NSDL E-GOVERNANCE INFRASTRUCTURE LIMITED,MUMBAI vs. DCIT, CIRCLE - 7(1), MUMBAI

Appellant by Shri Arvind Sonde (AR) Revenue by Shri M.C. Omi Ningshen (DR) Date of hearing : 18/01/2017 Date of order : 20/02/2017

O R D E R PER ASHWANI TANEJA, AM: These appeals pertain to the same assessee for two different years involving identical issues, therefore, these were heard together and being disposed by this common order.

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First we shall take up appeal in ITA Number 2728/Mum/2013 filed by the assessee against the order of Commissioner of Income Tax (Appeals)-13, Mumbai (hereinafter called as Ld. CIT (A) in short) dated 21.12.2012 passed against the Assessment Order of the AO dated 30.11.2011 u/s 143 (3) r.w.s. 254 of the Income Tax Act, 1961 (in short Act) for Assessment Year 2004-05 on the following grounds:

1:0 Re: Disallowance of software expenses- Rs. 41,51,768/- : 1:1 “The Commissioner of Income Tax (Appeals) has erred in upholding the view of the Assessing Officer that an amount of Rs. 41,51,768/- being incurred by the Appellant during the year on of software is a capital expenditure. 1:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, the expenditure of Rs. 41,51,768/- incurred during the year for acquisition of software was a revenue expenditure and the Commissioner of Income Tax (Appeals) ought to have held as such. 1:3 The Appellant submits that the Assessing Officer be directed to allow the expenditure of Rs. 41,51,768/- in computing its total income and to re-compute its tax liability for the year accordingly. 2:0 Re: General 2:1 The Appellant craves leave to add, alter, amend, substitute and/or modify in any manner whatsoever all or any of the foregoing of appeal at or before the hearing of the appeal.”

2.1. We have gone through the order passed by the lower authorities. It is noted that in AY 2003-04, Hon’ble ITAT had set aside this issue to the file of the AO for deciding it afresh as per decisions of ITAT Special

3 NSDL Bench, Delhi in the case of Amway India Enterprises. In pursuance of ITAT directions, the AO passed afresh assessment order for AY 2003- 04, wherein the software expenses incurred by the assessee have been treated ad capital in nature.

2.2. In the year before us, Ld. CIT (A) analysed the nature of expenses and held that nature of expenses was identical as was in AY 2003-04 and therefore following the decision of Amway India Enterprises, supra, Ld. CIT (A) held with impugned expenditure is a capital expenditure entitled for depreciation @ 60%. During the course of hearing before us, nothing wrong could be pointed out in law or in facts in the findings of Ld. CIT (A). Therefore, we uphold the order of the Ld. CIT (A) on this issue.

Now, we shall take up appeal in filed by the assessee against the order of Ld. CIT (A) dated 26.10.2010 passed against the Assessment Order of AO dated 17.12.2007 u/s 143 (3) of the Income Tax Act, 1961 for AY 2005-06 on the following grounds:

1. “The CIT (A) erred in upholding the action of the Assessing Officer in restricting the depreciation on computer software, purchased and forming part of the head “Depository System” @ 25% only being the rate applicable to “intangible assets”, instead of @ 60% which is the rate of depreciation admissible on computers and computer software, as claimed by the Appellant in its Return of Income and thereby disallowing depreciation of Rs. 3,03,33,614/- on “Depository System.”

2. The CIT (A) erred in upholding the disallowance of the following Software Expenses of Rs. 3,41,604/-

Date Name of Party Amount Description

05/10/2004 STARCOM 90,000 SPEED E STRESS SOFTWARE P TESTING PROJECT LTD AND FOR DEV OF SOFTWARE FOR PAN CARD APPLICATION

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TDS 5.13% 21/12/2004 STARCOM 90,000 SPEED E STRESS SOFTWARE P TESTING PROJECT LTD AND FOR DEV OF SOFTWARE FOR PAN CARD APPLICATION TDS 5.13% 20/04/2004 PC 35,554 100% FULL TECHNOLOGY DELIVERY FOR CENTRE PROCUREMENT OF MICROSOFT PROJECT PRO 2003 WIN 32 ENGLISH (PO 377) 07/05/2004 STARCOM 10,000 SPEED E STRESS SOFTWARE P TESTING PROJECT LTD AND FOR DEV OF SOFTWARE FOR PAN CARD APPLICATION TDS 5.13% 04/06/2004 QUESTA 116,050 INSTALL/ACCEPT OF SOFTWARE 40 NOS STAR SYSTEM LTD OFFICE LICENCE 7.0 AND 10 NO STAR OFFICE LICENCE 7.0 (PO NSDL/QUESTA/2004 /408 Without prejudice to the above, the CIT (A) erred in not allowing depreciation on the above @ 60% which is the rate of depreciation admissible on computers and computer software. 3.1 The CIT (A) erred in confirming the action of the Assessing Officer of making a disallowance u/s 14A of the Act. 3.2 The CIT (A) erred in directing the Assessing Officer to compute the disallowance u/s 14A on the basis of 0.5% of the monthly weighted average of investments in tax free securities. Without prejudice to the above, the Appellant contends that, in the facts of its case, no expenditure has been incurred for the purpose of earning the exempt income and, accordingly, no expenditure is required to be allocated, as having been incurred in relation to the income claimed exempt from tax.

3. The Appellant prays that the order of the AO be amended to grant reliefs claimed above.

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4. Ground Nos. 1 & 2: In these grounds the grievance of the assessee is that depreciation should be granted @ 60% as against 25% granted by the AO. In this regard, our attention is brought to the order of the Ld. CIT (A) for AY 2004-05, wherein depreciation has been granted @ 60%. It is brought to our notice that in AY 2004-05, Ld. CIT (A) has granted depreciation @ 60% on these items. The order of Ld. CIT (A) has been accepted by the Revenue. Therefore, as a matter of consistency we direct the AO to grant the depreciation @ 60% in AY 2005-06. With these directions these grounds are allowed.

5. Ground No.3: In this ground, the assessee is aggrieved with disallowance made by the AO u/s 14A. During the course of hearing, it was stated that identical issue has been restored back to the file of the AO by the ITAT vide its order dated 23.07.2014 for AY 2009-10. We have gone through the order passed by the lower authority and order of the Tribunal for AY 02.09.2010 passed in the own case of assessee. It is noted that the Tribunal has restored this matter back to the file of the AO with following observations:

“We have heard the parties, and perused the material on record. The entire disallowance is under rule 8D (2)(iii), i.e. at 0.5% of the average value of the investment, reckoned at one half of the book value of investments (yielding tax-exempt income), as at the beginning and the close of the Year. The Ld. CIT(A) has observed of substantial activity, even as mere holding of investment, as where in stocks and shares, subject to market volatility in response to various economic-macro and macro, factors, may require decision making at, and thus involvement, of the higher management, entailing incurring cost. In fact, as we observe, there is not much difference between the opening and the closing value of the investment and, two, the bulk of the tax exempt income arising by way of interest on tax-free bonds. The Revenue, in our view, ought to have required the assessee to substantiate its claim of the working of suo motu disallowance u/s. 14A with reference to its accounts, and which would include the underlying vouchers as well. The A.O. upon making such enquiry as he deems fit and proper in the matter, is to form

6 NSDL his opinion, expressing his satisfaction or dissatisfaction, as the case may be, in the matter. This examination and process, as apparent, has not been undertaken, which, as explained by the hon’ble jurisdiction high court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bom), is mandatory, forming, in fact, part of both, the law- per section 14A, which is a complete code in itself, as well as the delegated legislation in the form of rule 8D. We, accordingly, restore this matter back to the file of the A.O. to allow the assessee an opportunity to substantiate its claim qua the suo motu disallowance by it, deciding the matter afresh in accordance with law, observing the procedure as explained, and proceed in the matter following the express provision of section 14(A)(2) of the Act. We decide accordingly.” 5.1. It was jointly stated that same decisions may be given in this year. Therefore, respectively following the order of the Tribunal, we restore this issue back to file of the AO with the same directions as have been given in AY 2009-10. The AO is directed to follow order for AY 2009-10 while adjudicating this ground. Adequate opportunity of hearing shall be granted to the assessee while deciding this ground.

Order was pronounced in the open court at the conclusion of hearing.