ACIT, CHENNAI vs. M/S. NMS WORKS SOFTWARE PVT. LTD., CHENNAI

This appeal of the Department is directed against the order passed by the ld. Commissioner of Income Tax (Appeals) 8, Chennai dated 08.08.2016 relevant to the assessment year 2012-13. The Revenue has raised two effective grounds viz., (i) the ld. CIT(A) has erred in deleting the addition of ₹.24,23,035/- amortized in books in respect of software products and (ii) the ld. CIT(A) has erred in deleting the disallowance on the claim on interest on delayed payment on service tax of ₹.8,48,216/-.

Brief facts of the case are that the assessee is engaged in the business of software development. The assessee filed its return of income on 26.09.2012 admitting income of Nil after adjusting brought forward losses. The return filed by the assessee was selected for scrutiny and notice under section 143(2) of the Income Tax Act, 1961 [“Act” in short] was served on the assessee on 08.08.2013. Subsequently notice under section 142(1) of the Act was also issued to the assessee on 22.10.2013. In response thereto, particulars, documents, bank statements called for have been filed by the assessee. From the statement of total income filed along with return of income, the Assessing Officer has observed that while adding the depreciation in respect of software products, ₹.46,23,794/- has been added back, whereas as per the company’s balance sheet, the depreciation in respect of software products was ₹.70,46,829/-. Thus, ₹.24,23,035/- has not been added to income as per profit and loss account. When the Assessing Officer requested the AR to clarify, it was submitted that the expenditure incurred of ₹.24,23,035/- in respect of software products has been amortized in books and relied on the decision of the Tribunal in assessee’s own case for earlier assessment years. The Assessing Officer has not accepted the submission of the AR of the assessee and held that the amortization of expenditure is not recognized under the Income Tax Act and also held that finality has not been reached in this issue and thus, he brought the same to tax.

The assessee carried the matter in appeal before the ld. CIT(A). After considering the submissions of the assessee, the ld. CIT(A) allowed the appeal filed by the assessee.

On being aggrieved, the Revenue is in appeal before the Tribunal. The ld. DR has submitted that the amortization of expenditure is not recognized under the Income Tax Act. By referring to the grounds of appeal, he further submits that the ld. CIT(A) failed to follow the decision in the case of Madras Industrial Investment Corporation Ltd. 225 ITR 802 (SC), wherein, it was held that although the amount of lease premium paid in respect of such agreement should be amortized over the period of lease and only the amount pertaining to the relevant previous year should be allowed as deduction. He also submitted that the ld. CIT(A) erred in not following the decision in the case of Gail India Ltd. v. CIT [2012] (Del) and in the case of Deccan Chronicle Holdings v. CIT in dated 30.04.2013.

We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. As per the assessee company’s balance sheet, the depreciation in respect of software products was claimed at ₹.70,46,829/- whereas, as per statement of income, adding the depreciation in respect of software products, only ₹.46,23,794/- has been added back. When the Assessing Officer has asked to clarify as to why the depreciation of ₹.24,23,035/- [₹.70,46,829 - ₹.46,23,794] was not added to profit as per the profit and loss account while computing the business income, it was the submission of the AR of the assessee that the expenditure incurred of ₹.24,23,035/- in respect of software products has been amortized in books. From the statement of AR of the assessee, it is clear that the expenditure incurred towards software products is not depreciation. However, before the ld. CIT(A), the assessee has submitted that “we had claimed depreciation of ₹.24,23,035/- which includes depreciation for software development”. The ld. Counsel for the assessee could not explain the above contradictory statement of the assessee.

The decision of the Coordinate Benches of the Tribunal in assessee’s own case for the assessment year 2006-07 and 2007-08 was rendered in the context that the assessee has capitalized the software development expenditure in its books of account forming part of its block of assets, whereas, the Assessing Officer has observed that it was nothing but amortization of software development expenditure. However, in the assessment year under consideration, no material was brought on record before the Tribunal to contend that the assessee has capitalized the above expenditure. It is also not the fact of findings in the appellate order that the assessee has capitalized the above expenditure. Accordingly, we set aside the order of the ld. CIT(A) and remit the matter back to the file of the Assessing Officer to verify as to whether the software development expenditure of ₹.24,23,035/- incurred was capitalized in its books of account and formed its block of assets, so as to allow depreciation. If the same was found not capitalized, then the claim of assessee cannot be entertained since amortization of expenditure is not recognized under the Income Tax Act. Thus, the ground raised by the Revenue is allowed for statistical purposes.

The next ground raised by the Revenue is with regard to disallowance of ₹.8,48,216/- being interest on service tax. The Assessing Officer was of the opinion that the interest paid was penal in nature. Payment of interest, as such, not partake the nature of penalty until it is specifically provided for. Interest is levied for belated payment, whereas, penalty is levied due to default in making the payment. In this case, the assessee has claimed interest on delayed payment of service tax. In view of the above, the ld. CIT(A) has rightly deleted the disallowance made by the Assessing Officer. Thus, the ground raised by the Revenue is dismissed.

In the result, the appeal of the Department is partly allowed for statistical purposes. Order pronounced on the 28th July, 2017 at Chennai.