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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A. MOHAN ALANKAMONY
आदेश / O R D E R
PER A. MOHAN ALANKAMONY, AM:
This appeal by the assessee is directed against the order passed by the Ld. Commissioner of Income Tax (Appeals)-10, Chennai dated 13.10.2016 in for the assessment year 2009-10 passed u/s.250(6) r.w.s.143(3) of the Act.
The assessee has raised several grounds in its appeal, however the cruxes of the issues are as follows:-
(i) The Ld.CIT(A) has erred in upholding the order of the Ld.AO who had disallowed software expenses amounting to Rs.8,37,461/- by holding it to be capital expenditure. (ii) The Ld.CIT(A) has erred in upholding the order of the Ld.AO who had disallowed Rs.1,73,022/- by invoking the provision of Section 14A of the Act.
The brief facts of the case are that the assessee is a private limited company engaged in the business of stock broking, portfolio management dealing in shares, securities etc., filed its return of income for the assessment year 2009-10 on 29.09.2009, admitting total income of Rs.3,74,47,055/-. Initially the return was processed u/s.143(1) of the Act and subsequently the case was selected for scrutiny and finally assessment order was passed U/s.143(3) of the Act on 19.12.2011, wherein the Ld.AO had made the above mentioned additions / disallowances.
Ground No. 2(i) : Disallowance of computer software expenses: During the course of scrutiny assessment proceedings, it was observed by the Ld.AO that the assessee had claimed expenditure of Rs.8,37,461/- being purchase of computer software. The Ld.AO opined that the above expenditure is capital in nature and therefore disallowed the same, however he granted depreciation.
4.1 Before the Ld.CIT(A), assessee furnished the details of the software purchased as follows:-
S.No. Particulars Amount (Rs.) 1 Purchase of anti-virus software 17,000 2 MS Windows / SQL 1,31,806 3 BSE Front End Trading License 88,820 4 License fee – Share Pro Software 3,12,912 5 Pair trading software 2,10,000 6 NSE BSE Project work 75,625 7 Mail Merge tool 1,298 8,37,461 The Ld.AR further made the following submissions before the Ld.CIT(A) :-
(i) The expenditure incurred by the assessee for acquiring the license is for the period of one year, thereafter it is renewable on yearly basis. (ii) Therefore the assessee has not derived any benefit of enduring nature. (iii) Reliance was placed in the case Empire Jute Co Ltd. vs. CIT reported in 124 ITR 1(SC), wherein the Hon’ble Apex Court held “If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.”
(iv) Reliance was placed in the decision of the special bench of the Tribunal in the case M/s. Amway India Enterprises vs. DCIT reported in 111 ITD 0112. (v) Reliance was placed in the decision of the Delhi bench of the Tribunal in the case Indo Rama Synthetics India Ltd. vs. DCIT reported in 28 CCH 0044 (Delhi Trib), wherein it was held that yearly license fee in respect of existing computer software which were already loaded on the computers and for purchasing certain other application software required for facilitation of mere efficient and profitable day to day management and trading operations were revenue in nature.
(vi) Then the Ld.AR further placed reliance on various other decision which are cited in the order of the Ld.CIT(A).
4.2 After analyzing the submissions of the Ld.AR, the Ld.CIT(A) confirmed the order of the Ld.AO because in the Income Tax Rules, it was specifically mentioned that with effect from 01.04.2003 depreciation will be allowed on computer software as per the prescribed rate. Since the Ld.AO had granted depreciation on the computer software purchase by the assessee as per the Income Tax Rules for the relevant assessment year, the Ld.CIT(A) confirmed the order of the Ld.AO.
4.3 Before us, the Ld.AR reiterated the submissions made before the Ld.CIT(A) while as the Ld.DR argued in support of the orders of the Ld.Revenue Authorities.
4.4 We have heard the rival submissions and carefully perused the materials available on record. The Ld.AR had taken the plea that the software purchased by the assessee could be used by the assessee only for the period of one year and thereafter it is renewable on yearly basis by further payment. These facts are neither negated by the Ld.Revenue Authorities nor disputed. The Ld.Revenue Authorities had arrived at the decision for granting depreciation to the assessee only because depreciation was prescribed in the Income Tax Rules. Further the Ld.Revenue Authorities did not examine the scope of the usage of the software purchased by the assessee i.e., as to whether the expenditure is incurred only for the period of one year or for more number of years. If the software is used year after year without making any further payment, then it could be said that an asset is created which has enduring benefit. In that case the provisions of the Income Tax Rule will be applicable and the assessee would be eligible to claim depreciation on purchase of such software. But in the case of the assessee, it appears that the software purchased could be used only for one year and thereafter on further payment it could be used for another year so on and so forth. In this situation, it is apparent that the expenditure incurred by the assessee on purchase of computer software is revenue in nature and therefore such expenditure cannot be capitalized. For the above said reasons, we are of the considered view that the expenditure incurred for purchase of software by the assessee is revenue in nature and therefore we hereby direct the Ld.AO to delete the addition made for Rs.8,37,461/- towards purchase of computer software.
Ground No. 2(ii) : Disallowance U/s.14A of the Act:-
During the course of scrutiny assessment, it was observed by the Ld.AO that the assessee had disclosed in its Balance Sheet investments to the tune of Rs.5,49,25,362/- as on 31.03.2009 and Rs.4,20,63,960/- as on 01.04.2008. It was further observed by the Ld.AO that the above investments were made by the assessee for earning exempt income. Therefore the Ld.AO invoked the provisions of Section 14A of the Act and Rule 8D(2)(iii) and thereby computed the disallowance at half percent on the average investment of Rs.4,84,94,661/- [(Rs.5,49,25,362 + Rs.4,20,63,960)/2] which works out to Rs.2,42,473/-.
5.1 On appeal the Ld.CIT(A) confirmed the order of the Ld.AO by holding that the Ld.AO had correctly worked out the disallowance as per the provisions of the Act and Rule 8D(2)(iii) of the Rules by relying in the decision of Hon’ble Bombay High Court in the case Godrej & Boyce Mfg Co. Ltd. reported in 328 ITR 81, ITAT, decision of the Chennai Bench of the Tribunal in the case M/s. Lakshmi Ring Travellers vs. ACIT in ITA 2083 (Mds) dt. 02.11.2012 and in the case DCIT vs. K Hon'ble Arvind Pvt. Ltd. 5.2 Before us the Ld.AR reiterated the lengthy submissions made before the Ld.CIT(A) for deleting the addition made U/s.14A of the Act while as the Ld.DR argued in support of the orders of the Ld.Revenue Authorities.
5.3 We have heard the rival submissions and carefully perused the materials available on record. Even at this stage before us the assessee has not furnished any materials to suggest that it had not incurred any expenditure towards managing the investment made which earns income that is exempt from tax. In this situation, we find the action of the Ld.Revenue Authorities to 9 be appropriate because they have only followed the provisions of Section 14A of the Act and Rule 8D(2)(iii) of the Rules. Hence, we do not find it necessary to interfere in the orders of the Ld.Revenue Authorities on this issue.
In the result, the appeal of the assessee is partly allowed.
Order pronounced on 04th October, 2017 at Chennai.