RELIANCE CAPITAL ASSET MANAGE MENT LTD, MUMBAI V. DCIT CIR 3(3), MUMBAI

ITA 8625/MUM/2010

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8090 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 10 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-10-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 19-06-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 10-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AKHILENDRA P YADAV
• Assessee Lawyers: JITENDRA B SANGHAVI
• Keywords: Capital asset; Depreciation; Earning of tax free income; Revenue expenditure; Capital expenditure
• Section: 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI BEFORE HONBLE S/SHRI D. MANMOHAN , VICE-PRESIDENT AND B.R.BASKARAN (AM) , . , . . , ./I.T.A. NO.8625/MUM/2010 ( ! ' / ASSESSMENT YEAR : 2007-08) RELIANCE CAPITAL ASSET MANAGEMENT LTD. ONE INDIABULLS CENTER, TOWER-1, 12 TH FLOOR, JUPITER MILLS COMPOUND, 841, SENAPATI BAPAT ROAD, ELPHINSTONE ROAD, MUMBAI-400013 / VS. DY.COMMISSIONER OF INCOME TAX CIRCLE 3(3), AAYAKAR BHAVAN, M K ROAD, CHURCHGATE, MUMBAI-400020. ( #$ / APPELLANT) .. ( %&#$ / RESPONDENT) ./I.T.A. NO.4459/MUM/2012 ( ! ' / ASSESSMENT YEAR : 2008-09) RELIANCE CAPITAL ASSET MANAGEMENT LTD. ONE INDIABULLS CENTER, TOWER-1, 12 TH FLOOR, JUPITER MILLS COMPOUND, 841, SENAPATI BAPAT ROAD, ELPHINSTONE ROAD, MUMBAI-400013 / VS. DY.COMMISSIONER OF INCOME TAX CIRCLE 3(3), ROOM NO.609, 6 TH FLOOR, AAYAKAR BHAVAN, M K ROAD, MUMBAI-400020. ( #$ / APPELLANT) .. ( %&#$ / RESPONDENT) ./I.T.A. NO.4795/MUM/2012 ( ! ' / ASSESSMENT YEAR : 2008-09) DY.COMMISSIONER OF INCOME TAX CIRCLE 3(3), ROOM NO.609, 6 TH FLOOR, AAYAKAR BHAVAN, M K ROAD, MUMBAI-400020 / VS. RELIANCE CAPITAL ASSET MANAGEMENT LTD. ONE INDIABULLS CENTER, TOWER-1, 11 AND 12 TH FLOOR, JUPITER MILLS COMPOUND, 841, SENAPATI BAPAT ROAD, ELPHINSTONE ROAD, MUMBAI-400013 ( #$ / APPELLANT) .. ( %&#$ / RESPONDENT) # ./ '( ./ PAN/GIRNO.:AAACR2668G I.T.A. NOS. 8625/M/2010 ITA NOS.4459 & 4795 /MUM/2012 2 #$ ) / APPELLANT BY : SHRI JITENDRA B SANGHAVI %&#$ * ) /RESPONDENT BY: SHRI AKHILENDRA P YADAV + , * -. / DATE OF HEARING : 7.10.2014 /'! * -. /DATE OF PRONOUNCEMENT : 17.10.2014 / O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THE ASSESSEE HAS FILED THE APPEALS FOR ASSESSMENT Y EARS 2007-08 AND 2008-09 AND THE REVENUE HAS FILED THE APPEAL FOR AS SESSMENT YEAR 2008-09. ALL THESE APPEALS WERE HEARD TOGETHER AND HENCE THEY AR E BEING DISPOSED OF BY THIS COMMON ORDER, FOR THE SAKE OF CONVENIENCE. 2.0 FOLLOWING TWO ISSUES ARE CONTESTED IN THE APPEA L FILED BY THE ASSESSEE FOR ASSESSMENT YEAR 2007-08 : A) DISALLOWANCE OF SOFTWARE EXPENSE; AND B) DISALLOWANCE MADE U/S 14A OF THE AC T. 3.0 THE FACTS RELATING TO THE ABOVE SAID ISSUE ARE STATED IN BRIEF. THE ASSESSEE IS THE ASSET MANAGER OF THE RELIANCE MUTUAL FUND. T HE AO NOTICED THAT THE ASSESSEE HAS PURCHASED SOFTWARES AND CLAIMED THE SA ME AS REVENUE EXPENDITURE. THE DETAILS OF THE SAME ARE GIVEN BELO W:- NAME OF THE VENDOR AMOUNT NATURE OF PAYMENT NAME OF THE PRODUCT DATE OF ACQUISITION IDEATAKE INFORMATION TECHNOLOGIES P LTD. 11,31,136 WEBSITE DEVELOPMENT CHARGES WEBSITE 2 ND HALF OF THE YEAR APPLIED SOFTWARE P LTD 10,18,532 SOFTWARE/SUPPORT FOR PMS APPLICATION WEALTH SPECTRUM 2 ND HALF OF THE YEAR CREDENCE ANALYTICS (INDIA) P.LTD. 4,12,217 SOFTWARE/SUPPORT FOR I-DEAL APPLICATION I-DEAL 2 ND HALF OF THE YEAR CUBIC COMPUTING (P) LTD 2,79,000 SOFTWARE LICENCE C HART FX 1ST HALF OF THE YEAR SWAN SOLUTIONS AND SERVICES (P) LTD 1,71,587 SOFTWARE LICENCE WINDOWS SERVER/2003 1ST HALF OF THE YEAR CAPITAL MARKET PUBLISHERS INDIA P LTD. 1,20,833 SUBSCRIPTION TO DATABASE CAPITAL LINE 2 ND HALF OF THE YEAR LDS INFOTECH P LTD. 1,12,463 