2024 (5) TMI 1544 - AT - Income Tax

ITAT allows depreciation on software development expenditure, confirms vehicle depreciation rates, upholds indexation benefits for government securities

M/s. Sundaram Finance Ltd. Versus DCIT, Large Taxpayer Unit-1, Chennai.

ITAT Chennai ruled on multiple tax issues across three assessment years. The tribunal directed AO to verify if assessee's own funds covered investments ... Disallowance u/s. 14A r.w. Rule 8D - expenditure incurred for earning exempt income - HELD THAT:- Following consistent stand of Tribunal, we direct AO to verify whether assessee’s own funds are sufficient enough to cover the investment. If so, interest disallowance would not be justified.The indirect disallowance of 0.5% should be computed only on those investments which have yielded exempt income during the year. The grounds, in all the three years, stand allowed for statistical purposes. Recovery of Bad-Debt written off in the books of amalgamating Companies - HELD THAT:- In latest decision in [2022 (3) TMI 1634 - ITAT CHENNAI]bench held that after amalgamation, the assessee has all the rights as well as liabilities of amalgamating company which were transferred to it. Such recoveries of bad-debts were nothing but business receipts for assessee and therefore, assessable in its hands. Respectfully, following the same, we dismiss the grounds urged by assessee, in all the three years. Method of recognizing income on hire purchase contracts - HELD THAT:- We find that this issue is covered by the latest order of Tribunal [2022 (3) TMI 1634 - ITAT CHENNAI] wherein as considered the decision of Hon’ble High Court of Madras in assessee’s own case who directed Ld. AO to tax the interest income on EMI method or ESM method which was consistently being followed by the assessee and allow consequential relief in accordance with law. Considering the same, similar directions were issued by Tribunal. Since facts are pari-materia the same in this year, we issue similar directions to Ld. AO in this year to recognize income on such transactions. The assessee is directed to provide the requisite details. The grounds thus raised stand allowed for statistical purpose. Rate of depreciation on UPS - HELD THAT:- We find that this issue has been decided by Tribunal in assessee’s favor in its latest order [2022 (3) TMI 1634 - ITAT CHENNAI] as confirmed first appellate order which allowed depreciation of 60%. Nature of Software Development expenditure - HELD THAT:- AO disallowed the revenue expenditure but inadvertently made disallowance of Rs. 152.19 Lacs instead of Rs. 2.79 Lacs - CIT(A) directed Ld. AO to allow depreciation on Rs. 152.19 Lacs. No directions have been given qua expenditure of Rs. 2.79 Lacs which is the grievance of the assessee. AR has submitted that depreciation may be allowed on the remaining amount of Rs. 2.79 Lacs also. Accepting the same, we direct Ld. AO to allow depreciation on Rs. 2.79 Lacs. The corresponding ground stand partly allowed. Treatment of Broken Period Interest - HELD THAT:- We find that this issue is subject matter of latest Tribunal order[2022 (3) TMI 1634 - ITAT CHENNAI] as observed that Ld. CIT(A) did not appreciate the facts of the issue properly. The courts have held that if the securities are regularly purchased and sold, they could be stock-in-trade. Therefore, the matter was remitted back to the file of Ld. AO for fresh examination with a direction to the assessee to place all the material before Ld. AO. Disallowance of bad Debts - same were mainly related to the hire purchase and mortgage loan transactions - HELD THAT:- We find that this issue has been settled in assessee’s favor by coordinate bench in its order [2019 (9) TMI 974 - ITAT CHENNAI]. The coordinate bench, at para 10.3 of the order, relying upon order for AY 2001-02, dismissed revenue’s appeal. Therefore, taking consistent view in the matter, we dismiss the grounds raised by the revenue. Indexation benefit while computing Capital Gains on government securities - holding Bonds and Debentures are distinguishable from government securities - HELD THAT:- The bench for AY 2003-04 observed that government securities are not excluded from the definition of capital assets. As per Sec. 2(42A), the expression ‘securities’ shall have the meaning as assigned in Clause-11 of Securities Contract Regulation Act, 1956 which includes government securities also. It was thus concluded by the bench that bonds and securities are distinguishable. The bonds are not freely tradable whereas the securities are freely tradable. The Bonds could not be equated with securities. Further, from plain reading of 3rd proviso to Sec. 48. Government securities were not excluded for indexation benefit and only bond or debentures were excluded. Accordingly, the revenue’s grounds were dismissed. Facts being pari-materia the same, we dismiss this ground. Rate of Depreciation on Commercial vehicles - HELD THAT:- AO erred in disallowing the depreciation claimed by the appellant. The Assessing Officer is directed to allow depreciation at the higher rate of 50% for the new motor vehicles acquired between 1.1.2009 and 30.09.2009 and used for the purposes of their business. The appellant succeeds in this ground. 1. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment include: Disallowance under Section 14A read with Rule 8D regarding notional expenditure for earning exempt income. Taxability of recovery of bad debts written off in the books of amalgamating companies. Methodology for recognizing income on hire purchase contracts. Depreciation rate applicable to UPS systems. Classification of software development expenses as capital or revenue expenditure. Treatment of broken period interest in the purchase and sale of government securities. Disallowance of bad debts related to hire purchase and mortgage loan transactions. Eligibility for indexation benefits while computing capital gains on government securities. Rate of depreciation applicable to commercial vehicles leased out by the assessee.2. ISSUE-WISE DETAILED ANALYSISDisallowance under Section 14A read with Rule 8DThe relevant legal framework includes Section 14A and Rule 8D of the Income Tax Act, which disallow expenditure incurred in relation to earning exempt income. The Court considered the Tribunal's earlier decisions in the assessee's own case, which accepted that if the assessee's own funds exceed investments, interest disallowance is unjustified. Furthermore, the 0.5% disallowance should only apply to investments yielding exempt income.The Court directed the Assessing Officer (AO) to verify the sufficiency of the assessee's own funds and apply the 0.5% disallowance only to investments yielding exempt income, allowing the grounds for statistical purposes.Taxability of Recovery of Bad DebtsThe issue revolves around whether the recovery of bad debts written off in amalgamating companies' books is taxable. The legal framework includes Sections 41(1)(b) and 176(3A) of the Income Tax Act. The Court noted that the Tribunal had previously ruled against the assessee, holding that recoveries of bad debts are business receipts and taxable in the hands of the successor company. The grounds were dismissed following this precedent.Methodology for Recognizing Income on Hire Purchase ContractsThe assessee switched from the Even-Spread Method (ESM) to the Internal Rate of Return (IRR) method for accounting purposes but continued using ESM for tax purposes. The Court referenced the Tribunal's earlier decisions and the Madras High Court's directions to tax interest income based on the method consistently followed by the assessee. The AO was directed to follow this approach, allowing the grounds for statistical purposes.Depreciation Rate on UPS SystemsThe issue concerned the applicable depreciation rate for UPS systems, with the assessee claiming 60% while the AO restricted it to 15%. The Tribunal had previously ruled in favor of the 60% rate, considering UPS as part of the computer block. The Court upheld this view, allowing the grounds in favor of the assessee.Nature of Software Development ExpenditureThe assessee capitalized software development expenses but claimed them as revenue expenditure. The AO disallowed the revenue claim but made an error in the disallowance amount. The Court directed the AO to allow depreciation on the correct amount, partly allowing the grounds.Treatment of Broken Period InterestThe issue involved whether broken period interest should be treated as a revenue item or part of capital gains. The AO treated it as business income, but the CIT(A) allowed it as capital gains. The Court remitted the issue back to the AO for fresh examination, following the Tribunal's earlier order, allowing the grounds for statistical purposes.Disallowance of Bad DebtsThe disallowance of bad debts related to hire purchase and mortgage loans was contested. The Tribunal had previously ruled in favor of the assessee, allowing the claim. The Court followed this precedent, dismissing the revenue's grounds.Indexation Benefit on Government SecuritiesThe issue concerned the eligibility for indexation benefits on government securities. The CIT(A) allowed the benefit, distinguishing government securities from bonds and debentures. The Tribunal had previously ruled in favor of the assessee, and the Court upheld this view, dismissing the revenue's grounds.Rate of Depreciation on Commercial VehiclesThe assessee claimed higher depreciation on leased vehicles, which the AO disallowed. The CIT(A) allowed the claim, considering statutory provisions and the Supreme Court's decision in a similar case. The Court upheld the CIT(A)'s decision, dismissing the revenue's grounds.3. SIGNIFICANT HOLDINGSThe Court's significant holdings include: Verification of the sufficiency of the assessee's own funds is necessary to determine interest disallowance under Section 14A. Recoveries of bad debts are taxable as business receipts in the hands of the successor company. Interest income on hire purchase contracts should be taxed based on the method consistently followed by the assessee. UPS systems qualify for a 60% depreciation rate as part of the computer block. Depreciation should be allowed on software development expenses as capitalized in the books. Broken period interest requires fresh examination to determine its treatment as revenue or capital gains. Bad debts related to hire purchase and mortgage loans are allowable deductions. Government securities are eligible for indexation benefits, distinguishing them from bonds and debentures. Higher depreciation rates apply to commercial vehicles leased out by the assessee.