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Income Tax Appellate Tribunal, “E”, BENCH, MUMBAI
Before: SHRI RAJENDRA, AM & SHRI RAM LAL NEGI, JM
सुनर्ाई की तारीख / Date of Hearing : 14/03/2017 घोषणा की तारीख/Date of Pronouncement: 28/04/2017 आदेश / O R D E R
PER RAM LAL NEGI, JM
1. This appeal filed by the assessee is directed against the order dated 11/06/2014 passed by the Commissioner of Income Tax (Appeals)- 18, Mumbai hereinafter to be referred as CIT(A), whereby the Ld. CIT (A) has dismissed the appeal filed by the assessee against Assessment Order dated 31/12/2013 passed u/s 143 (3) of the Income Tax Act (for short ‘the act’).
Brief facts of the case are that the assessee company filed its return of income for the Assessment Year under consideration declaring the total income of Rs. 3,18,794/-. The same was processed u/s 143 (1) and after scrutiny assessment order u/s 143 (3) of the Act was passed determining the total income at Rs. 16,62,889/- after making the following disallowances:
Claimed for expenses of Rs. 7,42,200/- being payment made to M/s Nettra Infotech Pvt. Ltd. For purchase of software.
2 Assessment Year: 2011-12
2. The claim for expenses of Rs. 2,56,000/- incurred on various software/hardware and 3. The claim for expenses of Rs. 3,04,895/- incurred on acquiring Microsoft operating license.
Aggrieved by the assessment order the assessee filed first appeal before the Ld. CIT (A). The Ld. CIT (A) after hearing the authorized representative of the assessee dismissed the appeal. Still aggrieved, the assessee is in appeal before the Tribunal on the following grounds of appeal:
1. “The learned Commissioner of Income Tax (Appeals)-18 [CIT (A)] erred in law and on fact in confirming the disallowance of Rs. 7,42,200/- being expenditure incurred on development of software for the purpose of the business of appellant company.
2. The learned CIT (A) further erred in law and on fact in the not considering the fact that no new asset came into existence as the said software was abandoned by the appellant.
3. The Learned CIT (A) erred in law and on facts in confirming the disallowance Rs. 3,04,895/- being expenditure incurred on acquisition of Microsoft Licenses.
4. Without prejudice to (3) above, the Learned CIT (A) erred in not considering the appellant’s claim for depreciation u/s 32 of Income Act 1961 on Microsoft Licenses.
The learned CIT (A) erred in law and on facts in not considering the appellant’s claim for depreciation u/s 32 of Income tax Act 1961 on acquisition of Computer Hardware amounting to Rs. 2,56,000/-.
6. The Appellant craves leave to add and/or amend and/or modify and/or alter and/or withdraw all or any of the aforesaid grounds of appeal as and when the occasion demands.
7. All the aforesaid grounds of appeal are independent, in the alternative and without prejudice to one another.”
3 Assessment Year: 2011-12
This case was fixed for hearing on 14/03/2017. When the case was called for hearing, none appeared on behalf of the assesse. We noticed that the assessee had not appeared on the last date of hearing i.e., on 7.1.2017 and accordingly, notice was sent through registered post on the address furnished by the assessee in Form-36. However, the registry has received the said notice back with the remarks ‘left’. We further noticed that assessee has not furnished any new address. Since, there was no new address, we decided to dispose of the appeal on the basis of material placed before us after hearing the DR.
5. The Ld. DR relying on the findings of the Ld. CIT (A) submitted that the assessee had claimed expenditure of Rs. 13,03,095/- on account of the amounts written off in case of three parties from whom the software and hardware were purchased. The AO disallowed the claim of the appellant holding that the payments were made to purchase software and hardware and software license were capital expenditure and by writing off the capital expenditure the assessee cannot claim benefit under section 37(1) of the Act. Hence, the Ld. CIT(A) has rightly confirmed the findings of the AO.
We have perused the material on record in the light submissions of the Ld. DR and the contention of the assessee made before the Ld. CIT (A). The Ld. CIT (A) has confirmed the action of AO holding as under:
“2.3 I have considered the submissions of the appellant, order of the AO and facts of the case carefully. It is noticed that assessee has claimed expenditure of Rs. 1303095/- on account of amounts written off in case of three parties stated above from whom the software and hardware were purchased. The assessee has made this advance to these three parties but in the year under consideration this amount was written off and claimed deduction u/s 37(1) of the I.T. Act. However, the AO has disallowed the claim of the appellant by holding that the payments were made to purchase software and hardware and software license for its purchase and the expenditure was of capital nature and treated it as capital loss, hence disallowed the claim of Rs. 1303095/- and added back to the taxable income of the assessee. On the other hand the AR of the appellant has submitted that in F.Y. 2009-10, the appellant had entered into an agreement with Tata Teleservices (Maharashtra) Ltd. to manage TTML’s OOH media strategy. The 4 Assessment Year: 2011-12 agreement was for a period of one year beginning w.e.f. 01.05.2009 to 30.04.2010 and was renewable for further period. M/s. Tata Teleservices (Maharashtra) Ltd. asked the appellant to install the software through which they can track their advertisement process. The appellant had paid an advance of Rs. 7,42,200/- to Netra Infotech Pvt. Ltd. However, Tata Teleservices (Maharashtra) Ltd did not renew the agreement during the Financial Year relevant to the year under consideration and the software was also not complete till then. Therefore, the said expenses were written off as business expenditure in the year under consideration. In support to the software acquired from M/s. Netra Infotech Pvt. Ltd. the appellant has also purchased Microsfot Licenses from Technology Solution Group on 23/10/2009 for Rs. 3,04,895/- was also written off along with advance o Netra. To support the software to be acquired from Netra the appellant purchased computer hardware amount to Rs. 2,56,000/- i.e. a computer server and computer peripherals from Neptune Info Solutions Pvt. Ltd. Since the contract was not renewed the hardware cost of Rs. 2,56,200/- was also written off. Thus it was argued that it was a revenue expenditure and allowable u/s 37 (1) of the I.T. Act.