SOFTWARE LICENCE ADOBE PHOTSHOP, ILLUSTRATOR, FLASH 1ST HALF OF THE YEAR I.T.A. NOS. 8625/M/2010 ITA NOS.4459 & 4795 /MUM/2012 3 THE ASSESSEE SUBMITTED BEFORE THE ASSESSING OFFICER THAT THE ABOVE EXPENDITURE INCLUDES WEBSITE DEVELOPMENT CHARGES, ANNUAL MAINTE NANCE CHARGES, SUBSCRIPTION OF DATABASE AND SOFTWARE LICENSE AND T HEY RELATE TO FUNCTIONAL SOFTWARE/UTILITY SOFTWARE WHICH ONLY RENDER SUPPORT IVE FUNCTION TO THE BUSINESS ACTIVITY OF THE ASSESSEE. ACCORDINGLY IT WAS CONTEN DED THAT SOFTWARE EXPENDITURE SHOULD BE ALLOWED AS REVENUE EXPENDITURE. HOWEVER, THE AO HELD THAT THE DEPRECIATION SCHEDULE PROVIDES FOR ALLOWING DEPRECI ATION ON SOFTWARE @ 60% AND SINCE THE SOFTWARE IS INCLUDED IN THE DEPRECIATIO N SCHEDULE, IT CONSTITUTES CAPITAL EXPENDITURE. ACCORDINGLY THE AO DISALLOWED THE CLAIM MADE BY ASSESSEE AND ALLOWED DEPRECIATION THEREON. THE LD. CIT(A) N OTICED THAT THE SOFTWARE NAMED CAPITALINE IS A PAYMENT MADE ON ANNUAL BASI S. ACCORDINGLY HE DELETED THE DISALLOWANCE RELATING TO THE SAME. IN RESPECT OF THE BALANCE ITEMS, THE LD CIT(A) CONFIRMED THE ADDITION MADE BY THE AO. 3.1 THE AO FURTHER NOTICED THAT THE ASSESSEE HAS EA RNED DIVIDEND INCOME OF RS.3,70,16,331/- AND LONG TERM CAPITAL GAIN (L TCG) OF RS.3,51,99,942/- AND CLAIMED BOTH OF THEM AS EXEMPT FROM TAXATION. HOWEVER, THE ASSESSEE DID NOT DISALLOW ANY EXPENDITURE IN TERMS OF SEC. 14A O F THE ACT ON THE PLEA THAT IT DID NOT INCUR ANY EXPENDITURE FOR EARNING THE ABOVE SA ID EXEMPTED INCOME. HOWEVER, THE AO TOOK THE VIEW THAT THE PROVISIONS O F SECTION 14A R.W. RULE 8D OF THE INCOME TAX RULES, 1962 (THE RULES) ARE APPLICAB LE FOR THIS YEAR ALSO AND ACCORDINGLY, HE HELD THAT PART OF ADMINISTRATIVE EX PENSES HAS TO BE DISALLOWED. ACCORDINGLY, BY APPLYING RULE 8D, THE ASSESSING OFF ICER DISALLOWED 0.5% ON AVERAGE VALUE OF INVESTMENT, WHICH WORKED OUT TO R S.25,26,129/-. 3.2 IN THE APPELLATE PROCEEDINGS BEFORE LD CIT(A), THE ASSESSEE SUBMITTED THAT THE DIVIDEND WAS RECEIVED ONLY ON TWO OCCASION S AND THE SAID DIVIDEND WERE ALSO DIRECTLY CREDITED TO THE BANK ACCOUNT. THE LO NG TERM CAPITAL GAINS CONSISTED OF 8 TRANSACTIONS ONLY. FURTHER, IT WAS SUBMITTED THAT THE PROVISIONS OF RULE 8D CANNOT BE APPLIED TO THE YEAR UNDER CONSIDERATION I N VIEW OF THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG CO LTD VS DCIT (2010) 328 ITR 81 (BOM), WHEREIN THE HONBLE HIGH COURT HELD THAT THE PROVISIONS OF RULE 8D SHALL BE APPLICABLE PROSPECTI VELY FROM THE ASSESSMENT YEAR 2008-09 ONWARDS. THE ASSESSEE ALSO PLACED RELIANCE ON THE DECISION RENDERED BY LD CIT(A) IN AY 2004-05, WHEREIN THE DISALLOWANC E HAD BEEN MADE ON A I.T.A. NOS. 8625/M/2010 ITA NOS.4459 & 4795 /MUM/2012 4 REASONABLE BASIS. ACCORDING TO LD A.R, THE LD CIT( A) ASKED THE ASSESSEE TO FURNISH A WORKING OF THE DISALLOWANCE TO BE MADE U /S 14A OF THE ACT AND THE ASSESSEE FURNISHED A WORKSHEET SHOWING EXPENDITURE THAT COULD BE ATTRIBUTABLE TOWARDS EXEMPT INCOME, ACCORDING TO WHICH THE AMOUN T TO BE DISALLOWED WAS WORKED OUT AT RS.86,805/-. THE LD. CIT(A) WAS CONV INCED WITH THE CONTENTIONS OF THE ASSESSEE AND HENCE, BY FOLLOWING THE DECISION O F HIS PREDECESSOR RENDERED FOR ASSESSMENT YEAR 2004-05 IN THE ASSESSEES OWN C ASE, CONFIRMED THE DISALLOWANCE MADE U/S 14A OF THE ACT TO THE EXTENT OF RS.86,805/-. THE ASSESSEE IS STILL AGGRIEVED BY THE SAID DECISION RE NDERED BY THE LD. CIT(A). 