ADDL CIT SP RG 22, MUMBAI V. DSP MERRILL LYNCH LTD, MUMBAI

ITA 2198/MUM/2011

AI Insights

The case involves cross appeals by DSP Merrill Lynch Limited and the Additional Commissioner of Income Tax, Mumbai, against the order of the Commissioner of Income Tax (Appeals)-10, Mumbai, concerning the assessment year 1994-95. The primary issues revolved around the reopening of the assessment under section 147, the restriction of the deduction claim under section 80-O, the treatment of software license fees as capital expenditure, and the computation of interest under section 234B. The Tribunal examined the nature of services provided by the assessee to various foreign enterprises and whether these services qualified for deductions under section 80-O of the Income Tax Act, 1961. The Tribunal also considered the appropriate method for calculating interest under section 234B on the self-assessment tax paid by the assessee.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 785711 (ITAT-MUMBAI)
• Duration Of Justice: 14 year(s) 7 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-10-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 1994-1995
• Appeal Filed On: 17-03-2011
• Other Referred Cases: CIT vs Raychem RPG Limited, Dalhousie Investment Trust Company Limited v CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: LEYAQAT ALI AAFAQUI
• Assessee Lawyers: NITESH JOSHI
• Keywords: Set aside; Business income; Capital asset; Revenue expenditure; Corroborative evidences; Depreciation; Onus to prove; Capital expenditure; Capital Gains; TDS; Services rendered outside India
• Section: 147; 148; 143(3); 154; 234B; 80G

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, MUMBAI BEFORE SHRI AMIT SHUKLA, JM& MS PADMAVATHY S, AM I.T.A. No. 1581/Mum/2011 (Assessment Year: 1994-95) DSP Merrill Lynch Limited Mafatlal Centre, 8th Floor, Nariman Point, Mumbai 400021 PAN: AAACD0535G Vs. The Additional Commissioner of Income Tax, Range 4(1), Mumbai Aayakar Bhavan, Maharshi Karve Road, New Marine Lines, Churchgate, Mumbai 400020 Appellant) : Respondent) I.T.A. No. 2198/Mum/2011 (Assessment Year: 1994-95) The Additional Commissioner of Income Tax, Range 4(1), Mumbai Aayakar Bhavan, Maharshi Karve Road, New Marine Lines, Churchgate, Mumbai 400020 Vs. DSP Merrill Lynch Limited Mafatlal Centre, 8th Floor, Nariman Point, Mumbai 400021 PAN: AAACD0535G Appellant) : Respondent) Assessee by : Shri Nitesh Joshi Revenue by : Shri. Leyaqat Ali Aafaqui, Sr. AR Date of Hearing : 13.10.2025 Date of Pronouncement : 27.10.2025 O R D E R Per Padmavathy S, AM: Printed from counselvise.com 2 ITA No. 1581 & 2198/Mum/2011 DSP Merrill Lynch Limited These cross appeals by the assessee and revenue or against the order of the Commissioner of Income Tax (Appeals)-10 Mumbai (in short \"CIT(A)\") passed u/s. 250 of the Income Tax Act, 1961 (the 'Act') dated 29.12.2010 for AY 1994-95. The assessee and revenue has raised the following grounds of appeal. Assessee’s Ground: “1) The appellant submits that the learned Commissioner of Income-tax (Appeals) [CIT(A)] erred in upholding the action of the learned Additional Commissioner of income-tax (herein after referred to as \"the Assessing Officer\") in reopening the assessment under section 147 of the Act. 2) (a) The learned CIT(A) has erred in upholding the action of assessing officer in restricting the appellant's claim for deduction under section 80-0 of the Act to INR 1,26,31,735 as against a sum of INR 3,21,15,186 as claimed by the appellant. (b) The learned CIT(A) has erred in upholding the action of Assessing officer and thereby restricting the amount of the gross receipts eligible for computing the deduction under section 80-0 of the Act in respect of various clients as per the table below: Name of the client Amount of Gross receipts considered eligible by the assessee for deduction u/s 800 Amount of Gross receipts considered eligible by the CIT(A) for deduction u/s 800 Amount of disallowance upheld by the CIT(A) and appealed against herewith. Merrill Lynch 5,50,80,850 2,75,40,425 2,75,40,425 John Gavett 20,57,414 --- 20,57,414 Total 5,71,38,264 2,75,40,425 2,95,97,839 3) The learned CIT(A) has erred in upholding the action of the Assessing officer in treating software license fees of INR 89,000 paid by the appellant as a capital expenditure and thereby disallowing the claim of the appellant for deduction of the same as a revenue expenditure. 4) (a) The learned CIT(A) has erred in upholding the action of the assessing officer in levying interest under section 2348 of the Act amounting to INR 3,56,37,412. (b) Without prejudice to Ground 4(a) above, and subject to any relief being granted in the present appeal on various issues, the appellant submits that interest under section 234B of the Act ought to be levied only for the period from Printed from counselvise.com 3 ITA No. 1581 & 2198/Mum/2011 DSP Merrill Lynch Limited the date of passing of Intimation under section 143(1)(a) of the Act to the date of passing of the order under section 143(3) rw.s. 147 of the Act as per the specific provisions contained in section 234B(3) of the Act. (c) Without prejudice to grounds 4(a) and 4(b) above, the appellant submits that in the event the levy of interest under section 234B is upheld, while computing interest chargeable under section 2348, the tax paid u/s 140A should be adjusted first against the tax liability and then against the interest u/s 2348. 5) Each of the above grounds of appeal are independent and without prejudice to each other. 