2021 (4) TMI 457 - AT - Income Tax

Tribunal upholds Assessing Officer's decision on deductions, clarifies criteria for invoking section 263

The Tribunal held that the order passed by the Assessing Officer allowing the deduction for bad debts, software updation charges, and personal use ... Revision u/s 263 - Allowability of claim of bad debts - HELD THAT:- It is an admitted fact that the same has been claimed in respect of investment made in M/s Oro Trade Network India Ltd which has been written off in the books of accounts and not in respect of any regular debtors in respect of which the revenues have been booked on cash basis. Where the said claim has been made and allowed by the Assessing officer during the course of assessment proceedings, we donot find that the order so passed by the AO can be held as erroneous in so far as prejudicial to the interest of Revenue. Software updation charges are recurring charges paid on regular basis for updation of software from time to time and are thus for usage of the software and cannot be held as providing any enduring benefit to the assessee or for that matter, has resulted in creation of any ownership rights over such software and are more in the nature of usage/licence fees for usage of the software and has thus rightly been claimed and allowed as revenue expenditure - it is an admitted position that the assessee has purchased the vehicle only on 15.03.2015 and he has not claimed any interest on auto loan and vehicle maintenance expenses for the impugned assessment year and therefore, the question of disallowance of the same doesn’t arise. In light of the aforesaid discussions, we are of the considered view that there is no basis to hold that the order so passed by the AO is based on mistaken view of law/erroneous application of the provisions of the Act and is erroneous in so far as prejudicial to the interest of the Revenue. The order so passed by the ld Pr CIT is thus set-aside and the order of the AO is restored. Issues Involved:1. Allowability of bad debts under the cash system of accounting.2. Nature of software updation charges as capital or revenue expenditure.3. Disallowance of personal use expenses related to vehicle interest and maintenance.Issue-wise Detailed Analysis:1. Allowability of Bad Debts:The Principal Commissioner of Income Tax (Pr. CIT) observed that the assessee had debited Rs. 1,20,480 on account of bad debts in the Profit and Loss (P&L) account, which was allowed under scrutiny assessment. The Pr. CIT contended that this was not allowable as the assessee maintained books of accounts on a cash system, where income is booked on a receipt basis, thus negating the possibility of bad debts, which are allowable under the mercantile system. The assessee argued that the amount was invested in M/s Oro Trade Network India Ltd. for returns, but the company defrauded its investors, making the amount irrecoverable and justifying its transfer to the bad debts account. The Tribunal held that the claim was made and allowed by the Assessing Officer (AO) during the assessment proceedings, and thus the order passed by the AO could not be deemed erroneous or prejudicial to the interest of the Revenue.2. Nature of Software Updation Charges:The Pr. CIT noted that the assessee had debited Rs. 6,91,000 on account of software upgradation charges in the P&L account, which was allowed under scrutiny assessment. The Pr. CIT argued that these expenses were capital in nature and should have been allowed as depreciation. The assessee clarified that the amount was paid for the updation of internal software and data feeding, which are recurring charges for usage and do not provide any enduring benefit or ownership rights over the software. The Tribunal agreed with the assessee, stating that the software updation charges were rightly claimed and allowed as revenue expenditure, as they were more in the nature of usage/license fees.3. Disallowance of Personal Use Expenses Related to Vehicle Interest and Maintenance:The Pr. CIT pointed out that the AO disallowed 10% of expenses related to conveyance, petrol, and depreciation on the vehicle for personal use but failed to disallow the amount on interest on the auto loan and vehicle maintenance. The assessee argued that the vehicle was used for business purposes, and the interest on the auto loan was not charged to the P&L account for the assessment year 2015-16. The Tribunal noted that the vehicle was purchased on 15.03.2015, and no interest on the auto loan or vehicle maintenance expenses were claimed for the impugned assessment year. Therefore, the question of disallowance did not arise.Conclusion:The Tribunal concluded that the order passed by the AO was not erroneous or prejudicial to the interest of the Revenue. The Tribunal set aside the order of the Pr. CIT and restored the order of the AO, allowing the appeal of the assessee. The Tribunal emphasized that the AO had made necessary inquiries and passed a reasoned order after considering the entire material available on record. The Tribunal also highlighted that the Pr. CIT could not invoke section 263 merely because he disagreed with the conclusion arrived at by the AO, distinguishing between 'lack of inquiry' and 'inadequate inquiry.' The Tribunal reiterated that every loss of revenue could not be treated as prejudicial to the interests of the Revenue unless both conditions of being erroneous and prejudicial were cumulatively satisfied.