4. WE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE FIRST ISSUE RELATES TO THE SOFTWARE EXPENSES CLAIMED BY THE ASS ESSEE AS REVENUE EXPENDITURE. THE LD COUNSEL PLACED RELIANCE ON THE DECISION OF HONBLE DELHI HIGH COURT RENDERED IN THE CASE OF CIT VS. INDIAN V ISIT.COM (P) LTD (2009)(176 TAXMAN 164) TO SUBMIT THE THAT EXPENDITURE INCURRED ON WEBSITE DEVELOPMENT IS NOT CAPITAL IN NATURE. ON GOING THROUGH THE ABOVE SAID CASE LAW, WE NOTICE THAT THE HONBLE DELHI HIGH COURT HAS HELD THAT THE WEBS ITE DEVELOPMENT CHARGES HAS TO BE REGARDED AS REVENUE EXPENDITURE. HENCE, WE FIND MERIT IN THE SAID CONTENTION OF THE ASSESSEE. ACCORDINGLY, RESPECTFU LLY FOLLOWING THE DECISION RENDERED BY HONBLE DELHI HIGH COURT (REFERRED SUPR A), WE DIRECT THE ASSESSING OFFICER TO ALLOW EXPENDITURE RELATING TO WEBSITE DE VELOPMENT CHARGES AS REVENUE EXPENDITURE. THE ORDER OF LD CIT(A) IN RESPECT OF THIS ADDITION IS SET ASIDE ACCORDINGLY. 4.1 WITH REGARD TO SOFTWARE EXPENSES, THE LD A.R P LACED RELIANCE ON THE DECISION RENDERED BY HONBLE PUNJAB & HARYANA HIGH COURT RENDERED IN THE CASE OF CIT VS. VARINDER AGRO CHEMICALS LTD, WHEREIN THE HONBLE HIGH COURT HAS HELD THAT THE SOFTWARE EXPENSES ARE REVENUE IN NATU RE, IF IT IS NOT SHOWN THAT THEY WERE OF ENDURING NATURE AND WOULD NOT BECOME OUTDAT ED. IT WAS FURTHER HELD THAT SINCE TECHNOLOGY IS FAST CHANGING AND DAY-BY-DAY SY STEMS ARE BEING DEVELOPED IN A NEW WAY, SOFTWARE MAY BE NEEDED LIKE A RAW MAT ERIAL. ACCORDINGLY, THE HONBLE HIGH COURT UPHELD THE VIEW TAKEN BY THE TRI BUNAL THAT SOFTWARE EXPENSES ARE REVENUE IN NATURE ON THE GROUND THAT IT WAS A P OSSIBLE VIEW. THE LD COUNSEL SUBMITTED THAT THE SOFTWARE PURCHASED BY THE ASSESS EE WERE FUNCTIONAL SOFTWARES AND THEY ONLY HELP THE SMOOTH FUNCTIONING OF ITS ACTIVITIES. HE I.T.A. NOS. 8625/M/2010 ITA NOS.4459 & 4795 /MUM/2012 5 SUBMITTED THAT THEY CANNOT BE CATEGORIZED AS PROFIT MAKING TOOLS, AS THE ASSESSEE DOES NOT CARRY ON ITS BUSINESS BY SOLELY D EPENDING UPON THESE SOFTWARES. HE ALSO SUBMITTED THAT THE LIFE OF THES E SOFTWARES IS SHORT DUE TO CONTINUOUS UP-GRADATION AND HENCE THEY DO NOT HAVE ENDURING BENEFIT. THE LD A.R ALSO PLACED RELIANCE ON THE DECISION RENDERED B Y THE SPECIAL BENCH OF DELHI ITAT IN THE CASE OF AMWAY INDIA ENTERPRISES LTD (11 1 ITD 112) TO SUBMIT THAT THE EXPENSES INCURRED ON PURCHASE OF SOFTWARE IS REVENU E IN NATURE. IN THE CASE OF AMWAY INDIA ENTERPRISES LTD, THE FOLLOWING OBSERVAT IONS MADE BY THE DELHI SPECIAL BENCH OF ITAT ARE RELEVANT HERE:- FOR ASCERTAINING AS TO WHETHER EXPENDITURE ON COMP UTER SOFTWARE GIVES AN ENDURING BENEFIT TO AN ASSESSEE, THE DURATION OF TIME FOR WHICH THE ASSESSEE ACQUIRES RIGHT TO USE THE SOFTWARE BECOMES RELEVANT. HAVING REGARD TO THE FACT THAT SOFTWARE BECOMES OBSOLETE W ITH TECHNOLOGICAL INNOVATION AND ADVANCEMENT WITHIN A SHORT SPAN OF T IME, IT CAN BE SAID THAT WHERE THE LIFE OF THE COMPUTER SOFTWARE IS SHO RTER (SAY LESS THAN TWO YEARS), IT MAY BE TREATED AS REVENUE EXPENDITURE. I T IS ALSO EVIDENT FROM THE AMENDMENT TO THE LAW W.E.F. 1ST APRIL, 2003 GRA NTING 60 PER CENT DEPRECIATION ON COMPUTER SOFTWARE THAT EVEN THE LEG ISLATURE CONSIDERS THE LIFE OF COMPUTER SOFTWARE AS ABOUT TWO YEARS BY PRO VIDING THE HIGHER RATE OF DEPRECIATION @ 60 PER CENT THEREON SO AS TO ENAB LE ASSESSEE TO WRITE OFF THE SAME TO THE EXTENT OF 84 PER CENT EVEN WHEN TREATED AS CAPITAL ASSET WITHIN A PERIOD OF TWO YEARS. AN ASSESSEE MAY OWN A SOFTWARE OUTRIGHT OR BE A LICENSEE BUT THE SAME MAY OPERATE TO CONFER BENEFIT ONLY IN THE REVENUE FIELD AND THEREFORE IT MAY HAVE TO B E REGARDED AS REVENUE EXPENDITURE. WHAT IS MATERIAL TO CONSIDER IS THE NA TURE OF THE ADVANTAGE IN A COMMERCIAL SENSE AND IT IS ONLY WHERE THE ADVANTA GE IS IN THE CAPITAL FIELD THAT THE EXPENDITURE WOULD BE DISALLOWABLE ON AN APPLICATION OF THIS TEST. IF THE ADVANTAGE CONSISTS MERELY IN FACILITAT ING THE ASSESSEES TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT O F THE ASSESSEES BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHILE LEAVING