High Court rules on depreciation & interest expense disallowance under Income Tax Act

The High Court admitted the appeal on the issue of depreciation disallowance for acquiring the software license but dismissed the appeal concerning the disallowance of interest expense. The Court upheld that interest paid for acquiring capital assets is allowable under the Income Tax Act, even if the assets were not put to use in the relevant financial year, in line with the decision in Care Healthcare Ltd.

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Issues:
1. Disallowance of depreciation for acquiring a license of application software.
2. Disallowance of interest expense.

Analysis:
1. The tax appeal under Section 260A of the Income Tax Act, 1961 was filed by the Revenue against the order of the Income Tax Appellate Tribunal. The main issue was the disallowance of depreciation amounting to Rs. 20,58,80,087 for acquiring a license of application software. The Court admitted the appeal with a modification in the question of law proposed by the Revenue to focus on whether the Tribunal erred in upholding the decision of the CIT(A) in deleting the disallowance of depreciation for acquiring the software license.

2. Regarding the second question of disallowance of interest expense of Rs. 28,57,419, the Tribunal relied on the decision of the Supreme Court in the case of Care Healthcare Ltd. The Tribunal concluded that interest paid for borrowings to acquire capital assets is allowable under Section 36(1)(iii) of the Act, even if the assets were not put to use in the relevant financial year. The Tribunal dismissed the appeal on this issue, stating that the interest expenditure is permissible under the law.

3. The Tribunal emphasized that the pre-amended proviso to section 36(1)(iii) of the Act, applicable for the relevant assessment year, did not prohibit the claim of interest on revenue account if the capital borrowed resulted in the acquisition of an asset without extending the existing business. Therefore, the claim of interest expenditure was allowed under the main provision of section 36(1)(iii) of the Act.

4. Based on the legal position and the decision in Care Healthcare Ltd., the Tribunal upheld the claim of the assessee for interest expenditure related to the acquisition of capital assets. The Court agreed with the Tribunal's interpretation and declined to interfere with the order of the CIT(A) on this matter.

5. In conclusion, the High Court admitted the appeal on the issue of depreciation disallowance for acquiring the software license but dismissed the appeal concerning the disallowance of interest expense. The decision was based on the legal interpretation that interest paid for acquiring capital assets is allowable under the Income Tax Act, irrespective of the assets being utilized in the concerned financial year.

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