AXIS SECURITIES LTD, MUMBAI V. DCIT RG 4(1)(1), MUMBAI

ITA 4378/MUM/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0283 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-06-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 19-04-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 23-06-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANUPAMA SINGLA
• Assessee Lawyers: NITESH JOSHI VIPUL MODY
• Keywords: Depreciation; Question of law; Revenue expenditure; Capital expenditure
• Section: 143(3); 142(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G MUMBAI BEFORE SHRI D.T. GARASIA (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 4378/MUM/2016 ASSESSMENT YEAR: 2012 - 13 AXIS SECURITIES LTD 8 TH FLOOR, AXIS HOUSE, WADIA INTERNATIONAL CENTRE, PANDURANG BUDHKAR RD. WORLI, MUMBAI 400025 VS. DCIT RG 4(1)(1) 6 TH FLOOR, AAYAKARBHAVAN, MARINE LINES, MUMBAI 400020 PAN NO. AABCE6263F (APPELLANT) (RESPONDENT) APPELLANT BY: MR. NITESH JOSHI &VIPULMODY , A R RESPONDENT BY: MS. ANUPAMASINGLA , D R DATE OF HEARING: 19 /0 4 /2017 DATE OF ORDER: 14 /06/2017 ORDER PER N.K. PRADHAN, AM THIS IS AN APPEAL FILED BY THE ASSESSEE. THE RELEVANT ASSESSMENT YEAR IS 20 1 2 - 1 3 . THE APPEAL IS DIRECTED AGAINST THE ORDER COMMISSIONER (APPEALS) 0 9 , MUMBAI AND ARISES OUT OF ORDER U/S 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT). 2. THE GROUNDS OF APPEAL FILED BY THE ASSESSEE READ AS UNDER: 1. THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) ERRED IN UPHOLDING THE DISALLOWANCE OF RS. 65,64,642/ - OUT OF SOFTWARE EXPENSES TREATING IT AS CAPITAL EXPENDITURE. IT IS SUBMITTED THAT SOFTWARE EXPENSES ARE IN NATURE OF REVENUE EXPENDITURE AND HAVE NOT RESULTED IN CREATION OF AN ASSET OR A BENEFIT OF ENDURING IN NATURE. THE ENTIRE EXPENSES ARE INCURRED WHOLLY AND EXCLUSIVE FOR THE PURPOSE OF THE ITA NO 4378/MUM/2016 2 BUSINESS AND AS SUCH NO DISALLOWANCE IS CALLED FOR. THE CONCLUSIONS ARRIVED AT BY THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) AND THE LEARNED ASSESSING OFFICER IS ERRONEOUS AND CONTRARY TO THE FACTS AND THE LAW. THE DISALLOWANCE IS BAD IN LAW AND OUGHT TO BE DELETED. IN AN ALTERNATE, THE LEARNED ASSESSING OFFICER BE DIRECTED TO ALLOW DEPRECIATION ON THE SOFTWARE EXPENDITURE HELD AS CAPITAL EXPENDITURE . 3. BRIEFLY STATED , THE FACTS OF THE CASE ARE THAT THE ASSESSING OFFICER (AO) NOTICED DURING THE COURSE OF ASSESSMEN T PROCEEDINGS THAT THE ASSESSEE - COMPANY HAD CLAIM ED SOFTWARE EXPENSES OF RS. 65,54,642/ - AS REVENUE EXPENDITURE . IN RESPONSE TO A QUERY RAISED BY THE A.O. TO EXPLAIN WHY THE SAID SOFTWARE EXPENSES SHOULD NOT BE DISALLOWED BEING CAPITAL EXPENDITURE, THE ASSE SSEE FILED A REPLY STATING THAT : DETAILS OF COMPUTER SOFTWARE EXPENSES ARE ENCLOSED. IN REGARD TO COMPUTER SOFTWARE EXPENSES, IT IS SUBMITTED THAT THE COMPANY IS ENGAGED IN THE BUSINESS OF SECURITIES BROKING AND PORTFOLIO MANAGEMENT SERVICES. COMP UTER SOFTWARE EXPENSES ARE ANNUAL MAINTENANCE OF SYSTEM, TERMINAL CHA RGES, CHARGES OF USE OF ODIN (A N APPLICATION TO CONNECT WITH CLIENTS TO FACILITATE EFFICIENT TRADING) ETC. THESE EXPENSES ARE NOT INCURRED TO ACQUIRE SOFTWARE. THE EXPENDITURE HAS NOT R ESULTED IN CREATION OF AN ASSET OR A BENEFIT OF ENDURING IN NATURE AND AS SUCH CANNOT BE TREATED AS CAPITAL EXPENDITURE. THE SAID EXPENSES ARE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND ARE REVENUE IN NATURE. THE EXPENDITURE BEING RE VENUE IN NATURE, THE SAME IS CLAIMED AS DEDUCTION IN COMPUTING THE INCOME FOR THE YEAR. 3.1 THE A.O. RESORTED TO APPENDIX I TO INCOME TAX RULES, 1962 AND ALLOWED DEPRECIATION @ 60% ON RS. 65,54,642/ - AND DISALLOW ED THE BALANCE AMOUNT OF RS. 26,21,857/ - . 