THE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE ON REVENUE ACCOUNT, EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR AN INDEFIN ITE FUTURE. IN OTHER WORDS, THE FUNCTIONAL TEST WOULD BECOME MATERIAL AN D IF ON APPLICATION OF THE SAME IT IS FOUND THAT THE EXPENDITURE OPERATES TO CONFER BENEFIT IN THE REVENUE FIELD, THEN THE SAME WOULD BE REVENUE, IRRE SPECTIVE OF THE DURATION OF TIME FOR WHICH THE ASSESSEE ACQUIRES RI GHTS IN A SOFTWARE. THE PERIOD OF ADVANTAGE IN THE CONTEXT OF COMPUTER SOFT WARE SHOULD NOT BE VIEWED FROM THE POINT OF VIEW OF DIFFERENT ASSETS O R ADVANTAGES LIKE TENANCY OR USE OF KNOW-HOW BECAUSE SOFTWARE IS A BU SINESS TOOL ENABLING A BUSINESSMANS ABILITY TO RUN HIS BUSINESS. EMPIRE JUTE CO. LTD. VS. CIT (1980) 17 CTR (SC) 113 : (1980) 124 ITR 1 (SC) RELIED ON. THE FOLLOWING FACTORS WOULD BE RELEVANT TO DETERMIN E WHETHER THE ADVANTAGE OPERATES IN THE CAPITAL FIELD OR REVENUE FIELD(I) NATURE OF BUSINESS OF THE ASSESSEE : IT IS NECESSARY TO OBTAI N AN UNDERSTANDING OF THE BUSINESS FUNCTION OR EFFECT OF A CONCERNS SOFT WARE. SOFTWARE NORMALLY I.T.A. NOS. 8625/M/2010 ITA NOS.4459 & 4795 /MUM/2012 6 FUNCTIONS AS A TOOL ENABLING BUSINESS TO BE CARRIED ON MORE EFFICIENTLY. THE SCOPE, POWER, LONGEVITY OF SUCH A TOOL AND ITS CENT RALITY TO THE FUNCTIONS OF THE BUSINESS WILL ALL BEAR ON ITS TREATMENT. ONE OF THE ASSESSEES IN THE CASES REFERRED TO THE SPECIAL BENCH IS ENGAGED IN T HE BUSINESS OF SOFTWARE DEVELOPMENT AS WELL AS RUNNING A TRAINING CENTER TO IMPART SPECIALIZED TRAINING TO THE STUDENTS IN SOFTWARE TE CHNOLOGY. IF THE SOFTWARE WERE USED IN SUCH BUSINESS TO IMPART TRAINING TO TH E STUDENTS, THEN THE SAME WOULD BE PART OF THE PROFIT MAKING APPARATUS O F THE ASSESSEE AND CONSEQUENTLY EXPENDITURE ON SOFTWARE, CAPITAL. SIMI LARLY, EXAMPLE OF A TRAVEL AGENT CAN BE CITED HERE AS AN ILLUSTRATION W HEREIN THE EXPENDITURE INCURRED ON ACQUISITION OF A SOFTWARE FOR THE PURPO SE OF ENABLING THE ASSESSEE TO MAKE BOOKING OF AIR TICKETS WOULD BE A CAPITAL EXPENDITURE BECAUSE SUCH A SOFTWARE CERTAINLY FORMS PART OF THE PROFIT MAKING APPARATUS OF THE TRAVEL AGENCY BUSINESS INASMUCH AS THE BUSINESS OF AIR TICKET BOOKING IS DONE WITH THE HELP OF THAT SOFTWA RE. ANOTHER EXAMPLE WHICH CAN BE CONSIDERED HERE IS THAT OF ACQUISITION OF TURBO GOLD SOFTWARE FOR RS. 17.61 LAKHS BY ONE OF THE ASSESSEES IN THE PRESENT CASE. THE SAID SOFTWARE HELPS IN COMPRESSION OF SIZE OF E-MAILS SE NT THROUGH THE LOTUS NOTES MAILING SYSTEM AND IT INCLUDES LICENSES FOR 1 50 USERS WHO ARE USING LOTUS NOTES MAILING SYSTEM AND SOFTWARE LICENSE FOR RUNNING ON ITS SERVER. IF USE OF THIS SOFTWARE IN THE BUSINESS OF THE ASSE SSEE IS LIMITED TO FACILITATE MERELY AN EFFECTIVE AND FAST COMMUNICATION IN ORDER TO INCREASE ITS ORGANIZATIONAL EFFICIENCY, THE SAME CANNOT BE TREAT ED AS FORMING PART OF THE PROFIT MAKING APPARATUS OF THE ASSESSEE. ON THE OTHER HAND, IF SUCH SOFTWARE IS BEING USED BY AN ASSESSEE ENGAGED IN TH E BUSINESS OF PLACEMENT AGENCY WHERE THE APPLICATIONS FROM PERSON S SEEKING JOBS ARE INVITED THROUGH E-MAIL AND ARE ALSO FORWARDED TO TH E CONCERNED CLIENTS THROUGH E-MAIL, THE SAME MAY FORM PART OF PROFIT MA KING APPARATUS OF THE ASSESSEES BUSINESS OF PLACEMENT AGENCY AND CAN BE TREATED AS A CAPITAL ASSET. (II) AS A GENERAL RULE IT MAY BE STATED THAT THE MORE EXPENSIVE THE COMPUTER SOFTWARE, THE MORE IT IS LIKELY TO BE A CE NTRAL TOOL OF THE BUSINESS AND THE MORE ENDURING IS LIKELY TO BE ITS EFFECT AD DING TO THE PROFIT EARNING APPARATUS. IF THERE ARE ASSOCIATED CAPITAL EXPENDIT URE LIKE PURCHASE OF NEW COMPUTER EQUIPMENT FOR RUNNING THE SOFTWARE DEVELOP ED UNDER A PROJECT, THEN IT CAN BE CONSIDERED AS CAPITAL EXPENDITURE. T HIS IS ESPECIALLY THE