From the perusal of the submissions and facts of the case it is noticed that the appellant has entered into contract with Tata Teleservices (Maharashtra) Ltd. in the F.Y. 2009-10 for the period from 01.05.2009 to 30.04.2010. However, this contract was not renewed during the year under consideration. On the other hand the appellant has made payment to M/s. Netra Infotech Pvt. Ltd., M/s. Technology Solutions Group and M/s. Neptune Infosolution Pvt. Ltd. for acquiring software and hardware. Since the appellant has not renewed the licenses in the year under consideration therefore the deal was not renewed and written off the advance given amounting to Rs. 13,03,095/-. Now the question arises whether the advances given to these parties for acquiring software and hardware was revenue expenditure or capital expenditure. The appellant had treated it as revenue expenditure and claimed deduction u/s 37 (1) of the I.T. Act. But the AO has held that the assessee had made advance payment for purchase of software and hardware which were of capital nature and by writing off it as capital loss which is not allowable u/s 37 (1) of the I.T. Act. It is pertinent to note that the Agreement made by the appellant with M/s Tata Teleservices (Maharashtra) Ltd. was for a period of 1.5.2009 to 30.04.2010. Since it was not renewed for the year under consideration, therefore, the payments made by the appellant to these parties for acquiring hardware and software was not a business expenditure because the company was aware that without the renewal of the agreement the software/hardware cannot be acquired. Thus, this expenditure was not relating to business of the appellant without renewing the agreement with M/s. Tata Teleservices (Maharashtra) Ltd. Secondly the advances were made for acquiring software and hardware which is clearly a capital expenditure in view of the 5 Assessment Year: 2011-12 decision of the Hon’ble Rajasthan High Court in the case of CIT v. Aravalli Constructions Pvt. Ltd. 259 ITR 30 where it is held that whether acquisition of computer software is a revenue or capital expenditure held it was capital expenditure. Since it was a capital expenditure, therefore, writing off this amount is a capital loss which is not covered u/s 37(1) of the I.T. Act. Keeping in view these facts and circumstances it is held that this expenditure incurred for acquiring software and hardware are not wholly and exclusively for the business purposes because the agreement with M/s Tata Teleservices (Maharashtra) Ltd. was not renewed for the year under consideration and secondly it was a capital expenditure. Therefore, the reliance placed by the AR of the appellant on the decision of Honourable Courts stated above are not helpful because the facts of the present case are distinguishable. Thus in totality of facts and circumstances it is held that the AO has rightly treated the amount of Rs. 13,03,095/- as capital expenditure and the amount written off was a capital loss which is not allowable u/s 37(1) of the I.T. Act. Thus the action of the AO in disallowing this expenditure is upheld and the ground of appeal is dismissed.”
During the financial year relevant to the assessment year under consideration the assessee had made payment of Rs. 13,03,095/- to the parties concerned for purchase of software and hardware. However, the assessee written off the said amount and claimed deduction in this assessment year treating the same as revenue expenditure. In the light of the aforesaid facts, the only issue which is required to be adjudicated in this case is whether the assessee is entitled to claim deduction under section 37(1) of the Act or the same cannot be treated as revenue expenditure? The authorities below have treated the said amount as capital loss and denied the claim of the assessee keeping in view the nature of expenditure.
We notice that before the authorities below the assessee contended that the application software is an aid in the business operations rather than the tool itself. Therefore, the payment for such application software, though there is an enduring benefit does not result in acquisition of any capital asset and it merely enhances the productivity or efficiency and hence, has to be treated as revenue expenditure. No doubt the test of enduring benefit cannot be applied mechanically in the case of software purchase expenses, but in the present case the assessee has written off the amount paid to the concerned parties and claimed deduction. Since, the assessee has written off the amount in question, the same cannot be treated as business 6 Assessment Year: 2011-12 expenditure. Rather it is a business loss, as has been held by the authorities below. In our considered opinion, the assessee is not entitled for deduction u/s 37(1) of the Act in the assessment year under consideration. Since, the assessee has failed to substantiate its claim before the authorities below, we do not find any merit in the contention of the assessee. We, therefore, uphold the findings of the Ld. CIT (A) and dismiss all the grounds of appeal filed by the assessee.
In the result, the appeal filed by the assessee for assessment year 2011-2012 is dismissed.