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2022 (8) TMI 1580 - AT - Income TaxDisallowance of expenses invoking the provisions of section 14A r.w. rule 8D - CIT(A) deleted addition for the reason that there is no exempt income in the case of the assessee - HELD THAT - As noted that the CIT (A) deleted the addition by noting the fact that the assessee has not earned any exempt income and following the decision of Chettinad Logistics (P) Ltd 2017 (4) TMI 298 - MADRAS HIGH COURT and Redington (India) Ltd 2017 (1) TMI 318 - MADRAS HIGH COURT as held as now the law is if the appellant did not earn any exempt income like dividends section 14A cannot be invoked. Nature of receipt - addition of interest income earned during pre-operative period - revenue receipt or capital receipt - HELD THAT -We noted that the facts are undisputed and the assessee has earned interest income by depositing the loans received from banks as temporary deposit of funds with banks and group companies. We also noted that it is undisputed fact that this interest earned will go to reduce the expenditure incurred during construction period and as such it should be deposited against capital work-in-progress. This view of ours is supported by the decision of Hon ble Supreme Court in the case of Bokaro Steel Ltd 1998 (12) TMI 4 - SUPREME COURT Thus we delete the addition and allow capitalization of the same. Claim of depreciation of computer software at 25% as against the claim of assessee at 60% - HELD THAT - In the present case before us the project management software which was purchased by assessee as a product in the form of disc / other information i.e. storage device is a computer software and as such cannot be used without the aid of the computer and therefore this project management software is a computer software eligible for depreciation @ 60% as per Entry III(5) to New Appendix I of the Rules. See Computer Age Management Services (P.) Ltd 2019 (7) TMI 1153 - MADRAS HIGH COURT Thus direct the AO to allow depreciation @ 60% on the computer software. This issue of assessee s appeal is allowed. Disallowance of interest on delayed remittance of TDS u/s. 40(a)(ii) - HELD THAT - As contented by assessee the assessee wants to file certain details whether this is interest or TDS it is not clear and hence he only requested that matter can be remitted back to the file of the AO for verification. In term of the above we set aside the orders of lower authorities on this issue and remit the matter back to the file of the AO to ascertain the true character of this expenditure claimed by assessee whether this is interest or it is in the character of income-tax and accordingly decide the issue.
1. ISSUES PRESENTED and CONSIDERED
- Whether disallowance of expenses under section 14A read with Rule 8D of the Income Tax Rules, 1962 is justified when the assessee has not earned any exempt income during the relevant assessment year. - Whether interest income earned during the pre-operative period on borrowed funds and foreign currency convertible debentures (FCCD) deposits should be treated as revenue receipt taxable under income from other sources or as capital receipt to be capitalized and reduce the cost of assets under construction. - Whether depreciation on computer software licenses should be allowed at 60% as claimed by the assessee or restricted to 25% as held by the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)]. - Whether interest paid on delayed remittance of Tax Deducted at Source (TDS) under section 40(a)(ii) of the Income-tax Act, 1961 is allowable as deduction or disallowable as penal interest. 2. ISSUE-WISE DETAILED ANALYSIS Disallowance under Section 14A read with Rule 8D Relevant legal framework includes section 14A of the Income-tax Act, which disallows expenditure incurred to earn exempt income, and Rule 8D of the Income Tax Rules, prescribing the method for computing such disallowance. The Tribunal considered precedents from the jurisdictional High Court and the Supreme Court, notably CIT v. Chettinad Logistics (P) Ltd. and Redington (India) Ltd., which held that if no exempt income is earned, section 14A disallowance cannot be invoked. The AO had made disallowance of Rs. 1,84,57,282 invoking section 14A on the basis of presumed exempt income, but the CIT(A) deleted this addition noting that the assessee did not earn any exempt income such as dividends during the assessment year 2013-14. The Tribunal upheld this deletion, relying on the Supreme Court's affirmation of the High Court's decision in Chettinad Logistics, which clarified that section 14A applies only when exempt income is earned. Competing arguments by the Revenue that disallowance was justified were dismissed as the legal position is settled that without exempt income, section 14A cannot be invoked. The Tribunal accordingly dismissed the Revenue's appeal on this issue. Interest Income Earned During Pre-Operative Period The core legal question was whether interest earned on temporary deposits of borrowed funds and FCCDs during the pre-operative period should be treated as revenue income or capital receipt. The AO assessed the interest income of Rs. 6,27,70,128 as income from other sources, while the assessee claimed it as capital receipt to be capitalized against the cost of the power plant under construction. The CIT(A) confirmed the AO's addition, relying on the jurisdictional High Court decision in Tuticorin Alkali Chemicals & Fertilizers Ltd., which held that interest earned on borrowed funds is taxable as income. The Tribunal examined the facts that the funds were borrowed specifically for acquisition of land, plant, and machinery and were temporarily invested due to delays in project execution. The Tribunal relied on Supreme