Primary evidence defeats presumption in tax adjustments: ad hoc expense disallowance and interest capitalisation were deleted, while software charges were remanded.

Primary evidence cannot be displaced by presumption: software charges tied to recurring maintenance and usage were remitted for fresh examination because the record showed relevant agreements, invoices and allocation details, although some factual gaps remained. Ad hoc disallowance of travelling, conveyance and legal/professional es was unsustainable where additional invoices were verified and no specific defect was shown, so the addition was deleted. Interest expenditure also could not be capitalised as work-in-progress cost absent evidence that borrowed funds were diverted to capital work; the disallowance was deleted. The appeal was thus allowed in part, with statistical relief on the remanded software issue.

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Issues: (i) Whether software charges relating to recurring maintenance and usage were capital in nature or required fresh examination; (ii) Whether ad hoc disallowance of travelling and conveyance expenses and legal and professional fees was justified; (iii) Whether interest expenditure was liable to be capitalised as attributable to capital work in progress.

Issue (i): Whether software charges relating to recurring maintenance and usage were capital in nature or required fresh examination.

Analysis: The record showed a distinction between specific software acquisition/development costs and recurrent service charges under the information systems arrangement. The material filed before the lower authorities included the service agreement, invoices, allocation details and software licence information. The finding that no description or supporting material had been furnished was contrary to the record, while the view that the software must necessarily have enduring life was based on presumption rather than a proper appreciation of the evidence. At the same time, the supporting auditor certificate did not cover the relevant previous year and some invoices pre-dated the service agreement, leaving factual gaps in the claim.

Conclusion: The issue was sent back for de novo adjudication and the assessee obtained only statistical relief.

Issue (ii): Whether ad hoc disallowance of travelling and conveyance expenses and legal and professional fees was justified.

Analysis: Additional evidence in the form of invoices was produced and verified in remand proceedings on a test-check basis, with no specific infirmity pointed out in those documents. The disallowance was sustained mainly because party-wise segregation and a fuller co-relation of expenditure with the accounts were not furnished. The evidence on record established incurrence of the expenditure, and the disallowance was made only on an ad hoc basis without demonstrating any actual defect in the claim.

Conclusion: The disallowance was deleted and the assessee succeeded on this issue.

Issue (iii): Whether interest expenditure was liable to be capitalised as attributable to capital work in progress.

Analysis: The assessee produced the working capital facility agreements and the interest ledger, showing that the borrowings were for working capital requirements. The revenue did not show any material to establish diversion of the borrowed funds to capital work in progress, and the disallowance rested on a bare presumption that both borrowed and own funds had been used for the capital asset. In the absence of evidence of such diversion, the presumption could not be sustained.

Conclusion: The disallowance of interest was deleted and the assessee succeeded on this issue.

Final Conclusion: The appeal was allowed in part, with one issue restored for fresh examination and the remaining contested additions deleted.

Ratio Decidendi: An addition or capitalisation cannot rest on presumption when the assessee has produced primary evidence supporting the claim, and ad hoc disallowance is unsustainable where no specific defect in the evidence or any diversion of funds is shown.

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