallowance, stating lack of evidence for expenses pertaining to the assessment year. The appellant failed to prove the expenses were for the relevant year, leading to the denial of the deduction. However, the appellant argued that the charges were routine and not registration fees for a new business. The ITAT observed that the expenses were settled in the current year and should be expensed accordingly, contrary to the findings of the lower authorities. The ITAT allowed the appeal, emphasizing the routine nature of the charges and the lack of necessity for further verification.2. The second issue involved the disallowance of expenses for software purchased from Gigaware Software Solutions. The Assessing Officer treated the outstanding balance as deemed income under Section 41(1) due to lack of documentation. The CIT(A) confirmed this disallowance, noting the absence of confirmation from Gigaware Software Solutions. The appellant argued that bank statements were submitted as evidence during assessment proceedings, contrary to the lower authorities' findings. The ITAT found the appellant had indeed produced relevant documents, contradicting the CIT(A) and the Assessing Officer's conclusions. Consequently, the ITAT allowed the appeal, recognizing the appellant's submission of bank statements as evidence.In conclusion, the ITAT allowed the appeal, overturning the disallowances related to expenses incurred at the Software Technology Park of India and the purchase of software from Gigaware Software Solutions. The judgment highlighted the importance of substantiating expenses with proper documentation and upheld the appellant's position based on the evidence presented during the assessment proceedings.