CASE WHERE THE NEW HARDWARE IS NOT MERELY DESIRABLE BUT NECESSARY FOR THIS PURPOSE. (III) DEGREE OF ASSOCIATED ORGANIZATI ONAL CHANGE : SIMILARLY THE DEGREE OF CHANGE INTENDED IN THE WAY OPERATIONS ARE CARRIED OUT AS A RESULT OF THE COMPUTER SOFTWARE, FOR EXAMPLE, SAVIN GS IN THE NUMBER, AND CHANGES IN THE LOCATION, OF STAFF USED TO PROVIDE S ERVICES TO CUSTOMERS WILL HAVE A BEARING. THE MORE RADICAL THE CHANGES, THE M ORE LIKELY THE EXPENDITURE WILL BE CAPITAL. THESE CHANGES ARE LIKE LY TO BE MOST RADICAL WHEN OPERATIONS PREVIOUSLY CARRIED ON MANUALLY ARE COMPUTERIZED. (IV) IT HAS TO BE BORNE IN MIND THAT COMPUTER SOFTWARE INDU STRY IS OF A FAST CHANGING NATURE. THEREFORE WHATEVER SOFTWARE PURCHA SED BY AN ASSESSEE WOULD BECOME OUTDATED MUCH EARLIER THAN EXPECTED. T HE ASSESSEE HAS THEREFORE TO UPGRADE HIS SOFTWARE. AN ELEMENT OF UP GRADING DOES NOT AUTOMATICALLY MAKE THE EXPENDITURE CAPITAL. THE PRE SENCE OF AN ELEMENT OF UPGRADING, THEREFORE, WILL NOT NECESSARILY CAUSE THE EXPENDITURE IN QUESTION TO BE CAPITAL. I.T.A. NOS. 8625/M/2010 ITA NOS.4459 & 4795 /MUM/2012 7 THE CONCLUSIONS ON THE ISSUE UNDER CONSIDERATION TH US CAN BE SUMMARIZED AS UNDER : (I) WHEN THE ASSESSEE ACQUIRE S A COMPUTER SOFTWARE OR FOR THAT MATTER THE LICENSE TO USE SUCH SOFTWARE, HE ACQUIRES A TANGIBLE ASSET AND BECOMES OWNER THEREOF. (II) HAVI NG REGARD TO THE FACT THAT SOFTWARE BECOMES OBSOLETE WITH TECHNOLOGICAL I NNOVATION AND ADVANCEMENT WITHIN A SHORT SPAN OF TIME, IT CAN BE SAID THAT WHERE THE LIFE OF THE COMPUTER SOFTWARE IS SHORTER (SAY LESS THAN TWO YEARS), IT MAY BE TREATED AS REVENUE EXPENDITURE. ANY SOFTWARE HAVING ITS UTILITY TO THE ASSESSEE FOR A PERIOD BEYOND TWO YEARS CAN BE CONSI DERED AS ACCRUAL OF BENEFIT OF ENDURING NATURE. HOWEVER, THAT BY ITSELF WILL NOT MAKE THE EXPENDITURE INCURRED ON SOFTWARE AS CAPITAL IN NATU RE AND THE FUNCTIONAL TEST AS DISCUSSED ABOVE ALSO NEEDS TO BE SATISFIED. (III) ONCE THE TESTS OF OWNERSHIP AND ENDURING BENEFIT ARE SATISFIED, THE Q UESTION WHETHER EXPENDITURE INCURRED ON COMPUTER SOFTWARE IS CAPITA L OR REVENUE HAS TO BE SEEN FROM THE POINT OF VIEW OF ITS UTILITY TO A BUS INESSMAN AND HOW IMPORTANT AN ECONOMIC OR FUNCTIONAL ROLE IT PLAYS I N HIS BUSINESS. IN OTHER WORDS, THE FUNCTIONAL TEST BECOMES MORE IMPORTANT A ND RELEVANT BECAUSE OF THE PECULIAR NATURE OF THE COMPUTER SOFTWARE AND ITS POSSIBLE USE IN DIFFERENT AREAS OF BUSINESS TOUCHING EITHER CAPITAL OR REVENUE FIELD OR ITS UTILITY TO A BUSINESSMAN WHICH MAY TOUCH EITHER CAP ITAL OR REVENUE FIELD. WE HAVE NOTICED EARLIER THAT THE LD COUNSEL HAS SUB MITTED BEFORE US THAT THE SOFTWARES PURCHASED BY THE ASSESSEE WERE USED TO CA RRY ON THE BUSINESS MORE EFFICIENTLY AND THEY DO NOT FALL IN THE CATEGORY OF PROFIT MAKING APPARATUS OF THE ASSESSEES BUSINESS. HE FURTHER SUBMITTED THAT TH E SOFTWARES PURCHASED VIZ., WEALTH SPECTRUM, I-DEAL, CHART FX ARE FUNCTIONAL S OFTWARES HAVING SHORT DURATION OF LIFE DUE TO TECHNOLOGICAL OBSOLESCENCE AND CONTI NUOUS UP-GRADATION. ACCORDINGLY, THE LD A.R SUBMITTED THAT THEY FALL IN THE CATEGORY OF REVENUE EXPENDITURE AS PER THE TESTS LAID DOWN BY THE SPECI AL BENCH IN THE CASE OF AMWAY INDIA ENTERPRISES LTD (SUPRA) AND ALSO BY THE HONBLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF VARINDER AGRO CHE MICALS LTD (SUPRA). 