4. AGGRIEVED BY THE ORDER OF A.O., THE ASSESSING FILE AN APPEAL BEFORE THE LD. CIT (A). WE FIND THAT THE LD. CIT (A) HAS RELIED ON THE DECISION IN THE CASE OF BHARTI TELEVENTURES LTD. V S. JCIT (2013) 29 TAXMANN.COM 326(DELHI) ITA NO 4378/MUM/2016 3 AND ARAWALI CON STRUCTION CO (P) LTD . (2002) 124 TAXMAN 146(RAJ) AND DISMISSED THE APPEAL FILED BY THE ASSESSEE. 5. BEFORE US, THE LD. COUNSEL OF THE ASSESSEE FILES A PAPER BOOK CONTAINING (I) A CCOUNTS FOR THE YEAR ENDED 31 ST MARCH, 2012; (II) NOTICE U/S 142(1) DATED 21 .05.2014; (III) LETTER DATED 05.06.2014 TOGETHER WITH C OMPARATIVE STATEMENT OF EXPENSES FOR THE LAST 3 YEARS; (IV) NOTICE U/S 142(1) DATED 14.11.2014; (V) LETTER DATED 25.11.2014 TOGETHER WITH DETAILS OF C OMPUTER S OFTWARE EXPENSES . RELIANCE IS PLACED BY HI M ON THE DECISION IN THE CASE OF CIT V S. AMWAY INDIA ENTERPRISES (2012) 346 ITR 341 (DEL) AND CIT V S. RAYCHEM RPG LTD . (2012) 346 ITR 138 (BOM). 6. PER CONTRA , THE LD. DR RELIES ON THE ORDER OF THE LD. CIT (A). 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. WE BEGIN WITH THE DECISIONS RELIED ON BY THE LD. CIT (A). IN THE CASE OF BHARTI TELEVENTURES LTD. (SUPRA) , THE ASSESSEE HAD SECURED LICENSE TO EXPLOIT THE SOFTWARE PROVIDED IT PROCURED THE HARDWARE AS PER AGREED SPECIFICATION. THIS IS NOT SO IN THE INSTANT APPEAL AS THE EXPENSES WERE ANNUAL MAINTENANCE OF SYSTEM, TERMINAL CHARGES AND CHARGES FOR USE OF ODIN (AN APPLICATION TO CONNECT WITH CLIENTS TO FACILITATE EFFICIENT TRADING). THEREFORE, THE CASE OF THE ASSESSEE IS DISTINGUISHABLE FROM THE ABOVE DECISION RELIED ON BY THE LD. CIT (A). WE COME TO THE OTHER DECISION BY THE LD. CIT (A). IN THE CASE O F ARAWALI CONSTRUCTION CO (P) LTD. (SUPRA) , THE EXPENDITURE INCURRED ON COMPUTER SOFTWARE USED AS TECHNICAL KNOW - HOW IN THE MINING OPERATION HAS BEEN TREATED AS CAPITAL EXPENDITURE. THIS IS NOT SO IN THE INSTANT APPEAL. 7.1 NOW WE TURN TO THE DECISIONS R ELIED ON BY THE LD. COUNSEL OF THE ASSESSEE. IN THE CASE OF AMWAY INDIA ENTERPRISES (SUPRA) , THE ASSESSEE INCURRED EXPENDITURE ON PURCHASE OF SOFTWARE APPLICATIONS. THE ASSESSEE IN RESPECT OF THESE APPLICATIONS ACQUIRED A LICENCE TO USE THESE APPLICATION S ITA NO 4378/MUM/2016 4 ON PAYMENT OF CONSIDERATION. THE EXPENDITURE WAS DISALLOWED BY THE ASSESSING OFFICER TREATING THE EXPENDITURE AS ONE INCURRED ON CAPITAL ACCOUNT. ACCORDINGLY, DEPRECIATION @ 25 PER CENT WAS ALLOWED TO THE ASSESSEE. THE COMMISSIONER (APPEALS), WHILE SUSTAINING THE ORDER OF THE ASSESSING OFFICER, ALLOWED DEPRECIATION @ 60 PER CENT. THE TRIBUNAL RESTORED THE MATTER TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO FOL LOW THE DECISION OF ITS SPECIAL BENCH. THE HON'BLE HIGH COURT DISMISSED THE APPEAL FILED BY THE