2025 (9) TMI 34 - AT - Income Tax

Depreciation on UPS as computer accessory at 60%; software costs capitalized; s.35(2AB) R&D testing disallowed; s.80JJAA claim rejected

DCIT, Circle-1, LTU, New Delhi Versus M/s International Tractor Ltd. And (Vice-Versa)

DCIT, Circle-1, LTU, New Delhi Versus M/s International Tractor Ltd. And (Vice-Versa) - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether depreciation on Uninterruptible Power Supplies (UPS)/energy-saving devices is allowable at enhanced rates applicable to computer accessories/energy devices (60%/80%) or at the rate for plant and machinery (15%). 2. Whether software acquisition and development costs are capital in nature with depreciation allowance and whether associated annual maintenance charges are revenue expenditures. 3. Whether expenditures claimed as research and development qualify for weighted deduction under the statutory provision for approved R&D (section 35(2AB) equivalent) or must be disallowed/treated under general business expenditure provisions (section 37 equivalent). 4. Whether deduction under the employment-linked incentive provision (section 80JJAA equivalent) is correctly computed when additional salaries relate to persons not qualifying as 'workmen' or where prior years' claims were rejected. 5. Whether prior-period expenses debited in an earlier year but claimed in the assessment year are allowable as revenue expenditure on proof of crystallisation and supporting documentary evidence. 6. Whether higher depreciation at 50% is allowable for certain motor vehicles as 'commercial vehicles' where classification at registration and statutory definitions are determinative. 7. Whether a provision for warranty is an allowable revenue provision where the liability is contingent and whether the assessee has adopted a scientific and consistent method for its estimation. 8. Whether disallowance under the provision dealing with expenditure incurred to earn exempt income (section 14A equivalent) is attracted where only taxable capital gains are earned on investments. 9. Whether electrical installations affixed to plant and machinery retain separate identity (thus lower depreciation) or are integral parts attracting depreciation at the rate applicable to plant and machinery. 10. Whether penalty under the penal provision for concealment/false statements (section 271(1)(c) equivalent) can be sustained where quantum issues are decided in assessee's favour. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Depreciation on UPS / energy-saving devices Legal framework: Depreciation rates are governed by the classification of assets in the depreciation schedule; computer accessories/energy devices may attract higher rates (60%/80%) if they fall within the defined category; otherwise plant and machinery rate (15%) applies. Precedent treatment: The Tribunal followed prior decisions (including coordinate bench decisions and BSES Yamuna Power Ltd. authority) that treated eligible computer accessories as attracting higher depreciation. Interpretation and reasoning: Where the asset qualifies as computer accessory or as the specific energy-saving category under the schedule, enhanced depreciation is allowable. In one instance the parties agreed the issue was covered in assessee's favour by precedent; in another the assessee did not press the higher rate but pointed out arithmetic error in AO's computation, leading to correction of disallowance to the actual excess (Rs. 5,577) and directing AO to verify calculations. Ratio vs. Obiter: Ratio - asset classification per the depreciation schedule determines rate; Obiter - procedural direction to verify arithmetic. Conclusion: Enhanced depreciation affirmed where precedent and factual classification support it; where computation was erroneous, disallowance reduced and AO directed to correct calculations. Issue 2 - Capitalisation of software and treatment of annual maintenance charges Legal framework: Expenditure on acquisition/development of software may be capital if it results in an enduring asset; annual maintenance charges are typically revenue unless integrally part of a capital project and inseparable. Precedent treatment: Tribunal relied on earlier year decision in assessee's own case treating new software and development charges as capital and allowing depreciation, while annual maintenance charges were held to be revenue in nature by the Tribunal for the earlier year. Interpretation and reasoning: The Tribunal accepted the CIT(A)'s approach following the assessee's earlier year findings - software development costs capitalised with depreciation; annual maintenance costs treated as revenue and allowable accordingly. Ratio vs. Obiter: Ratio - where prior adjudication on identical facts exists, consistent treatment of software capitalization and separate treatment of annual maintenance as revenue is appropriate. Conclusion: Capitalisation of software upheld and annual maintenance charges allowed as revenue expenditure; revenue's challenge dismissed. Issue 3 - Deduction for research & development: section 35(2AB) vs section 37 Legal framework: Special weighted deduction is available where R&D expenditure is approved by prescribed authority; alternatively, business expenditure may be claimed under general provision for wholly and exclusively incurred expenses. Precedent treatment: Tribunal noted the requirement of approval for the research facility (not necessarily quantum) and relied on higher court authority (decision of the Delhi High Court) holding R&D charges may be allowable under section 37. Interpretation and reasoning: For years prior to the mandate requiring approval of quantum (effective 1.7.2016), non-approval of quantum did not justify total disallowance under the special provision; if expenditure is wholly and exclusively for business and facility is approved, deduction under section 37 is available. Tribunal found force in assessee's contention and authorities relied upon. Ratio vs. Obiter: Ratio - where statutory requirement for approval of quantum is not in force, AO cannot disallow R&D expenditure entirely under the special provision if the expenditure is otherwise exclusively for business and the facility is approved; such expenditure may be allowable under section 37. Conclusion: Disallowances under section 35(2AB) were set aside