6) The appellant craves liberty to add, to alter and/or amend the grounds of appeal as and when given.” Revenue’s Ground: \"1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the AO's action in treating the capital gains written by the assessee on sale of shares as income under the head business income\" 2. \"On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the claim of deduction u/s. 80O of the Act amounting to Rs.7,81,305 as against a sum of Rs. 3,21,15,186/- claimed by the assessee. 3. \"On the facts and in the circumstances of the case, the impugned order of the Ld.CIT(A) is contrary to law to be set aside and that of the Assessing Officer be restored.\" 4. \"The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.\" 2. The assessee is a limited company mainly engaged in the business of merchant banking, financial advisory services, equity broking and distribution of securities. The assessee filed the return of income for AY 1994-95 on 30.11.1994 declaring a total income of Rs.11,04,49,495/-. The return was processed u/s. 143(1)(a) of the Act, where an addition of Rs. 6,75,000/- was made on account of deduction u/s. 80M and 80G for want of proof. However, the said additions were deleted by a rectification the order passed u/s. 154 of the Act. Subsequently the AO Printed from counselvise.com 4 ITA No. 1581 & 2198/Mum/2011 DSP Merrill Lynch Limited issued notice u/s. 148 of the Act reopening the assessment on the ground that certain income as escaped the assessment. The assessee in response filed the return of income and also the various details called for by the AO from time to time. The AO completed the assessment u/s. 147 of the Act determined the income of the assessee at Rs. 15,35,64,870/- after making various additions/ disallowances. Aggrieved the assessee filed further appeal before the Ld. CIT(A). The Ld. CIT(A) gave partial relief to the assessee. Both the assessee and the revenue are in appeal against the order of the Ld. CIT(A). 3. Ground No.1 in assessee's appeal pertains to the legal issue challenging the reopening of assessee u/s. 147 of the Act. The Ld. AR during the course of hearing submitted that the said ground is not pressed and therefore Ground No.1 is dismissed as not pressed. Restricting the deduction claim u/s. 80O of the Act – Ground No.2 in assessee's appeal and Ground No.2 in revenue's appeal 4. During the year under consideration, the assessee has received payment amounting to Rs. 6,98,49,174/- from 5 foreign enterprises in convertible foreign exchange in consideration for the information containing industrial, commercial or scientific knowledge or in consideration of technical or professional services rendered outside India. The assessee claimed that the amount of is eligible for deduction u/s. 80O of the Act and accordingly 50% of the amount received net of expenses as deduction u/s. 80O to the tune of Rs. 3,21,15,186/- (Rs.6,98,49,174 less expenses of Rs.8,07,119). The AO in this regard called of the assessee to furnish the details pertaining to the nature of services rendered along with the copy of agreements. The assessee placed detailed submission with regard to the services rendered by parties along with the copy of agreements. The AO held that the Printed from counselvise.com 5 ITA No. 1581 & 2198/Mum/2011 DSP Merrill Lynch Limited assessee has not furnished any documentary evidences regarding the nature of services rendered by it except the gist of the agreements. Accordingly, the AO restricted the deduction u/s. 80O to Rs. 7,81,305/-. The details of the deduction claimed by the assessee and as allowed by the AO are tabulated below – Particulars Claim as per the assessee Claim allowed by the AO Name of the client Total Fees – Rs. Ratio Eligible Fees Total Fees considered – Rs. Ratio Eligible Fees Drsdner Bank 32,34,771 50/175 9,24,220 BFCE 9,34,889 50 4,67,445 SBC 31,28,750 54,12,500 35/100 100 10,95,063 54,12,500 Merill Lynch 5,50,80,850 100 5,50,80,850 6,25,04,418 5% 31,25,220 John Govett 20,57,414 100 20,57,414 Total 6,98,49,174 Less Expenses 8,07,119 15,62,630 Amount eligible 6,42,30,372 15,62,630 Deduction u/s.80O – Claimed / allowed – 50% 3,21,15,186 7,81,305 5. The Ld. CIT(A) called on a remand report from the AO stating that the AO should have examined the information in the agreement and verified that whether any commercial information has been supplied which is eligible for deduction u/s. 80O of the Act. Ld. CIT(A) allowed the deduction u/s. 80O towards the above listed parties except the payment received from M/s. Merrill Lynch and M/s. John Govett. With regard to payment received from M/s. Merrill Lynch the Ld. CIT(A) allowed 50% as eligible for deduction u/s. 80O and with regard to receipts from M/s. John Govett the Ld. CIT(A) denied 100%. The relevant findings of the Ld. CIT(A) in this regard are extracted below: M/s. Merrill Lynch “5.5.3. I have considered the facts and perused the material on record. It is seen that the Bank inward certificate shows that only one payment is on account of GDR and other inward remittance is in the nature of fees. Therefore, the AO has specifically asked the Printed from counselvise.com 6 ITA No. 1581 & 2198/Mum/2011 DSP Merrill Lynch Limited appellant to substantiate the claim with evidence of the nature of services rendered, but only furnishes copy of agreement and failed to furnish any document evidence regarding services rendered. In absence of nature of services rendered, the AO restricted deduction to 5% as was done in AY 96-97. However, it is seen that in earlier assessment year the claim of the appellant was allowed. But it is also true that the appellant has not been able to substantiate its claim with document evidence and more particularly nomenclature mentioned in Bank Inward of remittance