Infosys BPM Limited Vs DCIT (ITAT Bangalore)
Perusal of the assessment order would show that the AO did not examine the above said computation of the assessee and did not find any fault or error in the above said computation. The AO simply observes that section 14A provides that the expenditure has to be computed as per Rule 8D.
The provisions of sec. 14A(2) read as under:-
“The assessing officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.”
Hence it is imperative that the AO should examine the claim of the assessee having regard to the accounts of the assessee and if he is not satisfied with the said workings, then only the AO can have resort to the provisions of Rule 8D of IT Rules. The Mumbai bench of Tribunal has also expressed identical view in the case of Tata Projects Ltd vs. ACIT (ITA No. 459/Mum/2019 dated 22.10.2020). In the instant case, admittedly the AO did not examine the correctness of the workings furnished by the assessee by having regard to the accounts of the assessee. Hence the AO could not have resorted to apply provisions of Rule 8D for computing disallowance as required u/s 14A of the Act. For the above said reason, the Ld CIT(A) was not justified in confirming the working made by the AO.
In view of the above, we set aside the order passed by Ld CIT(A) on this issue in AY 2013-14 and direct the AO to delete the addition of Rs.32,03,288/- made by him u/s 14A of the Act.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
These cross appeals are directed against the orders passed by Ld CIT(A)-3, Bengaluru and they relate to the assessment years 2012-13 & 2013-14. Since most of the issues urged in these appeals are identical in nature, they were heard together and are being disposed of by this common order, for the sake of convenience.
2. The grounds of appeal urged by the assessee in both the years give rise to the following issues:-
(A) Common issues urged in both the years:-
(i) Disallowance of Provision for Software expenses.
(ii) Disallowance of software expenses u/s 40(a)
(iii) Disallowance of software expenses treating it as Capital exp.
INDIVIDUAL ISSUES:-
(B) Granting of Foreign Tax Credit is urged in AY 2012-13.
(C) Disallowance made u/s 14A is urged in AY 2013-14.
3. Following issues are urged by the revenue in both the years.
(i) Computation of deduction u/s 10AA by reducing expenses from both export turnover and total turnover.
(ii) Whether Ld CIT(A) has got power to remit the issue relating to disallowance of software expenses treating it as Capital in nature.
4. The assessee is engaged in the business of providing “Business process outsourcing services”.
5. We shall take up the appeals filed the revenue first. In both the appeals, the first issue contested by the revenue relates to deduction claimed u/s 10AA of the Act ,i.e. whether expenses that were reduced from export turnover should also be reduced from the total turnover or not. The assessee claimed deduction u/s 10AA of the Act. While computing deduction, the assessee reduced communication expenses from both export turnover and total turnover and accordingly computed quantum of deduction. The A.O. was of the view that the communication expenses should be deducted from only export turnover and not from Total turnover. Accordingly, he recomputed the deduction u/s 10AA of the Act. The Ld. CIT(A) allowed the claim of the assessee in both the years by following the decision rendered by Hon’ble Karnataka High Court in the case of CIT Vs. Tata Elxsi Ltd. (2012) 349 ITR 98. The revenue has challenged the said decision of CIT(A) by submitting that the revenue has filed a SLP in the Hon’ble Supreme Court challenging the above said decision of the Hon’ble Karnataka High Court.
6. We heard the parties on this issue. The Ld. A.R. submitted that the decision rendered by Hon’ble Karnataka High Court in the case of Tata Elxsi Ltd. (supra) has since been upheld by Hon’ble Supreme Court in the case of CIT Vs. HCL Technologies Ltd. (2018) 93 com 33. We notice that the decision rendered by Hon’ble Karnataka High Court has been upheld by Hon’ble Supreme Court in the case of HCL Technologies Ltd (supra) with the following observations:
“17. The similar nature of controversy, akin this case, arose before the Karnataka High Court in CIT V. Tata Elxsi Ltd. (2012) 204 Taxman 321/17/taxmann.com 100/349 ITR 98. The issue before the Karnataka High Court was whether the Tribunal was correct in holding that while computing relief under section 10A of the I.T. Act, the amount of communication expenses should be excluded from the total turnover if the same are reduced from the export turnover? While giving the answer to the issue, the High Court, inter-alia, held that when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the context in which it is used. Hence, what is excluded from ‘export turnover’ must also be excluded from total turnover’, since one of the components of ‘total turnover’ is export turnover. Any other interpretation would run counter to the legislative intent and would be impermissible.”
7. Since the decision rendered by Ld CIT(A) is in conformity with the decision rendered by Hon’ble Supreme Court, we do not find any reason to interfere with the decision rendered by Ld. CIT(A) on this issue in both the years.
8. The next issue contested by the revenue in both the years is linked to the issue being contested by the assessee, i.e., the issue of disallowance of software expenses by treating the same as Capital in nature. Hence the relevant grounds of both the parties shall be adjudicated together in the later part of this order.
9. We shall now take up the appeal of the assessee. The first common issue urged by the assessee relates to disallowance of “Provision for software expenses”. The assessee had claimed software expenses as deduction treating the same as revenue expenses in both the years. The AO disallowed the claim of the assessee partially under three different heads as given below:-
(a) Provision for software expenses – Contingent liability
(b) Disallowance of software expenses u/s 40(a)
(c) Disallowance of remaining software expenses treating the same as Capital in nature. However, the AO allowed depreciation there on and disallowed only net amount.
10. The first type of disallowance is the disallowance of “Provision for software expenses” claimed by the assessee treating the same as contingent liability. The Ld CIT(A) concurred with the view taken by him. However, he observed that, if the above said claim is treated as ascertained liability, then the disallowance of the said claim is warranted u/s 40(a)(i) of the Act for non-deduction of tax at source.
10.1 With regard to the question whether the “Provision for software” is a contingent liability or not, we notice the same has been decided in favour of the assessee by this bench of Tribunal in the assessee’s own case in AY 2011-12 in ITA No. 491/Bang/2018 dated 11.12.2020. The decision rendered in assessment year 2011-12 on an identical issue is extracted below:-
“14. We heard the rival contentions on this issue and perused the record. The first question is whether the provision for software expenses is a contingent liability or not. There is no dispute with regard to the fact that the assessee is following mercantile system of accounting. The assessee being a company, it is required to follow accounting standards prescribed by ICAI and also by the Central Government under the Income Tax Act. As per accounting standard-1 prescribed by the Central Government, the assessee is required to make provision for all known liabilities and losses even though the amount cannot be determined with certainty. Paragraph (4)(i) of Accounting Standard – 1 provides as under:
“Prudence: Provision should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of the available information.”
Further, the Hon’ble Supreme Court in the case of Rotork Controls India (P) Ltd. (supra) has explained the nature of provision for expenses created by the assessee as under:
“A provision is a liability which can be measured by using a substantial degree of estimation. A provision is recognised when; (a) an enterprise has a present obligation as a result of a past event; (b) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognised.”
15. We notice that the assessee has furnished breakup details of provision for software expenses created by the assessee and also the basis for estimating the said expenses. The Ld. CIT(A) has extracted the same in paragraph 6 & 6.1 of his order as under:
“During appellate proceedings the appellant was asked to provide the basis of estimating the provision and whether tax at source was deducted on the same (Order sheet entry dt. 8.11.2017). In response to the same the appellant made submissions vide letter submitted on 4.12.2017. The breakup of the vendors to whom payment was to be made and for which provision was created is as follows:
