2022 (7) TMI 154 - AT - Income Tax

Tribunal directs reassessment of depreciation and software expenses, allows education cess deduction.

The Tribunal partially allowed the appeal, directing the Assessing Officer to reexamine the disallowed depreciation for computer equipment and software ... Disallowance of depreciation u/s 32 of block of computer equipment - HELD THAT:- CIT(A) called for a remand report from the A.O. and the A.O. in the remand report stated that the invoices were not produced and conveyed his objections for allowing the claim of depreciation. The A.O., however, in the remand report stated that there is no objection for allowing depreciation on actual amount of invoices furnished and the CIT(A) may decide the issue based on the records available. The CIT(A) rejected the appeal of the assessee for the reason that the invoices produced are not legible. The legible copies of all the invoices in relation to the additions made to the computer equipments are placed on record - Therefore, in the interest of justice and equity, we are of the view that the matter needs to be verified by the A.O. afresh. Hence, the issue raised as regards to the disallowance of depreciation on addition made on block of computer equipments is restored to the files of the A.O. The A.O. is directed to examine the invoices in respect of Rs.6,18,80,241 and if found in order, the A.O. is directed to grant depreciation on the same. It is ordered accordingly. Disallowance of software development expenses - Allowable business expenditure or not? - HELD THAT:- CIT-A without appreciating the business model of the assessee, held that the same software and same testing may not be done every year. It was further held by the CIT(A) that the assessee may test different software in different years and once developed, tested and customized according to a country specification will give an enduring benefit to the assessee. Accordingly, the CIT(A) held that the expenditure incurred on the software development is capital expenditure - CIT(A) failed to appreciate that the assessee does not test on a single software during the entire year. Further, a software is not customized and deployed on the electronic products and a new product is launched every year and the same is a continuous activity. Since the CIT(A) has not understood the business model of the assessee, it is necessary that the matter needs to be examined afresh by the A.O. Accordingly, the issue raised in ground 2 is restored to the files of the A.O. The A.O. is directed to examine the expenditure incurred and come to a conclusion whether it is a capital or revenue expenditure. The A.O. shall afford a reasonable opportunity of hearing to the assessee before a decision is taken in this matter. It is ordered accordingly. Deduction of education cess on Income Tax and Secondary and Higher education cess on Income Tax - HELD THAT:-The Mumbai Bench of the Tribunal in the case of Voltas Limited [2020 (7) TMI 125 - ITAT MUMBAI] had admitted additional ground of appeal with regard to the claim of education cess and adjudicated the matter in favour of the assessee, by following the judgment of the Hon’ble Bombay High Court in the case of Sesa Goa Limited [2020 (3) TMI 347 - BOMBAY HIGH COURT]v - In the light of the aforesaid judicial pronouncements, we hold that education cess is to be allowed as deduction. It is ordered accordingly. Issues Involved:1. Disallowance of depreciation under the Income Tax Act.2. Disallowance of software development expenses.3. Deduction of education cess on income-tax and secondary and higher education cess on income-tax.Issue-wise Detailed Analysis:1. Disallowance of Depreciation under the Income Tax Act:The assessee claimed depreciation on fixed assets amounting to Rs. 12,28,67,305, including Rs. 3,62,98,140 for additions to the block of computer equipment. The Assessing Officer (AO) disallowed the entire depreciation due to lack of supporting documents. Upon rectification, the AO allowed Rs. 8,65,69,165 but omitted Rs. 3,62,98,140 for computer equipment. The CIT(A) upheld the disallowance, citing unclear and illegible invoices. The Tribunal noted that the assessment was taken up at the fag end of the period, and the assessee was not given proper hearing opportunities. The Tribunal restored the issue to the AO for fresh examination of the invoices and directed to grant depreciation if the invoices are found in order.2. Disallowance of Software Development Expenses:The assessee incurred Rs. 2,05,05,279 as software development expenses and claimed it as revenue expenditure. The AO disallowed the claim, stating no explanation was provided. The CIT(A) treated the expenses as capital expenditure, providing enduring benefit, and directed the AO to allow depreciation. The Tribunal noted that the expenses represented testing charges and other costs related to various projects, which become redundant post-project. The Tribunal restored the issue to the AO for fresh examination to determine whether the expenses are capital or revenue in nature.3. Deduction of Education Cess on Income Tax and Secondary and Higher Education Cess on Income Tax:The assessee sought deduction for education cess amounting to Rs. 34,72,811, which was omitted in the return of income. The Tribunal admitted the additional ground, noting it as a pure legal issue. The Tribunal referred to the Bombay High Court judgment in Sesa Goa Limited v. JCIT, which held education cess as an allowable expenditure since the term 'cess' is absent under section 40(a)(ii) of the I.T. Act. The Tribunal also cited the Rajasthan High Court and Mumbai Bench of the Tribunal decisions supporting the deduction of education cess. Consequently, the Tribunal allowed the deduction of education cess.Conclusion:The Tribunal partly allowed the appeal for statistical purposes, directing fresh examination of the depreciation and software development expenses by the AO and allowing the deduction of education cess based on judicial precedents.