4.2 ON A PERUSAL OF THE NARRATION GIVEN EXPLAININ G THE NATURE OF SOFTWARE SPECIFIED IN THE TABLE EXTRACTED ABOVE, WE NOTICE T HAT THE SOFTWARE NAMED WEALTH SPECTRUM IS SUPPORTIVE SOFTWARE FOR PMS AP PLICATION. SIMILARLY THE SOFTWARE NAMED I-DEAL IS ALSO SUPPORTIVE SOFTWARE FOR I-DEAL APPLICATION. THE NATURE OF SOFTWARE NAMED CHART FX IS NOT STATED. THE DESCRIPTION GIVEN FOR THE SAID SOFTWARE SUPPORTS THE SUBMISSION OF LD A.R THA T THEY ARE NOT THE PRIMARY SOFTWARE, ON WHICH THE BUSINESS OF THE ASSESSEE IS RUN, BUT THEY PERFORM SUPPORTING ROLE. FURTHER, THE LD A.R HAS ALSO SUB MITTED THAT THEY ARE HAVING SHORT LIFE DUE TO CONTINUOUS UPGRADING. ALL THESE SUBMISSIONS HAVE NOT BEEN CONTROVERTED BY THE REVENUE. HENCE, WE FIND MERIT IN THE CONTENTIONS OF THE I.T.A. NOS. 8625/M/2010 ITA NOS.4459 & 4795 /MUM/2012 8 ASSESSEE THAT THE EXPENDITURE INCURRED BY THE ASSES SEE IN RESPECT OF THE ABOVE SAID THREE SOFTWARES ARE REVENUE IN NATURE. ACCORD INGLY, WE SET ASIDE THE ORDER OF OF LD CIT(A) IN RESPECT OF THE ABOVE SAID THREE SOFTWARES AND DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM. 4.3 THE REMAINING TWO SOFTWARES ARE WINDOWS SERVER , 2003 AND ABODE PHOTOSHOP ETC. WE NOTICE THAT THE FIRST ONE IS AN OPERATING SYSTEM AND THE SECOND ONE IS APPLICATION SOFTWARE. BOTH THE SOFTW ARES ARE ALSO HAVING FAIRLY LONG UTILITY LIFE. HENCE, IN OUR VIEW, THE LD CIT( A) WAS JUSTIFIED IN HOLDING THAT THE EXPENDITURE INCURRED IN ACQUISITION OF THE ABOVE SA ID SOFTWARES IS CAPITAL IN NATURE. ACCORDINGLY, WE UPHOLD HIS ORDER ON THE AB OVE SAID TWO SOFTWARES. 5. THE NEXT ISSUE RELATES TO THE DISALLOWANCE MADE U/S 14A OF THE ACT. THE CONTENTIONS OF LD A.R ARE THAT THE ASSESSEE HAS REC EIVED DIVIDEND IN TWO OCCASIONS AND FURTHER THE SAID DIVIDENDS WERE ALSO DIRECTLY CREDITED TO THE BANK ACCOUNT. THE LONG TERM CAPITAL GAINS CONSISTED OF 8 TRANSACTIONS ONLY. ACCORDINGLY, IT WAS SUBMITTED THAT THE DISALLOWANCE OF RS.86,805/- CONFIRMED BY THE LD CIT(A) IS ALSO ON THE HIGHER SIDE. WE HAVE ALREADY NOTICED THAT THE ASSESSEE ITSELF HAS WORKED OUT THE DISALLOWANCE TO BE MADE U/S 14A AT RS.86,805/- AND FURNISHED THE SAME BEFORE LD CIT(A) . THOUGH IT IS SUBMITTED THAT THE ASSESSEE HAS RECEIVED DIVIDENDS ONLY ON TW O OCCASIONS BY WAY OF DIRECT CREDIT INTO THE BANK ACCOUNT OF THE ASSESSEE AND FU RTHER LONG TERM CAPITAL GAINS WERE EARNED ON EIGHT TRANSACTIONS, YET, IN OUR VIEW , THE DISALLOWANCE TO BE MADE U/S 14A IS NOT DEPENDENT UPON THE ACTUAL RECEIPT OF DIVIDENDS. WHAT IS REQUIRED TO BE DISALLOWED IS THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . IN THE INSTANT CASE, THE ASSESSEE ITSELF HAS WORKED OUT THE AMOUNT OF EXPEND ITURE RELATABLE TO THE EXEMPT INCOME AT RS.86,805/- AND FURNISHED THE SAME TO LD CIT(A). IT WAS SUBMITTED THAT THE SAID WORKINGS WERE FURNISHED AT THE REQUES T OF THE FIRST APPELLATE AUTHORITY. THE LD A.R SUBMITTED THAT THE ASSESSEE STANDS BY ITS CLAIM THAT IT DID NOT INCUR ANY EXPENDITURE. HOWEVER, WE ARE OF THE VIEW THAT THE LD CIT(A) WAS JUSTIFIED IN CONFIRMING THE DISALLOWANCE U/S 14A TO THE EXTENT OF RS.86,805/-, SINCE THE WORKINGS FURNISHED BY THE ASSESSEE WOULD SHOW T HAT THE ASSESSEE HAS ALLOCATED 20% OF SALARY OF AN EXECUTIVE AND SOME MI NOR PORTION OF CONVEYANCE I.T.A. NOS. 8625/M/2010 ITA NOS.4459 & 4795 /MUM/2012 9 AND COMMUNICATION EXPENSES TO WORK OUT THE TOTAL CO ST INCURRED IN RELATION TO THE EXEMPT INCOME. ACCORDINGLY, WE CONFIRM THE ORDER O F LD CIT(A) ON THIS ISSUE. 6. WE SHALL NOW TAKE UP THE APPEALS FILED BY BOTH THE PARTIES FOR AY 2008-09. THE GROUNDS RAISED BY BOTH THE PARTIES RELATE TO TH E DECISION TAKEN BY LD CIT(A) IN RESPECT OF DISALLOWANCE MADE U/S 14A OF THE ACT. 7. THE FACTS RELATING TO THE SAME ARE DISCUSSED IN BRIEF. DURING THIS YEAR, THE ASSESSEE DISCLOSED DIVIDEND INCOME OF RS.8,33,46,23 9/- AND LONG TERM CAPITAL GAINS OF RS.68,88,582/- AND CLAIMED BOTH THE INCOME AS EXEMPT. IN ITS RETURN OF INCOME, THE ASSESSEE DISALLOWED A SUM OF RS.1,25,60 5/- AS EXPENDITURE INCURRED IN EARNING THE ABOVE SAID INCOMES. HOWEVER, THE AS SESSING OFFICER TOOK THE VIEW THAT THE DISALLOWANCE U/S 14A SHOULD BE WORKED OUT AS PER THE PROVISIONS OF RULE 8D OF THE I.T RULES. THE AO ACCEPTED THAT THERE WA S NO REQUIREMENT OF MAKING ANY DISALLOWANCE OUT OF INTEREST EXPENDITURE. HOWE VER, THE AO DISALLOWED PART OF INDIRECT EXPENSES CALCULATED AT 0.5% OF THE AVERAGE VALUE OF INVESTMENTS, WHICH WORKED OUT TO RS.1,46,78,090/-, WHICH WAS IN TERMS OF RULE 8D. ACCORDINGLY, THE AO ENHANCED THE DISALLOWANCE MADE BY THE ASSESSEE T O THE ABOVE SAID FIGURE. 