Tribunal upholds software depreciation, rent allowance, and interest deduction decisions. Assessee prevails.

The Tribunal dismissed the Revenue's appeal and affirmed the CIT(A)'s decision to allow 60% depreciation on special software. The Tribunal also set aside the CIT(A)'s order disallowing rent equalization reserve and directed the Assessing Officer to allow the deduction. Additionally, the Tribunal upheld the CIT(A)'s decision to allow interest expenditure under Section 36(1)(iii), rejecting the Revenue's arguments. As a result, the assessee's appeal was allowed, and the Revenue's appeals for AY 2010-11, 2011-12, and 2012-13 were dismissed.

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Issues Involved:

1. Depreciation on special software.
2. Disallowance of rent equalization reserve.
3. Allowability of interest expenditure under Section 36(1)(iii).

Issue-wise Detailed Analysis:

1. Depreciation on Special Software:

The Revenue challenged the CIT(A)’s decision to allow depreciation at 60% on special software, arguing it should be 25% as it qualifies as an intangible asset. The Assessing Officer had reclassified the software as a 'license' under Section 32(1)(ii), reducing the depreciation rate to 25%. The CIT(A) followed precedent from the jurisdictional Tribunal in the case of ACIT vs. Voltamp Transformer Ltd., allowing 60% depreciation. The Tribunal referenced similar cases, including M/s. Navneet Publications (I) Ltd. vs. Addl. CIT and ACIT vs. Zydus Infrastructure (P.) Ltd., which upheld 60% depreciation for licensed software. Consequently, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)’s decision.

2. Disallowance of Rent Equalization Reserve:

The assessee contested the CIT(A)’s confirmation of the Assessing Officer’s disallowance of Rs. 41,69,148/- for rent equalization reserve, deemed a mere provision. The assessee argued that the provision was made per the ICAI's Guidance Note on ‘Accounting for Leases’ and should be deductible. The Tribunal referred to the Supreme Court’s decision in CIT vs. Virtual Soft Systems Ltd., which validated the bifurcation of lease rent as per ICAI guidelines. The Tribunal found merit in the assessee's argument, set aside the CIT(A)’s order, and directed the Assessing Officer to allow the deduction.

3. Allowability of Interest Expenditure under Section 36(1)(iii):

The Revenue disputed the CIT(A)’s decision to allow Rs. 28,57,416/- as interest expenditure under Section 36(1)(iii), citing a pre-amendment proviso. The CIT(A) referenced the DRP’s decision in a similar case (Vodafone West Ltd.) and the Supreme Court’s ruling in Core Healthcare Ltd., which allowed interest on borrowings for capital assets as deductible, irrespective of asset utilization within the fiscal year. The Tribunal upheld the CIT(A)’s decision, noting that the pre-amended proviso did not apply as the capital was not borrowed for business extension. The Tribunal cited the Supreme Court’s ruling in Vardhman Polytex Ltd. vs. CIT, affirming the deduction of interest expenditure under Section 36(1)(iii).

Combined Result:

- The assessee’s appeal was allowed.
- The Revenue’s appeals for AY 2010-11, 2011-12, and 2012-13 were dismissed.

Order Pronouncement:

This order was pronounced in Open Court on 28/05/2019.

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