Tribunal Overturns FAA Decisions on Loss Provision & Software Expenditure

The Tribunal partly allowed the appeal for the assessment year 2009-10, directing the First Appellate Authority (FAA) to reconsider certain issues and provide a fair hearing to the assessee. The disallowance of provision for anticipated loss was overturned, with the Tribunal finding the FAA's analysis biased. Additionally, the disallowance of expenditure for purchasing software was reversed, with the Tribunal ruling that the payment was not royalty and therefore not subject to tax. For the assessment year 2010-11, the Tribunal also ruled in favor of the assessee regarding the anticipated loss.

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Issues Involved:
1. Non-adjudication of grounds by the First Appellate Authority (FAA).
2. Disallowance of provision for anticipated loss.
3. Disallowance of expenditure incurred for purchasing software due to non-deduction of tax at source.

Issue-wise Detailed Analysis:

1. Non-adjudication of Grounds by the FAA:
The Authorized Representative (AR) did not press the first ground of appeal, leading to its dismissal. However, it was noted that the FAA did not adjudicate two grounds raised by the assessee: the short grant of credit in respect of tax deducted at source of Rs. 2.73 crores and the addition of Rs. 5.87 lakhs on account of unexplained credit card expenses as per the AIR report. The Tribunal restored these issues to the file of the FAA for fresh adjudication, directing the FAA to afford a reasonable opportunity for hearing to the assessee. Thus, the third and fourth grounds raised by the assessee were decided in its favor, in part.

2. Disallowance of Provision for Anticipated Loss:
The AO disallowed the anticipated loss of Rs. 6.49 crores claimed by the assessee, stating that the losses were uncertain and had not accrued. The FAA upheld the AO's decision, arguing that the assessee failed to meet the conditions of AS-7 and that anticipated losses could not be recognized if the contract was not completed. The Tribunal, however, found that the FAA had not properly analyzed AS-7 and had applied it in a biased manner. The Tribunal cited the case of ITD Cementation India Ltd., which supported the recognition of anticipated losses under AS-7. It was noted that the FAA did not doubt the genuineness of the expenditure but only the year of its allowability. The Tribunal decided this ground in favor of the assessee, directing the AO to recompute the business profits by allowing the losses provided by the assessee in its books.

3. Disallowance of Expenditure Incurred for Purchasing Software:
The AO and the FAA held that the payment made by the assessee for purchasing software was royalty and disallowed the expenses due to non-deduction of tax at source under section 40(a)(ia). The AR contended that the software was purchased for the assessee's own use and was not royalty. The Tribunal referred to the case of Infrasoft Ltd. and other relevant judgments, concluding that the payment for copyrighted software is not royalty and is not chargeable to tax in India. The Tribunal also addressed the retrospective applicability of section 40(a)(ia), referring to the case of Channel Guide India Ltd., and decided this ground in favor of the assessee.

Separate Judgments:
For the assessment year 2010-11, the solitary ground of appeal was about the anticipated loss of Rs. 2.89 crores. Following the decision for the earlier assessment year, the Tribunal decided this ground in favor of the assessee.

Conclusion:
The appeal for the assessment year 2009-10 (ITA/6219/Mum/2014) was partly allowed, and the appeal for the assessment year 2010-11 (ITA/6916/Mum/2014) was allowed. The order was pronounced in the open court on 04th April 2018.

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