Court decisions in CIT vs. Bokaro Steel Ltd. and CIT vs. Karnal Cooperative Sugar Mills, which distinguished the present facts from Tuticorin Alkali Chemicals. Those decisions held that interest earned on temporary deposits of borrowed funds directly linked to asset acquisition during construction is capital receipt and reduces the cost of the asset rather than being taxable income. The Tribunal noted that the interest income was inextricably linked with the capital project and thus should be capitalized. The Revenue's reliance on Tuticorin Alkali Chemicals was found inapplicable as that case did not involve funds directly linked to capital asset acquisition. The Tribunal allowed the assessee's appeal and deleted the addition for all three assessment years on this issue. Depreciation on Computer Software Licenses The issue was whether the depreciation on computer software licenses should be allowed at 60% (as claimed by the assessee) or restricted to 25% by the AO and CIT(A). The AO and CIT(A) treated the software licenses as intangible assets under Part B of Appendix I to the Income Tax Rules, allowing depreciation at 25%, relying on a Delhi ITAT decision. The Tribunal analyzed the relevant provisions of the Income Tax Rules, 1962, particularly the New Appendix I. Entry III(5) of Part A allows 60% depreciation on "computers including computer software," and Note 7 defines 'computer software' as any program recorded on discs, tapes, or other storage devices. The Tribunal found that the project management software in question was recorded on physical media and required a computer to function, thus falling squarely under the specific entry for computer software eligible for 60% depreciation. It distinguished this specific entry from the more general entry for intangible assets in Part B. The Tribunal also relied on multiple coordinate bench decisions and High Court rulings, including a recent Madras High Court decision in CIT vs. Computer Age Management Services (P.) Ltd., which upheld the 60% depreciation rate for similar software licenses. The Tribunal further referred to principles of statutory interpretation emphasizing that specific entries prevail over general ones and that the description must be given effect as per the plain language of the statute. Accordingly, the Tribunal allowed the assessee's claim for 60% depreciation on computer software licenses, reversing the AO and CIT(A) orders. Interest on Delayed Remittance of TDS under Section 40(a)(ii) The AO disallowed interest of Rs. 24,178 claimed by the assessee on delayed remittance of TDS under section 40(a)(ii), treating it as penal interest not allowable as deduction. The CIT(A) upheld this disallowance. The Tribunal observed that the assessee contested the characterization of this amount as interest or TDS and sought verification. The Tribunal found it appropriate to remit the matter back to the AO for ascertainment of the true nature of the expenditure-whether it is interest (which may be allowable under section 37(1)) or income-tax (which is not deductible). This approach allows the AO to examine the facts and documents to determine whether the payment is penal interest or tax and decide deductibility accordingly. 3. SIGNIFICANT HOLDINGS On disallowance under section 14A, the Tribunal held: "Now the law is if the appellant did not earn any exempt income like dividends, section 14A cannot be invoked. Respectfully following this judgement, subject to the condition that the appellant did not earn any exempt income during Asst. Year 2013-14, I direct the assessing officer to delete the addition made on account of disallowance u/s. 14A..." Regarding interest income during pre-operative period, the Tribunal quoted the Supreme Court in CIT vs. Bokaro Steel Ltd.: "While interest earned by investing borrowed capital in short-term deposits is an independent source of income not connected with the construction activities or business activities of the assessee, the same cannot be said in the present case where the utilisation of various assets of the company and the payments received for such utilisation are directly linked with the activity of setting up the steel plant of the assessee. These receipts are inextricably linked with the setting up of the capital structure of the assessee-company. They must, therefore, be viewed as capital receipts going to reduce the cost of construction. In the case of Challapalli Sugars Ltd. v. Commissioner of Income-tax... the Court held that interest incurred before the commencement of production on borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income." On depreciation of computer software, the Tribunal emphasized the principle of specific versus general entries in taxation statutes: "Part B of New Appendix I is a general entry whereas Entry 5 of Part A of New Appendix I is a specific entry read with Note 7. In the instant case, the Tribunal, in our considered view, rightly held that the assessee is eligible to claim depreciation at 60%." It further held: "If a particular article would fall within the description by the force of words used, it is impermissible to ignore the word description... going by the usage of the equipment purchased by the assessee, a decision has to be arrived at." On the issue of interest on delayed TDS, the Tribunal did not decide the issue on merits but remitted the matter for factual verification, directing: "We set aside the orders of lower authorities on this issue and remit the matter back to the file of the AO to ascertain the true character of this expenditure claimed by assessee whether this is interest or it is in the character of income-tax and accordingly, decide the issue." Final determinations:
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