which the says that the payment was received in respect of fees of services rendered. Considering the fact, it would be reasonable to consider there eligible amount @ 50% of the gross receipts amounting 5,50,80,850 which worked out at Rs. 2,75,40,425. The AO is therefore directed to consider the eligible amount at Rs. 2,75,75,425 for computation of deduction under section 80-O of the Act. The eligible amount will be further reduced by 33.91% being expense attributable to running gross receipts. M/s. John Govett 5.6.3. I have considered the facts and perused the material on record. It is seen that the assessee has failed to substantiate his claim that it has furnished commercial information to the said client. The information furnished by the assessee is very general and very vague. If the assessee company had really supplied the information. I do not find any reason as to why the same cannot be produced before the AO or before me for the benefit of deduction u/s 80-0 of the Act. The appellant also failed to prove before the AO that the information supplied by the appellant is normal business information required or investment advisory but commercial information which is eligible for deduction u/s 800. Since the claim of the appellant has remained un-substantiated, the action of the AO in disallowing the claim under section 800 is upheld.” 6. The Ld. AR submitted that, 100% of the amount received from M/s. Merrill Lynch has been allowed to be eligible for deduction u/s. 80O for AYs 1990-91 to 1993-94 and also during subsequent AY 1995-96. The Ld. AR further submitted that the nature of services rendered and the agreements across these years have remained the same and that the agreements were approved by CBDT/ CCIT as required under the Act. The Ld. AR drew our attention to the nature of services rendered as per the agreement to M/s. Merrill Lynch as submitted before the lower authorities as extracted below: “In terms of the agreement with Merrill Lynch (ML), the appellant provided professional services with respect to Investment Banking Transactions in the Financial Services Industry in view of the appellant's pre-eminent position in the financial sector. The information/services was provided mainly for managing Global Depository receipts Printed from counselvise.com 7 ITA No. 1581 & 2198/Mum/2011 DSP Merrill Lynch Limited (GDR's) / Other debt issues by Indian Companies outside India i.e. used outside India. More particularly, the appellant provided the following services -  Advise on the structure of the offering in relation to the Indian regulations and the investment criteria of the investors, documentation, preparation of the offer documents and marketing materials.  Advise on marketing of the offering, advise on the relevant legislation in India including Income-tax Act, FERA Act etc.  Advise on permissions/ approvals required from Govt of India / RBI and other regulatory authorities. The appellant had received fees of Rs.55,080,550/- from ML during the previous year relevant to the assessment year under appeal in respect of the information/ services provided to ML.” 7. The Ld. AR argued that from the above it is clear that the information provided by the assessee to M/s. Merrill Lynch have been used outside India and this is substantiated by the fact that the GDR/debt offering is made in international markets and that the marketing for the same is done by lead managers overseas. The Ld. AR drew our attention to Circular No.700 dated 23.03.1995 to submit that the CBDT in the said circular has clarified that as long as the technical and professional services that are rendered from India and are received by a foreign government and enterprise outside India, deduction u/s. 80O would be available to the person rendering the services even if the foreign recipient of the services utilizes the benefit of such services in India. Further the Ld. AR drew our attention to the below findings of the coordinate bench in assessee's own case for AY 1995- 96 (ITA 2727/Mum/2004 dated 02.01.2020) where it has been held that: “6. Upon careful consideration of factual matrix as enumerated in the Preceding paragraphs, we are of the considered opinion that no addition would be sustainable in law merely on the basis of suspicion, conjectures or surmises. The assessee had placed on record sufficient documentary evidences to substantiate its claim u/s 80-0 with respect to services rendered to MLINT. The claim was duly supported by the confirmatory letter of MLINT as well as RBI approval letter which specifically prohibited devolvement of foreign exchange to the assessee. On the contrary, except for mere suspicion & allegation, nothing was brought on record by Ld. AO to counter the assessee's claim. It is beyond doubt that the assessee was acting as co-lead manager in the aforesaid issues but Printed from counselvise.com 8 ITA No. 1581 & 2198/Mum/2011 DSP Merrill Lynch Limited the allegations of Ld.AO that the fee was received in that capacity through MLINT is without any corroborative evidences. Therefore, the conclusion of Ld. CIT(A) could not be faulted with and hence concurring with the same, we dismiss the appeal filed by the revenue.” 8. The Ld. AR also drew our attention to the notes to accounts in the financial statements where it has been mentioned that the assessee ha co-lead managed four transactions in the international capital market where M/s. Merrill Lynch as lead manager. The Ld. AR accordingly submitted that, the nature of services rendered by the assessee is very much within the purview of the nature of services eligible for deduction u/s. 80O and that the revenue has not disputed the eligibility of the assessee for the said deduction. The Ld. AR further submitted that once the nature of services has been accepted to be eligible then the revenue cannot restrict the deduction to 50% without any valid basis except that the nomenclature mentioned in the bank inward remittance does not mentioned the nature of service. With regard to amount received from M/s. John Govett the Ld. AR made similar submissions. 