2024 (6) TMI 1446 - AT - Income Tax

Software development expenses qualify for 60% depreciation as capital assets, bad debt recoveries taxable as business receipts

Sundaram Finance Limited, Versus Deputy Commissioner of Income Tax, Large Taxpayer Unit -1, Chennai And (Vice-Versa) And Sundaram Finance Limited Versus Assistant Commissioner of Income Tax, Circle -1, Large Taxpayer Unit, Chennai

Sundaram Finance Limited, Versus Deputy Commissioner of Income Tax, Large Taxpayer Unit -1, Chennai And (Vice-Versa) And Sundaram Finance Limited Versus ... 1. ISSUES PRESENTED and CONSIDEREDThe primary issues considered in this judgment are:Whether software development expenses should be treated as capital or revenue expenditure.The treatment of recovery of bad debts written off in the books of amalgamating companies.The appropriate rate of depreciation on UPS and commercial vehicles.Disallowance under Section 14A read with Rule 8D of the Income Tax Act.The method of recognizing income on hire purchase contracts.Inclusion of notional income related to Non-Performing Assets (NPA) as income.Disallowance of expenses related to pooja and presentations to employees/customers.Loss on sale of repossessed assets.Depreciation on computer software.Disallowance of bad debts.Non-compete fees as revenue expenditure.Business origination cost.2. ISSUE-WISE DETAILED ANALYSISSoftware Development Expenses:The Tribunal considered whether software development expenses should be treated as capital or revenue expenditure. The relevant legal framework involved the Income Tax Act provisions regarding capital and revenue expenditure. The Tribunal upheld the decision of the CIT(A) that software development expenses should be capitalized, allowing depreciation at 60%. This decision was consistent with earlier Tribunal orders in the assessee's case.Recovery of Bad Debts:The issue involved the taxability of amounts recovered from bad debts written off in the books of amalgamating companies. The Tribunal referred to Section 41(4) and Section 41(1) of the Act. It held that post-amalgamation, the assessee inherits the rights and liabilities of the amalgamating company, making such recoveries taxable as business receipts. This position was consistent with prior Tribunal decisions.Depreciation on UPS and Commercial Vehicles:The Tribunal considered whether the depreciation rate on UPS should be 60% and on commercial vehicles 50%. It was decided that UPS systems qualify for 60% depreciation as per earlier Tribunal rulings. For commercial vehicles, the Tribunal upheld the CIT(A)'s decision allowing 50% depreciation, aligning with statutory provisions and Supreme Court precedents.Disallowance under Section 14A r.w. Rule 8D:The Tribunal examined disallowance related to exempt income. It accepted the assessee's argument that no interest disallowance is warranted if own funds exceed investments. The Tribunal directed the AO to verify this and compute the disallowance on investments yielding exempt income, consistent with prior decisions.Income Recognition on Hire Purchase Contracts:The Tribunal dealt with the method of recognizing income on hire purchase contracts, emphasizing consistency with the EMI method or ESM method as per the Madras High Court's direction. The Tribunal dismissed the assessee's claim for reduction of income taxed in earlier years.Notional Income on NPA:The Tribunal upheld the lower authorities' decision to reject the deduction of notional income related to NPAs, considering the ongoing departmental appeal on the matter.Pooja and Presentation Expenses:The Tribunal allowed the deduction of pooja expenses and expenses on presentations to employees/customers as business expenditures, considering them customary and commercially expedient, following the High Court's precedent in Atlas Cycle Industries Ltd.Loss on Sale of Repossessed Assets:The Tribunal upheld the CIT(A)'s decision that losses on repossessed assets are trading losses, deductible as bad debts under Section 36(1)(vii), following the Delhi High Court's ruling in Citicorp Maruthi Finance Ltd.Depreciation on Computer Software:The Tribunal confirmed the CIT(A)'s decision allowing 60% depreciation on computer software, consistent with statutory provisions and prior Tribunal decisions.Disallowance of Bad Debts:The Tribunal dismissed the revenue's appeal against the CIT(A)'s decision allowing bad debt deductions, consistent with prior Tribunal rulings.Non-Compete Fees:The Tribunal upheld the CIT(A)'s decision treating non-compete fees as revenue expenditure, following the Supreme Court's ruling in Guffic Chem P Ltd. vs. CIT.Business Origination Cost:The Tribunal allowed the deduction of business origination costs as revenue expenditure, aligning with the Supreme Court's decision in Taparia Tools Pvt. Ltd. vs. JCIT.3. SIGNIFICANT HOLDINGSSoftware Development Expenses:'The Tribunal dismisses the grounds urged by the assessee, upholding the decision of the CIT(A) treating software development expenditure as a capital asset.'Recovery of Bad Debts:'Such recoveries of bad debts were nothing but business receipts for assessee and therefore, assessable in its hands.'Depreciation on UPS and Commercial Vehicles:'The Tribunal confirms the first appellate order allowing depreciation of 60% on UPS and 50% on commercial vehicles.'Disallowance under Section 14A r.w. Rule 8D:'If own funds are sufficient to cover the investment, interest disallowance is not justified.'Pooja and Presentation Expenses:'Considering the decision of the high court of P&H, the claim of pooja expenses claimed by the assessee cannot be denied as inadmissible expenditure.'Business Origination Cost:'The commission paid to the dealers/marketing agents is a revenue expenditure, deductible in the year incurred.'The Tribunal's decisions reflect a consistent application of legal principles and precedents, ensuring equitable treatment of similar issues across multiple assessment years.