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 precedent from a coordinate bench decision in 2015 involving similar software products. Second, regarding disallowance under section 40(a)(ia), the assessee had made contractor payments and professional service fees subject to TDS under sections 194C and 194J. While admitting Rs. 98,363 had lesser TDS deduction by Rs. 7,220, the assessee voluntarily disallowed 30% (Rs. 29,063) in income computation. CIT(A)'s deletion of AO's disallowance was upheld as justified.

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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 appeal
The 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 appeal
The 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.

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