9. The Ld. DR on the other hand, vehemently argued that the assessee has not produced sufficient evidences and the burden of proof lies with the assessee to demonstrate that the conditions as prescribed u/s. 80O have been fulfilled. The Ld. DR further argued that the Ld. CIT(A) has merely relied on the agreements without verifying the actual service utilization abroad. The Ld. DR also argued that the reliance placed by the assessee on earlier year assessments cannot be ground for allowing the deduction in the year under consideration since each assessment year is independent and the impugned issue has to be examined based on the facts pertaining to each year. The Ld. DR submitted that there is no justification for Printed from counselvise.com 9 ITA No. 1581 & 2198/Mum/2011 DSP Merrill Lynch Limited revising the indirect expenses to 33.91% from AO's 50% by the Ld. CIT(A). Accordingly, the Ld. DR supported the order of the AO. 10. We have heard the parties and perused the material on record. The assessee has claimed deduction under section 80-O of the Act towards services rendered to various parties as tabulated above. The provisions of section 80-O read as under – 80-O - Deduction in respect of royalties, etc., from certain foreign enterprises. Where the gross total income of an assessee, being an Indian company or a person (other than a company) who is resident in India, includes any income by way of royalty, commission, fees or any similar payment received by the assessee from the Government of a foreign State or foreign enterprise in consideration for the use outside India of any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided or agreed to be made available or provided to such Government or enterprise by the assessee, or in consideration of technical or professional services rendered or agreed to be rendered out- side India to such Government or enterprise by the assessee, and such income is received in convertible foreign exchange in India, or having been received in convertible foreign exchange outside India, or having been converted into convertible foreign exchange outside India, is brought into India, by or on behalf of the assessee in accordance with any law for the time being in force for regulating payments and dealings in foreign exchange, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction of an amount equal to fifty per cent of the income so received in, or brought into, India, in computing the total income of the assessee Provided that such income is received in India within a period of six months from the end of the previous year, or where the Chief Commissioner or Commissioner is satisfied (for reasons to be recorded in writing) that the assessee is, for reasons beyond his control, unable to do so within the said period of six months, within such further period as the Chief Commissioner or Commissioner may allow in this behalf. Explanation.—For the purposes of this section,— ( i) \"convertible foreign exchange\" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the law for the time being in force for regulating payments and dealings in foreign exchange; Printed from counselvise.com 10 ITA No. 1581 & 2198/Mum/2011 DSP Merrill Lynch Limited (ii) \"foreign enterprise\" means a person who is a non-resident. (iii) services rendered or agreed to be rendered outside India shall include services rendered from India but shall not include services rendered in India. 11. The contention of the assessee is that the consideration received from the parties is towards supply of information with regard to Indian Regulations, documentation and regulatory requirements, market related information, information regarding government approvals etc., and that these information helps in issue of debt instruments such as GDR etc outside India. The assessee further contents that the services rendered are within the purview of eligibility u/s.80-O of the Act as confirmed by the CBDT Circular No.700 dated 23.03.1995. The revenue's contention is that the assessee has merely submitted the agreements with these parties and has not submitted any documentary evidences regarding rendering of services. In this regard we notice that the Notes to Accounts forming part of the financial statements mentions that the assessee has contributed to closure of certain financial transactions in the international market where M/s.Merill Lynch International (MLINT) has been the lead manager. Accordingly, in our considered view, it cannot be held that the assessee has not rendered any services more so when the same is supported by existence of agreement and receipts in foreign currency. Further we notice from the findings of the CIT(A), as extracted in the earlier part of this order, we notice that the CIT(A) has denied 50% of the claim towards receipts from MLINT for the reason that the FIRC does not specify the services against which the payments are received. We also notice that as far as the receipts from MLINT is concerned, the deduction u/s.80-O had been allowed at 100% for AY 1990-91 to 1993-94 and from the records it is noticed that that the revenue has not preferred any appeal with regard to the same. However, the revenue challenged the action of