7.1 BEFORE LD CIT(A), THE ASSESSEE SUBMITTED AS UN DER:- IN THIS REGARD IT WILL BE NECESSARY TO CONSIDER WH ETHER THE WORKING OF THE APPELLANT IN RESPECT OF THE EXPENSE AT RS.1,25,605/ - IS CORRECT OR NOT. IT CAN BE SEEN THAT THE WORKING OF EXPENSE INCLUDES SA LARY, CONVEYANCE AND COMMUNICATION EXPENSES. THE APPELLANT HAS SUBSTANT IATED THE REASONABLENESS OF THE WORKING OF EXPENSES IN PARA 2 .5 OF THEIR SUBMISSION DATED 19.3.2010. IT CAN BE SEEN THAT OUT OF 27 TOTAL ENTRIES OF DIVI DEND, ALL ARE BY WAY OF CREDIT AND NO RECEIPTS ARE BY CHEQUE. 8 RECEIPTS AR E BY WAY OF DIRECT CREDIT, BALANCE 19 ENTRIES WERE RECEIVED IN THE FOR M OF DIVIDEND REINVESTMENT. THE TOTAL NUMBER OF ENTRIES IN THE N ATURE OF TRANSACTIONS IN RESPECT OF LONG TERM CAPITAL GAINS STT PAID ARE 4 I N NUMBER. CONSIDERING THE SMALLNESS OF ACTIVITIES OF INVESTME NTS AS NARRATED ABOVE, THE APPELLANT SUBMITS THAT THE WORKING OF ASSESSING OFFICER IN ACCORDANCE WITH RULE 8D IS UNREASONABLE AND EXCESSIVE AND ON T HE CONTRARY THE WORKING OF THE APPELLANT IS MOST REASONABLE. THE ASSESSEE ALSO SUBMITTED BEFORE LD CIT(A) THAT T HE ASSESSING OFFICER CAN PROCEED TO COMPUTE THE DISALLOWANCE IN ACCORDANCE W ITH RULE 8D ONLY IF HE IS NOT SATISFIED ABOUT THE CORRECTNESS OF THE APPELLANTS CLAIM. THE ASSESSEE ALSO I.T.A. NOS. 8625/M/2010 ITA NOS.4459 & 4795 /MUM/2012 10 POINTED OUT THE SIMILAR TYPE OF DISALLOWANCE WORKED OUT BY THE ASSESSEE IN AY 2007-08 WAS ACCEPTED BY LD CIT(A) IN THAT YEAR AND THE DEPARTMENT DID NOT CHALLENGE THE SAME. THE ASSESSEE ALSO PLACED RELIA NCE ON THE DECISIONS RENDERED BY THE JURISDICTIONAL BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE & MFG. CO. LTD AND ALSO THE DECISION RENDERED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD VS. CIT (203 TAXM AN 364). ACCORDINGLY, THE ASSESSEE PLEADED THAT THE DISALLOWANCE WORKED OUT B Y THE ASSESSEE SHOULD BE SUSTAINED. 7.2 THE LD CIT(A), HOWEVER, DID NOT ACCEPT THE WO RKINGS FURNISHED BY THE ASSESSEE WITH REGARD TO THE DISALLOWANCE MADE BY IT IN ITS RETURN OF INCOME. THE LD CIT(A) EXPRESSED THE VIEW THAT IT IS NOT ACCEPTA BLE THAT A JUNIOR LEVEL EXECUTIVE WAS EMPLOYED TO LOOK AFTER THE INVESTMENT MADE BY THE ASSESSEE COMPANY. HE ALSO HELD THAT THE DECISION TO MAKE IN VESTMENT IN SHARES OR MUTUAL FUNDS OR IN ANY OTHER INVESTMENT PRODUCTS IS NOT A SIMPLE DECISION AND THE SAME REQUIRES LOT OF CARE AND STUDY BY A TEAM OF EXPERTS IN THE FIELD OF CAPITAL MARKET. HOWEVER, THE LD CIT(A) ACCEPTED THE CONTENTION OF T HE ASSESSEE THAT ONLY THOSE INVESTMENTS WHICH HAS RESULTED IN EARNING INCOME SH OULD ONLY BE CONSIDERED TO COMPUTE DISALLOWANCE UNDER RULE 8D(2)(III) OF I.T R ULES. IN THIS REGARD, THE LD CIT(A) TOOK SUPPORT OF THE DECISION RENDERED BY CHE NNAI BENCH OF ITAT IN THE CASE OF SIVA INDUSTRIES AND HOLDING LTD (59 DTR 182 ). ACCORDINGLY, THE LD CIT(A) RESTRICTED THE DISALLOWANCE TO RS.1,25,66,793/- AS AGAINST THE AMOUNT OF RS.1,45,52,785/- DISALLOWED BY THE AO. AGGRIEVED, BOTH THE PARTIES ARE IN APPEAL BEFORE US. 8. WE HAVE HEARD THE RIVAL CONTENTIONS ON THIS ISS UE AND PERUSED THE RECORD. A PERUSAL OF THE TOTAL INVESTMENTS HELD BY THE ASSE SSEE WOULD SHOW THAT THE ASSESSEE HAD HELD INVESTMENT OF RS.70.62 CRORES AS ON 1.4.2007 AND IT HAS COME DOWN TO RS.68.26 CRORES