2024 (8) TMI 970 - AT - Income Tax

Software license expenses treated as revenue expenditure, TDS disallowance under section 40(a)(ia) reduced after voluntary adjustment

ITAT Mumbai-AT decided two issues in favor of the assessee. First, software license expenses were held to be revenue expenditure, not capital, following ... Nature of expenses - software license expenses - revenue or capital expenditure - HELD THAT:- Whether software license expenditure incurred by the assessee is revenue or capital expenditure, is recurring in nature and has been decided in favour of the assessee by the coordinate bench of the Tribunal in preceding years. We find that in DCIT v/s M/s First Advantage Private Limited [2015 (6) TMI 1052 - ITAT MUMBAI] for the assessment year 2010-11, the coordinate bench of the Tribunal vide order dated 30/06/2015 held the software license expenditure on similar products to be revenue in nature - Decided in favour of assessee. Disallowance u/s 40(a)(ia) - assessee made a payment of to the contractors and fee for professional or technical service, which were subject to TDS under section 194C and 194J - HELD THAT:- The assessee admitted that out of the aforesaid amount, on an amount of Rs. 98,363 the tax was deducted at a lesser rate than what was prescribed in the statute, by an amount of Rs. 629 and Rs. 6,591 under section 194C and 194J, respectively. There is no material contrary to the assessee’s submission that the relevant details were submitted before the CIT(A) in this regard and 30% of Rs. 98,363, i.e. Rs. 29,063 was disallowed in its computation of income by the assessee. Such being the facts, we are of the considered view that the learned CIT(A) has rightly deleted the disallowance made by the AO u/s 40(a)(ia) of the Act, and found disallowance of 30% of the total payments to be unjustified. Accordingly, the order passed by the learned CIT(A) on this issue is affirmed. - Decided against revenue. Issues:1. Disallowance of software license expenses - Revenue's appeal.2. Disallowance under section 40(a)(ia) of the Act - Revenue's appeal.Analysis:Issue 1: Disallowance of software license expenses - Revenue's appealThe Revenue challenged the deletion of disallowance of software license expenses by the learned CIT(A). The assessee, a private limited company in the business of employment background screening services, claimed software license expenditure as revenue, while the AO treated it as capital expenditure. The AO disallowed the claim, considering it an 'intangible asset.' However, the learned CIT(A) deleted the disallowance based on prior Tribunal decisions in favor of the assessee. The Tribunal noted that similar expenses were treated as revenue in nature in previous years. The Tribunal cited the ownership, enduring benefit, and functionality tests from previous cases to support its decision. As a result, the Tribunal dismissed the Revenue's appeal on this ground.Issue 2: Disallowance under section 40(a)(ia) of the Act - Revenue's appealThe second issue involved the deletion of disallowance under section 40(a)(ia) of the Act by the learned CIT(A). The AO disallowed Rs. 9,10,64,526 for non-deduction and non-deposit of TDS on payments to contractors and professional fees. The assessee admitted to short deductions but argued compliance with TDS provisions and a suo moto disallowance in its return. The learned CIT(A) directed the AO to delete the addition. The Tribunal found that the assessee had deducted TDS but at a lesser rate on certain payments. The Tribunal agreed with the learned CIT(A) that the disallowance was unjustified and affirmed the deletion. Consequently, the Tribunal dismissed the Revenue's appeal on this issue.In conclusion, the Tribunal dismissed the Revenue's appeal challenging the deletion of software license expenses disallowance and the disallowance under section 40(a)(ia) of the Act. The decisions were based on the nature of the expenses, compliance with TDS provisions, and previous Tribunal rulings.