The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) has instructed the Assessing Officer (AO) to review the case involving the disallowance of legal and professional charges incurred for system development by System Development.
In this matter, the CIT (A) upheld the AO’s decision to disallow legal and professional charges totaling Rs. 8,85,400/-, treating them as capital expenses due to their alleged association with software expenses and their perceived enduring quality and long-term benefits.
The AO had initially disallowed these charges, asserting that they were capital in nature, particularly related to software purchase. However, the assessee provided detailed records of these expenses, which were documented between pages 216 to 241 of the paper book.
While the CIT (A) partially favored the assessee by allowing certain expenses, he also directed the AO to verify the facts and allow expenses related to maintenance, albeit with the stipulation that other expenses should be capitalized, with a depreciation allowance of 25%. Notably, the assessee did not specifically contest the allowance of 25% for other expenses as restricted by the CIT (A).
Regarding the remaining maintenance expenses, the ITAT bench of Rifaur Rahman (Accountant Member) and Kuldip Singh (Judicial Member) directed AO to conduct a thorough verification to determine their nature as revenue expenses. Consequently, the AO has been directed to decide on the maintenance charges claimed by the assessee in accordance with the CIT (A)’s directives within a six-month period from the date of receiving the order.
This decision by the ITAT partly favours the assessee, providing clarity and instruction for the reassessment of the disputed charges, particularly in distinguishing between capital and revenue expenses.
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