2017 (3) TMI 196 - HC - Income Tax

Disallowance of claim on bad debt/ trading loss - Held that - It is not in dispute that as such the assessee himself written off the aforesaid amount as bad debt / trading loss. The said amount is irrecoverable during the year and the loss is arising during the year under consideration. In that view of the matter and aforesaid undisputed facts, it cannot be said that the learned Tribunal has committed any error in treating the same and / or considering the same as trading loss. When the assessee itself in his books of account shown and written of said amount, the same is rightly considered as bad debt / trading loss. Under the circumstances, no error has been committed by the learned Tribunal in confirming the order passed by the learned CIT(A) in deleting the addition - Decided in favour of the assessee. Treatment to software expenses - revenue expenditure or capital expenditure - Held that - Expenditure of software stock and maintenance charges is required to be treated and / or considered as revenue expenditure. See Commissioner of Income-tax-I Versus NJ. India Invest (P.) Ltd. 2013 (7) TMI 738 - GUJARAT HIGH COURT - Decided in favour of the assessee.

Summary

Issues:
1. Disallowance of claim on bad debt/trading loss
2. Treatment of software expenses as revenue expenditure

Analysis:

Issue 1: Disallowance of claim on bad debt/trading loss
The appellant challenged the order of the Income Tax Appellate Tribunal (ITAT) allowing the appeal by the assessee regarding the addition of a certain amount as bad debt/trading loss. The assessee had initially claimed this amount as bad debt under Section 36(1)(vii) and later as a business loss under Section 28 of the Income Tax Act. The Assessing Officer (AO) disallowed this deduction initially. However, the Commissioner of Income Tax (Appeals) (CIT(A)) allowed the appeal by the assessee, directing the deletion of the said addition. The High Court upheld the decision of the CIT(A) and ITAT, stating that since the assessee had written off the amount as bad debt/trading loss in their books and it was deemed irrecoverable during the relevant year, it was correctly treated as a trading loss. The Court found no error in the decisions of the lower authorities and ruled in favor of the assessee.

Issue 2: Treatment of software expenses as revenue expenditure
The second issue pertained to the treatment of software expenses amounting to a specific sum as revenue expenditure. The CIT(A) had allowed the claim of the assessee in this regard, which was challenged by the revenue before the ITAT. The High Court referred to a previous decision of the Division Bench in a similar case and held that software expenses like stock and maintenance charges should be considered as revenue expenditure. Relying on the precedent, the Court concluded that the treatment of software expenses as revenue expenditure was appropriate in the present case as well. Consequently, the Court ruled in favor of the assessee on this issue too.

In conclusion, the High Court dismissed the appeal filed by the revenue, upholding the decisions of the lower authorities in favor of the assessee on both issues. The Court found no errors in the treatment of bad debt/trading loss and software expenses as revenue expenditure, as per the provisions of the Income Tax Act and relevant judicial precedents.