allowing the claim for AY 1995-96 and the Printed from counselvise.com 11 ITA No. 1581 & 2198/Mum/2011 DSP Merrill Lynch Limited coordinate bench vide order dated 02.01.2020 has deleted the disallowance (refer relevant findings extracted in the earlier part of this order). It is also relevant to mention that for AY 1996-97 while considering the similar receipt from MLINT, where the AO restricted the deduction to 5% the coordinate bench remitted the issue back to the AO vide order dated 22.10.2019. From the perusal of the said order we notice that for the said assessment year, the lower authorities has made the disallowance based on certain specific findings with regard to rendering of services which was not substantiated. However for the year under consideration with regard to MLINT, the CIT(A) has allowed 50% and has denied the balance only for the reason that the FIRC does not mention the nature of service rendered. We further notice that no specific findings are recorded with regard to eligibility of the deduction vis-à-vis the nature services and therefore we see merit in the contention of the ld AR that the decision of the coordinate bench for AY 1995-96 is applicable since the revenue for the year under consideration also has sustained the addition merely on the basis of suspicion, conjectures or surmises without considering the documentary evidences placed on record by the assessee. Further we see that there is no basis for the CIT(A) to consider the expenses at an adhoc percentage of 33.91%. In view of these discussions we direct the AO delete the disallowance made towards deduction claimed u/s.80-O towards receipts from MLINT. 12. With regard to claim of deduction u/s.80-O towards receipts from M/s.John Govett, we notice that the reason as mentioned by the CIT(A) for denial is that the information furnished by the assessee is very general and very vague and that whether the assessee had really supplied the information is not substantiated. The AO has held that the services are rendered only in India to be used in India thereby Printed from counselvise.com 12 ITA No. 1581 & 2198/Mum/2011 DSP Merrill Lynch Limited denied the entire deduction claimed by the assessee. In this regard we notice that the AO has allowed 100% of the deduction claimed towards receipts from M/s.John Govett in AY 1995-96 and on perusal of the appeal filed by the revenue for the said AY we notice that the revenue has not challenged the said allowance by the AO. However, it is relevant to note that the AO made a 5% allowance for AY 1996-97 and the coordinate bench while deciding the issue has remitted the issue back to the AO for a de-novo consideration. From the perusal of these facts we notice that the nature of services rendered by M/s.John Govett have not been factually examined and the assessee did not bring any new material on record in this regard. Considering the facts stated herein above, we are of the view that the basis on which is the AO has denied the claim needs to be examined i.e. whether the services are rendered from India are services are rendered in India since the CBDT circular number 700 dated 23.03.1995 has clarified that \"as long as the technical and professional services are rendered from India and are received by a Foreign Government or enterprise outside India, deduction under section 80-O would be available to the person rendering the services even if the foreign recipient of the services utilises the benefit of such services in India\". This is so since the AO has not recorded any factual findings in this regard and that the CIT(A) has merely stated that the assessee failed to submit details. Accordingly following the decision of the coordinate bench for AY 1996-97 we remit the issue of deduction u/s.80-O towards receipts from M/s.John Govett back to the AO for examination. The AO is directed to call for necessary details and decide keeping in mind the clarification provided by CBDT in the above circular. 13. With regard to the deduction allowed by the CIT(A) with regard to receipts from M/s.Dresdner Bank, BFCE, and SBC we notice that the CIT(A) has held that Printed from counselvise.com 13 ITA No. 1581 & 2198/Mum/2011 DSP Merrill Lynch Limited the nature of services rendered are within the scope of deduction u/s.80-O and that the AO has allowed the deduction for these parties in AY 1993-94. We notice from the perusal of records that the AO has allowed the deduction for earlier years and that the revenue has not disputed the said allowance. Therefore, we see no reason to take a different view considering that the revenue has not brought any new material on record to rebut the claim of the assessee that the nature of services rendered to these parties has not undergone any change. Accordingly, we dismiss the grounds raised by the revenue in this regard. Software License Fees treated as capital in nature – Ground No.3 in assessee's appeal 14. The assessee during the year have incurred expenditure to the tune of Rs.99,900/- towards purchase of MS Office Software. The AO held that the same is capital in nature in accordingly, allowed depreciation at 25% and the balance amount was disallowed. The Ld. CIT(A) upheld the disallowance by placing reliance on the decision of the Special Bench in the case of Amway India Enterprises also DCIT (111 ITD 112) where it is held that the computer software life expires more than 3 years of period than the expenditure of the capital in nature. 15. We heard the parties and perused the material on record. The Ld. AR submitted that the assessee has purchased only to right to use the software and the software as it is not acquired and accordingly argued that the mere license to use software does not result in any benefit of enduring nature to the assessee. In this regard, we notice that the Hon'ble Bombay High Court in the case of CIT vs Printed from counselvise.com 14 ITA No. 1581 & 2198/Mum/2011 DSP Merrill Lynch Limited Raychem RPG Limited (2012) 21 taxmann.com 507 (Bom) as considered has similar issue and held that: “1. Two questions of law raised by the Revenue in this appeal, which read thus: \"(a) Whether on the facts and circumstance of the case and in law, the Hon'ble Tribunal was justified in deleting the additions in respect of disallowance of software expenditure to the extent of Rs. 23,62,368 as capital expenditure as software used for the first time will have to be considered as capital in nature? (b) **** 2. As regards the first question, Tribunal relying upon its order in the assessee's own case relating to asst, yr. 2001-02 held that the software expenditure was a revenue expenditure. The appeal filed by the Revenue for the asst. yr. 2001-02 has been dismissed for want of removal of office objections and thus the order passed by the Tribunal for the asst. yr. 2001-02 has attained finality. Moreover, the Tribunal in its order relating to the asst. yr. 2001-02 has allowed expenditure as revenue expenditure by recording thus: \"7. When we apply this functional test suggested by the Special Bench of the Tribunal, we find that impugned software does not form part of the profit-making apparatus of the assessee and hence the same is to be disallowed as revenue expenditure. We hold so because we find that the business of the assessee company is that of manufacturing of telecommunication and power cable accessories and trading retracing system and other products and impugned software is an enterprises resources planning (ERP) package and hence it facilitates the assessee's trading operations or enabling the management to conduct the assessee's business more efficiently or more profitably but it is not in the nature of profit-making apparatus. We, therefore, decide this issue also in favour of the assessee and we hold that this expenditure of Rs. 20.60 lakhs are revenue expenditure. We hold so by following the judgment of the Special Bench of the Tribunal relied upon by the learned Authorized Representative of the assessee.\" 3. In our view, no fault can be found in the aforesaid order of Tribunal holding that software expenditure was allowable as revenue expenditure.” 16. During the course of hearing our attention is also drawn to the copy of invoices (page 119 and 120 of paper book) to substantiate the fact that the assessee has acquired only the right to use the software. Considering the facts and circumstances of the case and respectfully following the above decision of the Printed from counselvise.com 15 ITA No. 1581 & 2198/Mum/2011 DSP Merrill Lynch Limited Hon'ble High Court we hold that amount spent towards purchase of Software Licenses cannot be treated as capital in nature. Accordingly, we direct the AO to delete the disallowance made in regard. Interest u/s. 234B - Ground No.4 of Assessee's appeal 17. The Ld. AR in this regard, submitted that the AO while computing the interest u/s. 234B has reduced the self-assessment tax paid by the assessee on 30.06.1994 towards interest first and the balance amount is adjusted towards tax. The Ld. AR further submitted that, the said treatment by the AO has resulted in excess interest to be paid u/s. 234B which is not correct. The Ld. AR submitted that an identical issue has been considered by the coordinate bench in assessee’s own case for AYs 1990-91, 1993-94 and 1994-95 (ITA No. 5480 to 5483/Mum/1998 dated 30.09.2003) where it has been held that: “4. The first three grounds relate to the charge of interest us. 2348. Under section. 140A as amended w.e.f. 1.4.1889, where any tax is payable on the basis of the return after taking into account the advance tax, such amount shall be paid by the assessee together with interest payable u/s, 2348 for any default or delay in payment of the advance tax, before furnishing the return and the return has to by accompanied by proof of payment of tax and Interest. There is an Explanation to sub-sec. (1) which says that where the amount paid by the assesses as above falls short of the aggregate of tax and interest as above, the amount so paid shall first be adjusted towards the interest payable as aforesaid and the balance, if any, shall be adjusted towards the tax payable, The assessee had paid Rs.1,12,50,000 a advance lax. It had also paid self-assessment tax u/s. 140A on 29.12.1990 in the amount of Rs. 11,87,419. According to the assessee, the total interest us. 2348 would be Rs.33,48,109 and not Rs.33,85,082 as charged by the Assessing Officer. The assessee's contention is that no interest was payable by it u/s. 2348 at the time of fling the return and paying the self-assessment u/s. 140A and therefore there was no question of reducing any amount towards interest u/s. 234B, resulting in a higher amount of lax payable by the assessee giving rise to additional liability towards interest u/s. 234B. It says that as per section 234B(2)(1) where tax is paid by the assessee as self- assessment tax u/s. 140A, Interest shall be calculated in accordance with sec. 2348(1) upto the date on which the self-assessment tax is paid and reduced by the interest, if any, paid u/s, 140A towards the interest chargeable under this section. Per contra, if no interest is paid u/s, 2348, along with the sell assessment tax paid u/s. 140A, there is no question of reducing any such Interest from the amount paid as self-assessment tax