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

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ITA 2728/MUM/2013Status: DisposedITAT Mumbai20 February 2017AY 2004-057 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

For AY 2004-05, the Tribunal upheld the lower authorities' view that software expenses were capital, dismissing the appeal. For AY 2005-06, depreciation was allowed at 60% on consistency, and the Section 14A issue was restored to the AO.

What were the facts?

The assessee incurred software expenses and claimed depreciation on them. The Assessing Officer and CIT(A) treated these expenses as capital in nature. For AY 2005-06, the assessee also disputed the disallowance made under Section 14A.

What were the issues?

Whether software expenses are revenue or capital expenditure, and the correct depreciation rate for computer software. The applicability and computation of disallowance under Section 14A.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 14A

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Income Tax Appellate Tribunal, MUMBAI BENCHES “H”, MUMBAI

Before: SHRI AMIT SHUKLA & SHRI ASHWANI TANEJA

For Appellant: Shri Arvind Sonde (AR)
For Respondent: Shri M.C. Omi Ningshen (DR)
Hearing: 18/01/2017

Heard together (2 matters)

I.T.A. No. 2728/Mum/2013
I.T.A. No. 2008/Mum/2011

Read from the judgment's own cause title. This page is filed under one of them.

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.

Ground No1: In this ground, assessee is aggrieved with the action lower authorities in treating expenditure incurred of software as capital expenditure. During the course of hearing it was stated at the outset that this issue has already been decided by the Tribunal against the assessee in its order for AY 2001 to 2003-04 vide order dated 30.07.2009.

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.

3.

As a result, appeal of the assessee is dismissed.

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.

The Appellant craves leave to add to, alter or amend, any of the foregoing grounds of appeal, if and when necessary”.

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.

6.

As a result, this appeal is partly allowed.

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

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