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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
PER MAHAVIR SINGH, JM:
This appeal by assessee is directed against the order of CIT(A)-20, Mumbai in Appeal No. CIT(A)-20/Addl.CIT-7(1)/IT-110/09-10/2011-12 vide order dated 04.02.2013. Assessment was framed by Addl.CIT, range-7(1), Mumbai u/s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for AY 2007-08 vide his order dated 24.11.2009.
The first issue in this appeal of assessee is against the order of the CIT(A) confirming the disallowance made by AO of software expenses by treating the same as capital in nature. 3. Briefly stated facts are that the assessee has debited a sum of Rs.65,53,250/- as software expenses in its P&L Account. The assessee National Securities Clearing Corpn.Ltd. Asst. Year 2007-08 itself has capitalized a sum of Rs.55,52,783/- to the fixed assets and claimed depreciation on the same. Balance sum of Rs.10,00,467/- was claimed as revenue expenditure. The AO called for the details and examined the same. From the details, the AO noted that this amount claimed as revenue expenditure for a number of items, which relates to purchase of various software licences. Following are the details of such licences purchased and debited as revenue expenditure:
MFI Explorer user License Fees & content charges Rs.13,787 Renewal of existing Symantec Antivirus Desktop License Rs.1,50,430 Renewal of existing Symantec Antivirus Desktop License Rs.1,11,828 Renewal of Lotus Notes License Rs.1,54,937 Subscription advantage for Citrix mainframe XPA starter Rs.21,000 system (20 user License) 3 yr. software subs for security suite product Rs.46,361 Telerate 8 equities package Rs.26,787 Rs.5,25,130 According to AO, as the assessee himself has claimed capitalization of software expenses partly and partly it has claimed as revenue expenditure, it is double standard. According to AO, these are capital expenditure and he disallowed the claim of assessee amounting to Rs.5,25,130/-. Aggrieved, assessee preferred appeal before CIT(A).
CIT(A) relying on the decision of Tribunal in assessee’s own case in earlier years confirmed the action of AO by observing in para 6.3 as under: “6.3 I have considering the issue under appeal. I find that all these expenses referred to by Assessing Officer are related to computer software. MFI Explorer user license fees is definitely related to the software similarly renewal of desktop license and lotus note license is related to software itself hence it has to be capitalized. The same cannot be claimed as revenue expenditure. Similar is the fact in respect of subscription advantage for use of license and three years software subscription for security suit product is also found to be related to software. The fact on record reveals that software expenses are incurred by NSEIL for common benefit of NSEIL and NSCCF (Appellant) these expenses are shared by the both the companies nevertheless the nature of the expenses cannot be changed when it is related to software therefore, I find force in the National Securities Clearing Corpn.Ltd. Asst. Year 2007-08 argument of Ld. Assessing Officer that it is capital expenditure. Obviously appellant cannot take two stands, one is in respect of capitalization of software and second one is in respect of expenditure relating to software. Both the expenditures are inter- dependent and inter-mixed, hence it has to be considered simultaneously in the same background. Therefore, I find substance in the arguments of Ld. Assessing Officer, thus, disallowance of claim of revenue expenditure is sustained. However, the rate of depreciation is to bed allowed @ 60% and not @ 25% as has been held by the Hon’ble Jurisdictional ITAT as referred to earlier. Therefore, Assessing Officer is directed to allow depreciation @ 60% instead of 25% on software purchases expenses of Rs.5,25,130/-.” Aggrieved, assessee is in appeal before Tribunal.
We have heard rival submissions and gone through facts and circumstances of the case. We find that the expenses relate to computer software. From the details of the expenses it is clear that these software expenses are incurred by NSEIL for the common benefit of NSEIL and the assessee and both have shared these expenses. We further find that all such expenses are periodical in nature and mainly incurred for software upgradation charges, subscription, annual licence fee etc. These software equipments has short life span having no enduring benefit and it requires often change and in such circumstances, the expenditure incurred for purchase of these software is called as revenue expenditure and not capital in nature. This issue is covered by the decision of Hon’ble Bombay High Court in the case of CIT Vs. Raychem RPG Ltd. (2012) 346 ITR 138 (Bom), wherein it has been held as under:
Held, (i) that the Tribunal in the assessee’s own case for the assessment year 2001-02 had allowed the software expenditure as revenue expenditure finding that software did not form part of the profit-making apparatus of the assessee. Further, it held that the business of the assessee was that of manufacturing of telecommunication and power cable accessories and trading in oil retracing system and other products and the software was an enterprise resource planning package and, hence, it facilitated the assessee's trading operations or enabled the management to conduct the assessee's business more efficiently or more profitably National Securities Clearing Corpn.Ltd. Asst. Year 2007-08 but it was not in the nature of profit-making apparatus. Therefore, the expenditure was to be allowed.
In view of the above and respectfully following the decision cited supra, we allow this issue of assessee’s appeal.
The next issue in this appeal of assessee is as regards to the order of CIT(A) confirming the disallowance of excess liability written back (debit balances) amounting to Rs.21,25,585/- being business loss occurred in normal course of its business. For this, assessee has raised following ground nos. 2.1 and 2.2: “2.1. On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in confirming the disallowance of excess liability written back (Debit Balance) amounting to Rs.21,25,585/- without appreciating the fact that the same represents differential liability accrued to the appellant in the normal course of its business activity and that the same is allowable as business expenditure/business loss. 2.2. On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in holding that differential liability on account of mis-match with NCSS System has not accrued to the appellant without appreciating that on reinstatement of liability by the appellant the same being payable to members is an allowable business expenditure u/s. 37(1) of the Income Tax Act, 1961 or as a business loss u/s. 28 of the Income Tax Act, 1961. ”
7. Briefly stated facts are that the AO disallowed excess liability written back being debit balances amounting to Rs.21,25,585/-. According to AO, the assessee has debited a negative figure under the head other incomes and reduced the taxable income. The assessee before AO explained that this expenditure is allowable for the reason that same has been charged to P&L Account by way of debit entry under the head other income. Accordingly, he made claim u/s. 41(1) of the Act. But the AO disallowed the claim of the assessee by holding that the same does not qualify u/s. 41(1) of the Act as well as u/s. 37(1) of the Act. Aggrieved, assessee preferred appeal before CIT(A), who also confirmed the action of AO vide para 8.3 of his appellate order as under:
National Securities Clearing Corpn.Ltd. Asst. Year 2007-08 “8.3 I have considered the finding of the Assessing Officer and rival submission of the appellant, carefully. I find that by crediting negative deposits of Rs.21,25,585/~ appellant has suppressed the taxable income because this is not an expenditure which is to be allowed. The clearing members of the appellant are required to bring in stipulated amount in the form of interest free security deposits and security deposits are as a part of their admission condition. The daily margins not made by additional base capital nevertheless that less deposits cannot be part and parcel of revenue account but is of capital account. The claim that this liability was more in NCSS systems hence same is being payable to the member is allowable expenditure, is untenable because that is not business expenditure of the appellant. Such differential liability is not accrued to the appellant in respect of day to day business activity and same cannot be presumed to be revenue in nature. The Auditor has mention in Form No.3CD, Annexure 'H' that this is profit chargeable to tax u/s.41 but the fact reveals that such security deposits are not taxable income hence differences cannot be presumed to be cessation of liability or taxable income or allowable expenditure. Therefore, in the light of the above discussion, I find force in the arguments of the Assessing Officer. The various case laws referred to and relied upon by the appellant in written submission are not applicable to the peculiar facts of the appellant. In the case of CIT vs. Laxmivilas Bank Ltd. 220 ITR 305 (SC), it has been held that assessee bank in the course of its business purchased securities for its constituents on receiving certain percentage of face value called margin money in deposits and if constituents tads to pay the balance, margin money is forfeited and securities becomes property of the assessee. Such margin so forfeited is taxable income. Here is not the case alike. Similar, is the situation in other cited cases hence, I do not see any merit in the arguments advanced by the appellant through written submission. Thus, in view of the above discussion I am of the considered opinion that such negative debit of Rs.21,25,585/- is not at all allowable expenditure, hence, disallowance made by the Assessing Officer is sustained.” Aggrieved, assessee is in second appeal before Tribunal.
Before us, Ld. counsel for the assessee explained the facts that the assessee has collected stipulated amounts in the form of interest free security deposit (IFSD) in cash and security deposits in cash, bank guarantees, securities and FDRs as a part of their admission as a clearing member. The members are provided exposure benefits on these deposits and members also bring additional base capital in the form of cash, bank guarantees, FDRs and securities for additional exposures and also for meeting margin requirements. He also explained that daily margins not met by additional base capital but is collected by way of National Securities Clearing Corpn.Ltd. Asst. Year 2007-08 cash from members through an automated process at the end of trading plus one day. He also explained that in specific cases there could be a collection of ad hoc margins also. In this way, he explained that the IFSD is refundable only after the member surrenders his membership and margins are released automatically or at the option of the member. According to him, assessee maintains member wise margins and additional base capital collected and also ad hoc margins are levied on certain members. He explained that in the accounting records of assessee the main account is not reflected member wise but was reflected as one consolidated figure in respect of daily collection and release of total margins. He further explained that in initial years of operation by assessee, the accounting entries were being passed annually or monthly basis which was later on being made on daily basis. In subsequent years the interface system has been automated and made seamless to ensure that the output from the NCSS automatically creates an entry for the accounting system without any manual intervention. Accordingly, there was some old differences between the accounting records and member wise records maintained by NCSS with respect to earlier years when the interface was manual. He explained that the assessee in its board meeting finally, after reconciliation of facts and figures came to know that as on 31.03.2007 an amount of Rs.21.26 lacs is to be written off as a one-time corrective action to match the balances of member wise records. Ld. counsel for the assessee explained that this excess amount was reconciled with the accounts of the members and one-time payment was made to them after finding the reconciliation. Ld. counsel for the assessee drew our attention to the reconciliation statement filed at pages 97 and 98 of assessee’s paper book wherein he has reconciled the entire figure. Ld. counsel for the assessee in view of these facts stated that this is neither a claim of expenditure nor remission of liability u/s. 41(1) of the Act. Ld. counsel for the assessee stated that this is clearly a business loss National Securities Clearing Corpn.Ltd. Asst. Year 2007-08 allowable u/s. 28 of the Act being differential liability on account of mismatch with assessee and NCSS system and this reinstatement of liability by the assessee being payable to members is allowable as a business loss u/s. 28 of the Act. According to Ld. counsel, this differential liability in the debit balances of the assessee has occurred in the normal course of carrying on business and is incidental to the business. According to him, there is a direct and proximate nexus between the business operation and the liability and this fact that it is incidental to business cannot be denied by any one. In view of this, Ld. counsel for the assessee relied on the judgment of Hon’ble Bombay High Court in the case of Lord’s Dairy Farm Ltd. Vs. CIT (1955) 27 ITR 700 (Bom) and also tribunal’s order in the case of ACIT Vs. Lord Krishna Bank Ltd. in 581 & 716/Coch/2007 for AYs 2002-03 to 2004-05 dated 27.04.2012.
On the other hand, the Ld. Sr. DR heavily relied on the orders of the CIT(A) and also that of the AO.
We have heard rival submissions and gone through facts and circumstances of the case. We find from the facts of the case that the assessee collected stipulated amounts in the form of interest free security deposit (IFSD) in cash and security deposits in cash, bank guarantees, securities and FDRs as a part of their admission as a clearing member. The members are provided exposure benefits on these deposits and members also bring additional base capital in the form of cash, bank guarantees, FDRs and securities for additional exposures and also for meeting margin requirements. The assessee also collected by way of cash from members through an automated process at the end of trading plus one day as daily margins, which was not meet by base capital. It is clear that the IFSD is refundable only after the member surrenders his membership and margins are released automatically or at the option of the member. We find from the facts that assessee maintains member wise margins and additional base capital collected National Securities Clearing Corpn.Ltd. Asst. Year 2007-08 and also ad hoc margins are levied on certain members. Factually, as per the accounting records of assessee, the main account is not reflected member wise but was reflected as one consolidated figure in respect of daily collection and release of total margins. And in initial years of operation, accounting entries were being passed annually or monthly basis which was later on being made on daily basis. In subsequent years the interface system has been automated and made seamless to ensure that the output from the NCSS automatically creates an entry for the accounting system without any manual intervention. Accordingly, there was some old differences between the accounting records and member wise records maintained by NCSS with respect to earlier years when the interface was manual. As explained by Ld. Counsel, the assessee in its board meeting finally, after reconciliation of facts and figures came to know that as on 31.03.2007 an amount of Rs.21.26 lacs is to be written off as a one-time corrective action to match the balances of member wise records, it rectified the same. We also find that this excess amount was reconciled with the accounts of the members and one-time payment was made to them after finding the reconciliation. For this we have gone through the reconciliation statement filed at pages 97 and 98 of assessee’s paper book wherein he has reconciled the entire figure. In view of the above we find that the assessee made this claim u/s 41(1) of the Act. As explained by Ld. counsel for the assessee, in view of these facts, that this is neither a claim of expenditure nor remission of liability u/s. 41(1) of the Act. Ld. counsel for the assessee stated that this is clearly a business loss allowable u/s. 28 of the Act being differential liability on account of mismatch with assessee and NCSS system, And this reinstatement of liability by the assessee being payable to members is allowable as a business loss u/s. 28 of the Act. We are of the view that this differential liability in the debit balances of the assessee has occurred in the normal course of carrying on business and is incidental National Securities Clearing Corpn.Ltd. Asst. Year 2007-08 to the business and this has a direct and proximate nexus between the business operation and the liability.
This view of ours is supported by the judgment of Hon’ble Bombay High Court in the case of Lord’s Dairy Farm Ltd. Vs. CIT (1955) 27 ITR 700 (Bom), wherein it is held that the deductions permissible u/s. 10(2) of the act (under old Act of 1922), if there is any loss which from the commercial point of view can be considered to be a trading loss, then that lost must be deducted before the true profit can be ascertained. If a loss caused to a businessman by any reason which can be proved by evidence that the claim is genuine, then assessee would be entitled to deduct that loss although such a loss may not fall within the ambit of any of the deduction mentioned in section 10(2) of the Act. It was further held by Hon’ble High court that when a businessman writes off an amount as a loss, there is prima facie evident that amount is irrecoverable. The department can rebut the prima facie inference by drawing attention to the circumstances or by leading some evidence to suggest that the position taken up by the assessee was not correct. In the present case before us, no such circumstances were led by revenue. Accordingly, this issue is covered by the decision of Hon’ble Bombay High Court in the case of Lord Dairy Farm Ltd., supra. This issue of assessee’s appeal is allowed.
In the result, appeal filed by assessee is allowed. Order pronounced in the open court 15th April, 2016.