REVENUE . IN THE CASE OF RAYCHEM RPG LTD . (SUPRA), THE QUESTION OF LAW BEFORE THE HON'BLE HIGH COURT WAS THE FOLLOWING: WHETHER, ON THE FACTS AND IN THE C IRCUMSTANCE OF THE CASE AND IN LAW, THE HON'BLE INCOME TAX APPELLATE 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 TI ME WILL HAVE TO BE CONSIDERED AS CAPITAL IN NATURE? THE HON'BLE HIGH COURT IS HELD AS UNDER: THAT THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2001 - 02 HAD ALLOWED THE SOFTWARE EXPENDITURE AS REVENUE EXPENDITURE FINDING THAT SOFTWAR E 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 TELECOM MUNICATION AND POWER CABLE ACCESSORIES AND TRADING IN OIL RETRACING SYSTEM AND OTHER PRODUCTS AND TH E SOFTWARE WAS AN ENTERPRISE RESOURCE PLANNING PACKAGE AND, HENCE, IT FACILITATED THE ASSESSEES TRADING OPERATIONS OR ENABLED THE MANAGEMENT TO CONDUCT THE ASSESSEES BUSINESS MORE EFFICIENTLY OR MORE PROFITABLY BUT IT WAS NOT IN THE NATURE OF PROFIT - MAKI NG APPARATUS. THEREFORE, THE EXPENDITURE WAS TO BE ALLOWED. 7.2 WE NOW REFER TO A RECENT DECISION IN INDIAN ALUMINUM CO . LTD. V S. CIT (2016) 384 ITR 386 (CAL.). IN THAT CASE , THE ASSESSEE WAS ENGAGED IN THE MANUFACTURE AND PRODUCTION OF ALUMINIUM AND RELATED PRODUCTS. BAUXITE WAS A B ASIC RAW MATERIAL FOR MANUFACTURING ALUMINIUM. THE ASSESSEE ITA NO 4378/MUM/2016 5 CLAIMED DEDUCTION OF EXPENDITURE INCURRED ON DEVELOPMENT OF APPLICATION SOFTWARE TO HELP THE ASSESSEE IN PLANNING THE PRODUCTION AND BAUXITE GRADE CONTROL IN MINES TREATING IT AS DEFERRED REVENUE EXPENDITURE AND AMORTISED A PART OF IT DEBITING IT TO THE PROFIT AND LOSS ACCOUNT OF THE RELEVANT PREVIOUS YEAR OF THE ASSESSMENT YEAR 1997 - 98. THE ASSESSING OFFICER DISALLOWED THE DEDUCTION ON THE GROUND THAT THE EXPENDITURE ON SOFTWARE DEVELOPMENT WAS INCURRED WITH A VIEW TO OBTAIN AN ASSET OR ADVANTAGE OF A PERMANENT NATURE. THE COMMISSIONER (APPEALS) DELETED THE ADDITION BUT THE TRIBUNAL REVERSED THE ORDER OF THE COMMISSIONER (APPEALS) AND RESTORED THE ASSESSING OFFICERS ORDER AND HELD THAT SOFTWARE DEVELOPMENT EXPENSES WERE CAPITAL EXPENDITURE AND TO BE DISALLOWED. ON APPEAL, THE HON'BLE CALCUTTA HIGH COURT HELD ALLOWING THE APPEAL AS UNDER : THAT THE SOFTWARE INDUSTRY WAS ONE SUCH FIELD WHERE ADVANCEMENTS AND CHANGES HAPPENED AT A LIGHTNING PACE AND IT WAS DIFFICULT TO ATTRIBUTE ANY DEGREE OF ENDURABILITY. THE SOFTWARE USED BY THE ASSESSEE WAS APPLICATION SOFTWARE WHICH NEEDED TO BE CONSTAN TLY UPDATED DUE TO THE RAPID ADVANCEMENTS IN TECHNOLOGY AND INCREASING COMPLE XITY OF THE FEATURES. DISALLOWANCE OF THE EXPENDITURE INCURRED ON SOFTWARE DEVELOPMENT WAS ERRONEOUS. 7.3 WE FIND THAT THE RATIO OF AMWAY INDIA ENTERPRISES , RAYCHEM RPG LTD. AN D INDIAN ALUMINIUM CO . LTD. SQUARE LY APPLIES TO THE ISSUE IN THE INSTANT APPEAL. WE FOLLOW THE SAME AND DIRECT THE A.O. TO TREAT THE CLAIM OF SOFTWARE EXPENSES OF RS. 65,54,642/ - MADE BY THE ASSESSEE AS REVENUE EXPENDITURE. 8. IN THE RESULT, THE APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 14/06/2017. SD/ - (D.T. GARASIA) SD/ - (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER ITA NO 4378/MUM/2016 6 MUMBAI ; DATED: 14/06/2017 RAHUL DHOKE P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI