2022 (11) TMI 304 - AT - Income Tax

Tribunal rules on credit card fees, salary capitalization, and software expenses

The Tribunal partly allowed the assessee's appeal by upholding the deletion of the credit card commission disallowance and treating processing fees and ... TDS u/s 194H - credit card commission under the head ‘commission, brokerage and discounts’ - Addition u/s 40(a)(ia) for non deduction of tds - HELD THAT:- We observe that the similar issue regarding credit card commission has been decided in assessee’s own case in the assessment year 2010-11 [2015 (11) TMI 1880 - ITAT BANGALORE] decided in favour of the assessee as held that such payments were more in the nature of bank charges than in the nature of commission and Section 194H of the Act would not be attracted. - Decided in favour of assessee. Disallowance u/s 14A - HELD THAT:- There is nothing on record to suggest that the assessee has not earned any exempt income for the relevant assessment year. For the limited purpose of examination of the same, the matter is restored to the files of the AO. AO on examination finds that there is no exempt income earned during the relevant assessment year, there shall be no disallowance u/s 14A of the IT Act. The AO shall decide the issue as per law laid down by the Era Infrastructure India Ltd., [2022 (7) TMI 1093 - DELHI HIGH COURT] Nature of expenditure - revenue expenditure claimed by the assessee whereas it is in the nature of capital in nature - assessee could not prove that it is a revenue expenditure - HELD THAT:- We observe that the AO has observed that the assessee itself has capitalized in the financial statements to the expenditure incurred but the assessee has claimed it as a revenue expenditure and the assessee also could not justify that this expenditure is in the nature of revenue expenditure before us. Therefore, the AO has rightly treated it as capital expenditure after observing the submissions of the assessee that the salary paid towards the expansion activities in Hyderabad, the capital expenditiure incurred by the assessee is not allowable u/s 37(1) of the Act. Therefore, we uphold the order of the AO and reverse the order of the CIT(A). Allowability of processing fees and interest paid by the assessee on the loan taken - HELD THAT:- No infirmity in the order of the CIT(A) and this issue is also covered by the judgment of Hon’ble Supreme Court in the case of Vardhman Polytex Ltd. Vs. CIT [2012 (9) TMI 519 - SC ORDER] in favour of the assessee. Therefore, we dismiss this ground of the Revenue. Issues Involved:1. Credit card commission disallowance under Section 40(a)(ia) for non-deduction of TDS.2. Nature of software expenses (revenue vs. capital).3. Allowability of processing fees and interest as revenue expenditure.4. Disallowance under Section 14A for exempt income.5. Treatment of salaries transferred to work in progress.Detailed Analysis:1. Credit Card Commission Disallowance:The assessee argued that the credit card commission should not be subjected to TDS under Section 194H, as it was in the nature of bank charges. The Tribunal noted that a similar issue had been decided in favor of the assessee in the preceding assessment year 2010-11. The Tribunal held that payments to banks for credit card services are more akin to bank charges rather than commission. Consequently, the disallowance under Section 40(a)(ia) was deleted, following the precedent set in the assessee's own case and other judicial decisions.2. Nature of Software Expenses:The assessee did not press this ground during the hearing, and it was dismissed as not pressed.3. Allowability of Processing Fees and Interest:The Revenue contended that the processing fees and interest paid for a loan taken for a new hotel project should be capitalized, as the hotel was not yet operational. The CIT(A) allowed these expenses as revenue expenditure, reasoning that the loans were used for the working capital requirements of the company. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court judgment in Vardhman Polytex Ltd. and other judicial precedents which supported treating such expenses as revenue in nature.4. Disallowance under Section 14A:The AO made a disallowance under Section 14A, despite the assessee claiming no exempt income was earned during the year. The CIT(A) allowed the appeal, holding that no disallowance could be made if no exempt income was earned. The Tribunal remanded the issue back to the AO to verify if any exempt income was earned during the relevant assessment year. If no exempt income was found, no disallowance under Section 14A should be made.5. Treatment of Salaries Transferred to Work in Progress:The AO disallowed the deduction of salaries transferred to work in progress, treating it as capital expenditure. The CIT(A) allowed the appeal, but the Tribunal reversed this decision. It upheld the AO's view that the salaries related to the expansion activities in Hyderabad should be capitalized and not treated as revenue expenditure, as the assessee failed to substantiate its claim with adequate evidence.Conclusion:- The appeal of the assessee was partly allowed, with the Tribunal upholding the deletion of the credit card commission disallowance and the treatment of processing fees and interest as revenue expenditure.- The Tribunal remanded the Section 14A disallowance issue back to the AO for verification.- The Tribunal upheld the AO's decision to capitalize salaries transferred to work in progress, reversing the CIT(A)'s order.- The software expenses issue was dismissed as not pressed.