AS ON 31.3.2008. A PE RUSAL OF DETAILS OF INVESTMENTS WOULD SHOW THAT THE ASSESSEE HAS INVEST ED MAINLY IN VARIOUS SCHEMES OF RELIANCE MUTUAL FUND AND ITS SUBSIDIARIE S. INVESTMENTS MADE IN OTHER COMPANIES ARE VIZ,M SHARES OF CITICORP FINANC IAL LTD (RS.2.00 CRORES), CLEARING CORPORATION LTD (RS.5.00 CRORES), ICICI BA NK LTD (0.50 CRORE) AND KOTAK MAHINDRA BANK LTD (0.50 CRORE). THUS, OUT OF AGGRE GATE INVESTMENTS OF RS.68.25 CRORES, THE INVESTMENT MADE IN OTHER COMPANIES WAS ONLY RS.8.00 CRORES. THE I.T.A. NOS. 8625/M/2010 ITA NOS.4459 & 4795 /MUM/2012 11 REMAINING INVESTMENTS ARE MAINLY IN VARIOUS SCHEMES OF RELIANCE MUTUAL FUND ONLY AND ALSO IN OTHER GROUP CONCERNS. THERE SHOUL D NOT BE ANY DISPUTE THAT THE INVESTMENTS MADE IN THE VARIOUS SCHEMES OF RELIANCE MUTUAL FUND AND ALSO IN OTHER GROUP CONCERNS ARE USUALLY MADE OUT OF BUSINE SS POLICY AND THE SAME DOES NOT REQUIRE COMPLEX ANALYSIS BY TECHNICAL EXPERTS, AS ASSUMED BY LD CIT(A). 8.1 ACCORDING TO THE ASSESSEE, IT HAS RECEIVED DIV IDENDS FROM 27 TRANSACTIONS, OUT OF WHICH 8 RECEIPTS WERE BY WAY OF DIRECT CREDI T TO ITS BANK ACCOUNT AND 19 RECEIPTS WERE IN THE FORM OF REINVESTMENT OF DIVIDE ND, I.E., THE DIVIDEND AMOUNT WAS REINVESTED AND IT DID NOT PHYSICALLY RECEIVED T HE DIVIDEND AMOUNT. CAPITAL GAINS WERE EARNED OUT OF FOUR TRANSACTIONS. THUS, IT IS SEEN THAT THE TRANSACTIONS RELATING TO EARNING OF DIVIDEND INCOME AS WELL AS L ONG TERM CAPITAL GAINS ARE LIMITED. FROM THE INVESTMENT SCHEDULE OF THE BALAN CE SHEET, WE NOTICE THAT THE ASSESSEE, IN TOTAL, HAS CARRIED OUT 23 TRANSACTIONS IN ITS INVESTMENT PORTFOLIO, I.E., PURCHASED NEW INVESTMENTS 15, SOLD FIVE INVESTMENTS AND MADE MODIFICATION IN 3 INVESTMENTS. AS STATED EARLIER, ALL THESE TRANSACT IONS MAINLY RESTRICTED WITHIN THE GROUP COMPANIES/SCHEMES. 8.2 FROM THE FOREGOING ANALYSIS OF TRANSACTIONS AND ALSO FROM THE NATURE OF INVESTMENT MADE BY THE ASSESSEE, I.E., MAINLY IN TH E SCHEMES OF RELIANCE MUTUAL FUND AND GROUP CONCERNS, WE ARE OF THE VIEW THAT THERE IS NO NECESSITY TO APPLY THE FORMULA PRESCRIBED IN RULE 8D(2)(III) OF THE INCOME TAX RULES. AT THE SAME TIME, THE DISALLOWANCE OF RS.1,25,605/- WORKED OUT BY THE ASSESSEE ALSO, IN OUR VIEW, APPEARS TO BE ON A LOWER SIDE. AS POI NTED OUT BY THE LD CIT(A), THE ASSESSEE HAS ALLOCATED SALARY OF A JUNIOR EXECUTIVE IN THE WORKINGS. THOUGH THE INVESTMENTS MADE IN THE SCHEMES OF RELIANCE MUTUAL FUND AND GROUP CONCERNS DO NOT REQUIRE TECHNICAL ANALYSIS, YET THE DECISION TO MAKE INVESTMENT IS NORMALLY TAKEN AT A HIGHER LEVEL. HENCE, ON A CONSPECTUS OF THE MATTER, WE ARE OF THE VIEW THAT THIS MATTER WOULD MEET THE ENDS OF JUSTICE, IF THE DISALLOWANCE TO BE MADE UNDER RULE 8D(2)(III) IS DETERMINED AT RS.3,50,000/ -. ACCORDINGLY, WE MODIFY THE ORDER OF LD CIT(A) AND DIRECT THE ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE TO BE MADE U/S 14A OF THE ACT TO RS.3,50,000/-. I.T.A. NOS. 8625/M/2010 ITA NOS.4459 & 4795 /MUM/2012 12 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE FOR AY 2007-08 AND THE APPEAL FILED BY THE REVENUE FOR AY 2008-09 ARE PART LY ALLOWED AND THE APPEAL FILED BY THE ASSESSEE FOR AY 2008-09 IS DISMISSED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPE N COURT ON 17TH OCT, 2014. /'! + 0 1 2 3 17TH OCT , 2014 * ;, < SD SD ( . / D. MANMOHAN ) ( . . ,/ B.R. BASKARAN) / VICE- PRESIDENT / ACCOUNTANT MEMBER + , MUMBAI: 17TH OCT,2014. . . ./ SRL , SR. PS ! ' / COPY OF THE ORDER FORWARDED TO : 1. #$ / THE APPELLANT 2. %&#$ / THE RESPONDENT. 3. + =- ( ) / THE CIT(A)- CONCERNED 4. + =- / CIT CONCERNED 5. 6. >?; %- @ , . @ ! , + , / DR, ITAT, MUMBAI CONCERNED ; A, / GUARD FILE. B + / BY ORDER, TRUE COPY ' (ASSTT. REGISTRAR) . @ ! , + , /ITAT, MUMBAI