u/s. Printed from counselvise.com 16 ITA No. 1581 & 2198/Mum/2011 DSP Merrill Lynch Limited 140A. If the computation is made on this basis, there would be a lesser balance amount of tax payable, on complete of the assessment, on which section 234B interest would be payable. It is contended that in the method adopted by the Assessing Officer, a higher amount of tax would be shown as payable on completion of the regular assessment and consequently a higher amount of interest has been charged. It is claimed that the method adopted by the Assessing Officer is not authorized by law. 5. In order to appreciate the controversy, a comparison of the methods adopted by the assessee as well as the Assessing Officer would be useful:- A As per AO As per assesse Tax on Income assessed 1,74,48,298 1,74,48,298 Less: TDS credit allowed 6,71,889 6,71,889 Advance tax paid 1,12,50,000 1,12,50,000 Balance tax payable 55,24,409 55,24,409 B Interest paid by assessee on Self-assessment uls, 140A: Section 234C 21,741 21,741 Section 234B Nil Nil Self-assessment tax paid on 29.12.90 (including sec. 234C interest) 11,87,419 11,87,419 C. Computation of Interest u/s, 234B a) On Rs.55,24,408 @ 2% p.m. for 9 months (1.4.90 to 21.12.90) 9,94,394 9,94,394 As par AO As per assessee b) On Rs.53,63,125 2% p.m. for 27 months (1.1.91 to 29.3.63) 28,90,588 -- On Rs.43,68,731 2% p.m. for 27 months 11.1.92 to 29.3.03) -- 23,53,715 Total interest u/s. 234B 38,85,082 --- --- 33,48,109 The amount on which interest in respect of (b) above was computed is es under :- Balance tax payable 55,24,409 55,24,409 Lass: Amount paid on self-assessment after reducing Interest u/s, 234B as computed at (a) above and interest u/s. 234(c) as per return 1,71,284 -- Amount paid on self-assessment after reducing Interest u/s. 234C pald u/s. 140A (21,741) -- 11,65,679 Balance amount of tax payable On which interest is computed at (b) above 53,53,125 43,55,731 Printed from counselvise.com 17 ITA No. 1581 & 2198/Mum/2011 DSP Merrill Lynch Limited The above comparative table would bring out the controversy in a nutshell. It will be seen that whereas the Assessing Officer has treated only the amount of Rs. 1,71,264 as amount paid as self-assessment tax u/s. 140A, the assessee has treated the amount of Rs.11,65,078 as self-assessment tax which has resulted in a lesser amount of tax outstanding on assessment, resulting in a lesser amount of Interest changeable u/s. 2340. The question is which of the two methods is correct. 6. There is no dispute that interest w/s. 234B is chargeable. The dispute is only with references to the amount on which it is chargeable, in the method adopted by the Assessing Officer, he has calculated interest of Rn 29,90,888 Ps.53.53,125, in doing so, as explained in the above table, ha has reduce Interest of Rs.9,94,384 charged us. 2348 from the amount of self-assessment tax of Rs.11,87,419, whereas the assessee has not done so. $2348(2), so far as s relevant, mads as below: \"(2) Where, before the data of determination of total income under sub section (1) of section 143 or completion of a regular assessment, tax is pad by the assessee under section 140A or otherwise, - (i) Interest shall be calculated in accordance with the foregoing provisions of this section up to the date on which the tax is so paid, and reduced by the interest, if any, paid under section 1404 towards the Interest chargeable under this section;\" A plain madding of the above provision shows that it authorizes the reduction of the Interest u/s. 234B only if such interest has been paid by the assessee along with the self- assessment tax as envisaged by section 140A(1). In the casa before us, it is common ground that the assessee was not liable to, nor did it actually pay, any Interest u/s. 2348, while paying the self-assessment tax. That apart, the above provision is a provision based on equity and it simply means that if the assessee has already paid the interest at the time of paying the self-assessment tux us, 140A, credit shall be given for the same when the Assessing Officer charges interest on completion of the regular assessment. This provision does not in any manner authorize the Assessing Officer to reduce the amount of self-assessment fox paid by the assessee, by the amount of interest u/s. 2348 charged at the time of correlation of the assessment. The levy of Interest, In our opinion, has to be strictly in accordance with the provisions of sac. 2348, which is the charging section. This section confers no authority upon the Assessing Officer to reduce the interest al Rs.9,94,394 charged by him at the time of completion of the assessment from sell- assessment fax of Rs.11,87,419 paid by the assessee.” 18. We heard the parties and perused the material on record. It is the submission of the assessee is that the AO while computing the interest u/s. 234B has adjusted the self-assessment tax paid by the assessee on 30.06.1994 against the interest u/s.234B calculated up to the said date and adjusted the balance against the tax Printed from counselvise.com 18 ITA No. 1581 & 2198/Mum/2011 DSP Merrill Lynch Limited payment. In perusal of the above findings of the coordinate bench it is clear that the facts for the year under consideration are identical and accordingly, we directed to the AO re-compute the interest u/s. 234B as per ratio laid down by the coordinate bench in the above decision. 19. Ground No.5 & 6 in assessee's appeal are general not warranting any specific adjudication. Treatment of profit from sale of shares as business income – Ground No.1 in revenue's appeal 20. The assessee during the year under consideration has computed short term and the long term capital gain on sale of shares to the tune of Rs. 2,63,83,467/-. The AO treated the same as the business income of the assessee for the reason that the assessee is a regular trader in shares and that the assessee is using borrowed funds directly and indirectly for purchase of shares. The AO further held that merely showing the shares as investment in the balance sheet is not a decisive factor to decide the nature of claim considering that the assessee has been systematically carrying out the business of purchase and sale of shares. The CIT(A) while giving relief to the assessee held that: “4.3. assessee is investing in shares in which surplus funds were invested to earn long term capital gains. No borrowed fund were utilized in purchase of share. The shares were held for the sufficiently long period. Therefore, there was no intention to earn profit but it was the intention of the appellant to earn dividend income by making investment in shares. It is also seen that the appellant has acquired shares by way conversion of debentures or by issue of right shares, bonus shares etc, therefore, the same could be treated as investment. It is held by many courts that sale of bonus shares and right shares are in the nature of capital. Hence sale of right shares and bonus shares would attract only capital gains as held in the case of CIT v Madan Gopal Radhe 73 ITR 652 & CIT v Hindustan Industrial Agencies Pvt. Ltd. 4 TAXMAN 204(Bam). As a dealer of shares, the trader would not be holding on the shares for longer time, if the motive of the trader is to book profit. It is seen that the physical delivery of shares was taken by the appellant. It is also argued that the intention of the assessee to invest in shares had been accepted by the Printed from counselvise.com 19 ITA No. 1581 & 2198/Mum/2011 DSP Merrill Lynch Limited Department in earlier years and in part Ay 92-93. The assessee has invested his own money in the shares and it has not borrowed funds to invest in shares. It has been held in the case of Dalhousie Investment Trust Company Limited v Cit 68 ITR 486(SC) that where the interest paid on moneys borrowed for purchases of shares was higher than the return on shares, the transactions of purchase and sale of shares would amount to trading activity. In other words, the interest payments on the amount borrowed would commensurate with the returns earned from the shares. It is also noticed that the issue stands covered in favour of the appellant's own case by the order of Han ble Tribunal Mumbai for AY 1995-96 vide order in ITA No. 2735/M/1999 dated 11-2-2009 while reversing the order of CIT (A) the Tribunal held it cannot not be said that the assessee was trading in shares. The Tribunal also observed that Department has also accepted in AY 92-93 that the assessee was investing in shares. Therefore, considering the entirety of facts and circumstances they are unable to sustain the order of CIT (A). Similarly the Tribunal has also allowed the appeal on this ground in assessee's own case for AY 93-94 in ITA 4462/m/02, AY 96-97 ITA 2634/M/02, AY 97-98 in ITA 2728/M/02 and AY 98-99 in ITA 4522/M/02 vide order dated 11-2-2009. In the light of these facts and context and respectfully following the order of Tribunal in the appellant's own case for aforesaid assessment years, this ground of appeal is allowed in favour of the appellant.” 21. The Ld. DR submitted that the reliance placed by the Ld. CIT(A) stating that the period of holding is more than 700 days is not correct since the holding period is not a determinative factor. The Ld. DR further submitted that, the low turnover ratio does not negate the business intent of the assessee given the assessee's core operations. The Ld. DR also argued that, the absence of borrowed fund is irrelevant if the shares are held in stock in trade as per CBDT guideline which has not been considered by the Ld. CIT(A). Accordingly, the Ld. DR submitted that the treatment of the impugned income by the AO the upheld. 22. We heard the parties and perused the material on record. The assessee has declared the gain on sale of shared as LTCG and STCG. The AO re-classified the said gain as the business income of the assessee. In this regard from the perusal of the financial statements we notice that the assessee has reflected the shareholding in various companies under the head Investments (page 27 to 32 of paper book). Further the CIT(A) has given a detailed factual finding with regard to impugned Printed from counselvise.com 20 ITA No. 1581 & 2198/Mum/2011 DSP Merrill Lynch Limited issue and has also followed the ratio laid down by the coordinate bench in assessee's own case. The ld AR during the course of hearing submitted that the investments are held by the assessee on a long term basis and that the turnover ratio of the investment is only 0.27 which goes substantiate that the shares are held as capital asset and not stock in trade. Considering that there is no change to the facts and that the revenue did not bring any new material on record to controvert the earlier year decisions, we see no reason to interfere with the decision of the CIT(A). The ground raised by the revenue is accordingly dismissed. 23. In the result, appeal of the assessee is partly allowed and the appeal of the revenue is dismissed. Order pronounced in the open court on 27-10-2025. Sd/- Sd/- (AMIT SHUKLA) (PADMAVATHY S) Judicial Member Accountant Member Divya R. Nandgaonkar Stenographer Copy of the Order forwarded to: 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. 5. Guard File CIT BY ORDER, (Dy./Asstt. Registrar) ITAT, Mumbai Printed from counselvise.com "