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Income Tax Appellate Tribunal, MUMBAI BENCH “D” MUMBAI
Before: SHRI RAVISH SOOD & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2011-12. The appeal is directed against the order of the Commissioner of Income Tax-10, Mumbai [in short ‘CIT(A)’] and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).
The 1st ground of appeal On the facts and in the circumstances of the case, the learned CIT (A) has erred in confirming the AO's Disallowance of Rs.9,68,582/-u/s 14A of the Income Tax Act 1961. 1.1 That CIT (A) has erred in disallowing Rs.9,68,582/- u/s 14A read with Ruled 8Dwithout having a finding that any expenses were actually incurred in relation to earnings of income which did not form part of total income in hands of Appellant or total income in overall content of the Income-tax Act. 1.2 That CIT (A) has erred in applying S.I4A in relation to income which has been subject matter of taxation of income in some other manner as per taxation policy in respect of security transaction tax or dividend distribution tax. Thus, such incomes cannot he called as Income which does not form part of total income under this Act as used in second limb of S.14A. 2.1 Briefly stated, the facts are that the assessee filed its return of income for the assessment year (AY) 2011-12 on 27.09.2011 declaring loss at Rs.46,02,773/-. During the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee has earned dividend income of Rs.16,79,709/- during the impugned assessment year, which it claim to be exempt. In response to a query raised by the AO to furnish the details of investments and also to explain why the disallowance u/s 14A r.w. Ruled 8D of the Income Tax Rules, 1962 (the ‘Rules’) should not be made, the assessee submitted that it had not incurred any expenditure nor claimed any such expenditure in relation to investment in tax-exempt securities. However, the AO was not convinced with the said reply of the assessee and made a disallowance of Rs.9,68,582/- under Rule 8D(2)(iii) of the Rules.
2.2 In appeal, the Ld. CIT(A) observed that the AO has assessed the tax u/s 115JB since the tax liability under the normal provision of the Act is lower than the tax computed on the book profit. Further observing that the disallowance u/s 14A under the normal provisions being academic, the addition of Rs.9,68,582/- to the book profit was confirmed by him. 2.3 Before us, the Ld. counsel of the assessee files a copy and relies on the order of the Tribunal in Tata Petrodyne Ltd. and Ors. V. Assist CIT and Ors. – (2018) 54 CCH 0285 Mum Trib and Assist CIT & Anr. V. Vireet Investment Pvt. Ltd. & Anr. – (2017) 58 ITR (Trib) 0313 (Delhi) (SB). On the other hand, the Ld. DR supports the order passed by the Ld. CIT(A). 2.4 We have heard the rival submissions and perused the relevant materials on record. As far as normal computation of income is concerned, as per Rule 8D(2)(iii) only those investments are to be considered for computing average value of investment which yielded exempt income during the year under consideration as held by the Special Bench of the ITAT in Vireet Investment Pvt. Ltd. (supra). We direct the AO to follow the above decision and make an addition accordingly. We direct the assessee to file the relevant documents/evidence before the AO. Also, in the case of Vireet Investment (P.) Ltd. (supra), the question before the Tribunal was, whether the amount or amounts of expenditure relatable to exempt income as contemplated in clause (f) to Explanation 1 to section 115JB(2) could be arrived at by resorting to provisions of section 14A or not. The Special Bench of the Tribunal in the above case held that computation under clause (f) of Explanation 1 to section 115JB(2) is to be made without resorting to computation as contemplated u/s 14A r.w. Rule 8D. Accordingly, we direct the AO to delete the disallowance u/s 14A of Rs.9,68,582/- made to the book profit u/s 115JB of the Act. Thus, in respect of normal provisions the appeal is allowed for statistical purposes, whereas for computation of book profit u/s 115JB, the appeal is allowed.
The 2nd ground of appeal On the facts and in the circumstances of the case, the learned CIT (A) has erred in confirming that the software development & consultancy charges of Rs.12,05,204/- are not of revenue nature but of capital nature and as such the appellant Company is entitled to claim only depreciation thereon, though the said charges are periodic and were paid for the use of software on monthly/quarterly/ half yearly /yearly basis. 3.1 We find that on similar facts, the issue is decided in favour of the assessee by the Tribunal in assessee’s own case for AY 2009-10. The Tribunal vide order dated 30.09.2016 in has held as under :
“5. Second Ground of appeal raised in the present appeal is that the CIT(A) erred in confirming the disallowance of Software Usages Charges. The Ld. AR of the assessee argued that Software Uses Charges are Revenue in nature. The Software Uses Charges are not enduring in nature and they are fully allowable and relied upon the decision of Thomas Cook (I) Ltd. vs. DCIT, ITAT, Mumbai in & 9354/Mum/1992 reported in 15. SOT 392. The Ld. DR for Revenue supported the orders of authorities below.
We have considered the rival contention of the parties and perused the orders of authorities below. While making assessment, the AO observed that assessee-company claimed Software Uses Charges of Rs. 14,56,292/- which was paid on account of Software Uses Charges. The AO concluded it as Capital in nature and allowed only 60% depreciation, thus Rs. 5,82,517/- was disallowed. The CIT(A) while considering this ground concluded that the AO has given consequential effect on the depreciation in the specific year in accordance with provision of the Act and on the written down value of the previous year mentioned software capitalized by him on the basis of depreciation allowed @ 60% in AY 2006-07. For ascertaining as to whether the expenditure of computer software gives enduring benefit to assessee, the duration of time for which assessee required right to use the software become relevant having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time, it would be said that where the life of computer software is shorter (less than 2 years) it may be treated as revenue expenditure. In Thomas Cook (India) ltd Vs DCIT (supra) the coordinate bench of Tribunal held that expenses incurred on up-gradation of software do not result into acquisition of any asset nor acquisition of enduring benefits as software become obsolete very quickly. Thus, following the order of coordinate bench this Ground of appeal is allowed.”
3.2 Facts being identical, we follow the above order of the Co-ordinate Bench and allow the 2nd ground of appeal.
The 3rd ground of appeal On the facts and in circumstances, the learned CIT (A) has erred in confirming the disallowance of misc. expenditure of Rs.15,76,678/- of total expenses of Rs.9,70,848/-. 4.1 During the year under consideration, the assessee has written off miscellaneous expenses of Rs.19,17,848/-. In response to a query raised by the AO to give details and justification for write off of miscellaneous expenses, the assessee vide reply dated 15.01.2014 submitted that these expenses were incurred after the incorporation of the company but before the start of the operation of the company for the purpose of enabling the assessee to commence its business. However, the AO observed that the above expenses consist of demerger expenses, preoperative expenses, registration fees, stamp duty and goodwill, totalling to Rs.19,70,848/-. The AO allowed 1/5th of the above expenses of Rs.19,70,848/- which comes to Rs.3,94,170/- u/s 35D of the Act and disallowed the balance amount of Rs.15,76,678/-. In appeal, the Ld. CIT(A) agreed with the reasons given by the AO and confirmed the above disallowance. 4.2 During the course of hearing before us, the Ld. counsel submits that the above expenses were incurred by the assessee after the commencement of the operation of the company and not prior to it. It is stated that demerger and related expenditure can be incurred only after the company has already engaged itself in the business and not prior to the commencement of the business.