2019 (2) TMI 37 - AT - Income Tax

Tribunal dismisses additional disallowance, allows depreciation on sheds, software, and fees

The Tribunal dismissed the grounds related to additional disallowance under Section 14A and depreciation on electrical fittings. It allowed the grounds ... Disallowance u/s 14A read with Rule 8D - Held that:- Except for investment made in a trading field, there is no question of any exclusion while calculating the disallowance u/s.14A of the Act. It is not disputed that none of the investments of the assessee were held as stock in trade. Accordingly, we are of the opinion that lower authorities were justified in making a disallowance u/s.14A of the Act read with rule 8D(2) (iii) of the Rules. Especially so, since ld. Assessing Officer had clearly stated the reasons why he was not satisfied with the suo-motu disallowance made by the assessee. Claim of depreciation on temporary sheds which was restricted to 10% - Held that:- It is not disputed that the sheds were made by using steel pipes and iron meshes. Such structures which are built in open space are susceptible to very fast corrosion. Especially so, in a sea side area like Chennai. We cannot say that such structure is having an enduring nature. We are of the opinion that assessee was eligible to claim 100% depreciation on such structures. We set aside the orders of the lower authorities and allow the claim of the assessee for 100% depreciation on such temporary sheds built by using steel pipes and iron meshes. Ground No.2 of the assessee for all the years stands allowed. Restriction of depreciation claimed on electrical fittings - eligible for 15% depreciation or 10% - Held that:- It is not disputed that electrical fittings if considered as part of building is eligible for only 10% depreciation. Claim of the assessee is that these fittings were to be considered as part of plant and machinery. However nothing has been brought on record to show that electrical wiring, switches, sockets, other fittings were part of any plant and machinery. Accordingly, we are of the opinion that lower authorities were justified in restricting the depreciation to 10%. Restriction of the claim of depreciation on software - @25% or 60% - Held that:- What we find from the above description is that all these were nothing but items in the nature software or software applications. Entry No.5 coming in III of Part A in New Appendix I clearly says that computer included computer software. Note 7 of the Appendix, defines computer software as any computer programme recorded in any information storage device. We are therefore of the opinion that assessee was eligible to claim depreciation at the rate of 60% on the above items. Orders of the lower authorities on this issue are set aside and the claim is allowed. Ground No.4 of the assessee stands allowed. Disallowance of payment of non-compete fees - Held that:- We cannot say that assessee derived any enduring benefit due to the above payment effected by it for obtaining certain commitments from Shri V. Shankar and restricting himself from indulging in any competition with the business of the assessee or from weaning way the employees. We are of the opinion that non compete fee was a revenue expenditure, and had to be allowed in one go, irrespective of the method of accounting adopted by the assessee. Accordingly, we set aside the orders of the lower authorities and allow the claim of the assessee. Issues Involved:1. Additional disallowance under Section 14A read with Rule 8D.2. Depreciation on temporary shed.3. Depreciation on electrical fittings.4. Depreciation on software licenses.5. Disallowance of payment of non-compete fees.Issue-Wise Detailed Analysis:1. Additional disallowance under Section 14A read with Rule 8D:The assessee claimed exempt income and made suo-motu disallowances under Section 14A for the respective assessment years. The Assessing Officer (AO) was not satisfied with the basis of these disallowances and applied Rule 8D, resulting in further disallowances. The assessee argued that investments in mutual funds and subsidiaries, which did not yield exempt income, should be excluded. However, the Tribunal referred to the Supreme Court judgment in Maxopp Investment Ltd. vs. CIT, which held that the dominant purpose of investment is irrelevant, and the principle of apportionment applies. The Tribunal upheld the AO’s disallowance, stating the assessee did not maintain separate accounts for investment-related expenses and did not provide a basis for suo-motu disallowances. Thus, the ground was dismissed.2. Depreciation on temporary shed:The assessee claimed 100% depreciation on temporary sheds made of steel pipes and iron meshes, which the AO restricted to 10%, viewing them as permanent structures. The Tribunal found that such structures, especially in a seaside area like Chennai, are susceptible to fast corrosion and do not have an enduring nature. Therefore, the Tribunal allowed 100% depreciation, setting aside the lower authorities' orders.3. Depreciation on electrical fittings:The assessee claimed 15% depreciation on electrical fittings, arguing they should be classified under plant and machinery. The AO and CIT(A) classified them under the block of Furniture and fittings, allowing only 10% depreciation. The Tribunal upheld this classification, as the assessee did not provide evidence showing the fittings were part of plant and machinery. Thus, the ground was dismissed.4. Depreciation on software licenses:The AO restricted depreciation on software licenses to 25%, treating them as intangible assets, while the assessee claimed 60% depreciation, treating them as computer software. The Tribunal found that the items in question were software or software applications, which fall under the definition of computer software as per New Appendix I of the Income Tax Rules. Therefore, the Tribunal allowed 60% depreciation, setting aside the lower authorities' orders.5. Disallowance of payment of non-compete fees:The assessee paid non-compete fees to restrict a competitor for eighteen months and claimed it as revenue expenditure. The AO and CIT(A) treated it as capital expenditure, providing an enduring benefit. The Tribunal referred to the Madras High Court judgment in Asianet Communications Ltd vs. CIT, which held that non-compete fees do not create a new business or profit-making apparatus and should be treated as revenue expenditure. Therefore, the Tribunal allowed the non-compete fees as revenue expenditure, setting aside the lower authorities' orders.Conclusion:The Tribunal dismissed the grounds related to additional disallowance under Section 14A and depreciation on electrical fittings. It allowed the grounds related to depreciation on temporary sheds, software licenses, and non-compete fees, thereby partly allowing the appeals of the assessee for all the assessment years.