and expenditure allowed under section 37 for the relevant years. Issue 4 - Deduction under section 80JJAA (employment-linked incentive) Legal framework: Deduction depends on additional employment of eligible 'workmen' as defined; salaries paid to persons not qualifying as workmen are not to be included. Precedent treatment: CIT(A) reduced the AO's disallowance by confirming the smaller amount which arose from discrepancies not controverted by the assessee; Tribunal affirmed CIT(A)'s confirmation. Interpretation and reasoning: AO correctly excluded salaries of persons not qualifying under the statutory definition; earlier years' rejections were noted but the CIT(A) correctly confirmed AO's quantified disallowance where discrepancies remained unchallenged. Ratio vs. Obiter: Ratio - entitlement under the provision must be computed excluding ineligible employees; where discrepancies are not controverted, confirmation is appropriate. Conclusion: Disallowance as quantified (Rs. 32,40,896) affirmed; ground raised by revenue dismissed. Issue 5 - Prior period expenses Legal framework: Allowability of prior period expenses depends on when liabilities crystallise and factual proof in the assessment year; documentary support and posting dates are material. Precedent treatment: Tribunal followed its own coordinate bench decision in assessee's earlier year allowing similar claims where supporting documents and posting dates established the expenses' nature. Interpretation and reasoning: Paper-book evidence (bifurcation, posting dates, lease/agreement copies and invoices) showed many items dated in prior year and paid in that year; there was no finding of non-business nature; earlier Tribunal decision favoured the assessee. On that basis the Tribunal allowed the claim. Ratio vs. Obiter: Ratio - where documentary record shows timing consistent with prior year postings and nature appears revenue, prior period expenses may be allowed; reliance on coordinate bench precedent permissible. Conclusion: Disallowance set aside and prior period expenses allowed. Issue 6 - Higher depreciation on motor vehicles (50% vs 15%) Legal framework: Higher depreciation for commercial vehicles depends on statutory definitions (Motor Vehicles Act and Income-tax Depreciation Schedule) and registration classification. Precedent treatment: Tribunal relied on earlier decision in assessee's own case for a prior year where vehicles purchased in a specified period were held eligible for 50% depreciation. Interpretation and reasoning: Considering definitions and facts (vehicles purchased between specified dates), the Tribunal held the AO misconstrued conditions and that the vehicles were eligible as commercial vehicles attracting 50% depreciation. Ratio vs. Obiter: Ratio - factual and legal classification in line with statutory definitions can justify higher depreciation; prior identical factual adjudication controls. Conclusion: Higher depreciation allowed for the vehicles in question; ground of appeal by assessee allowed. Issue 7 - Provision for warranty Legal framework: Provision for contingent liabilities is allowable if liability crystallises on occurrence of events and the provision is computed on a scientific, consistent basis. Precedent treatment: Tribunal followed its earlier decision in assessee's case where identical issue was decided in assessee's favour. Interpretation and reasoning: AO and CIT(A) found fluctuations and lack of scientific basis; assessee produced audited schedules and working showing conservative provisioning ratios. Tribunal found prior adjudication in favour of assessee and accepted the methodology as consistent and conservative. Ratio vs. Obiter: Ratio - reasonable, consistent and documented method for provisioning contingency makes provision allowable; fluctuations alone do not defeat allowability if supported by methodology and precedent. Conclusion: Provision for warranty allowed and disallowance set aside. Issue 8 - Section 14A disallowance in absence of exempt income Legal framework: Disallowance under provision for expenditures related to exempt income is not attracted where no exempt income is earned. Precedent treatment: Tribunal relied on its prior decision in assessee's case and the factual position that only taxable capital gains arose from investments. Interpretation and reasoning: Since investments produced taxable capital gains and no exempt income, section 14A was inapplicable; identical earlier decision supported this view. Ratio vs. Obiter: Ratio - section 14A disallowance requires existence of exempt income; absent that, no disallowance. Conclusion: Disallowance under section 14A deleted; ground allowed for assessee. Issue 9 - Depreciation on electrical installations Legal framework: Where electrical installations form integral parts of plant and machinery, depreciation applies at the same rate as plant and machinery; separate identity may change rate if not integral. Precedent treatment: Tribunal noted settled law that integral fittings take rate of the plant; assessee showed installations (generator, DG set, inverters, batteries) were integral to factory machinery. Interpretation and reasoning: The AO's finding that electrical fittings retained separate identity was incorrect on facts; installations were integral to factory machinery and therefore depreciation at 15% was appropriate. Ratio vs. Obiter: Ratio - integral electrical installations to plant and machinery attract plant and machinery depreciation rate. Conclusion: Depreciation at plant and machinery rate allowed; grounds of assessee allowed. Issue 10 - Penalty under section 271(1)(c) equivalent Legal framework: Penalty for concealment/false statement depends on the correctness of assessment; where substantive additions are deleted or relief granted, penalty may not be sustainable. Precedent treatment: Having allowed quantum reliefs for the assessee in the relevant years, the Tribunal affirmed deletion of penalty by the CIT(A). Interpretation and reasoning: Since quantum issues were decided in favour of assessee, there was no basis to sustain penalty for the disputed additions. Ratio vs. Obiter: Ratio - deletion of substantive additions may require deletion of consequential penalty where concealment is not established. Conclusion: Penalty deleted and revenue appeals against penalty dismissed.