2012 (9) TMI 185 - AT - Income Tax

Depreciation on BSE membership Card - dis-allowance - assessee engaged in business of Share broking & dealing in shares and securities - Held that - Right of membership is a business or commercial right and could be said to be owned by the assessee and used for business purposes in terms of section 32(1)(ii). See Techno Shares and Stocks Ltd. Vs CIT (2010 (9) TMI 6 - SUPREME COURT OF INDIA). In view of aforesaid depreciation on BSE membership Card is allowed. Computer software expenditure - revenue or capital - Held that - In case of Amway India enterprises v/s DCIT (2011 (11) TMI 4 - DELHI HIGH COURT) it has been held that functional test becomes more important and 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 capital or revenue field. Therefore, in the instant case issue is restored back to the files of the AO with a direction to examine the functions of the software with the nature of requirement of the business and then decide whether it is revenue or capital in nature. Dis-allowance of service charges paid by the appellant to M/s Sovereign to take over the clientele business of the said company pursuant to the SEBI regulations - Held that - MOU clearly shows that assessee company has purchased entire clientele business of SGFPL. We fail to understand how payments made to SGFPL for purchase of its clientele business can be termed as service charges as no services have been provided by the said company except transferring its entire clientele as per MOU. Entire payment is of capital in nature and deserves to be added back to the returned income - Decided partly in favor of assessee

Summary

Issues involved:
1. Disallowance of depreciation on BSE membership card.
2. Treatment of computer software expenditure as capital expenditure.
3. Disallowance of business expenditure on service charges paid.

Issue 1 - Disallowance of depreciation on BSE membership card:
The appellant claimed depreciation on the BSE membership card, but the AO disallowed it, citing that the asset was acquired before the introduction of provisions on depreciation for intangible assets. The CIT[A] upheld the disallowance. However, the appellant argued that the BSE membership card was an intangible asset, citing a Supreme Court decision. The ITAT analyzed the Supreme Court's decision, which confirmed that the BSE membership card was an intangible asset eligible for depreciation. Consequently, the ITAT directed the AO to allow depreciation on the BSE membership card, reversing the CIT[A]'s decision.

Issue 2 - Treatment of computer software expenditure as capital expenditure:
The AO treated computer software expenditure as capital expenditure, disallowing it as a revenue expense. The CIT[A] supported this decision, noting that software was now eligible for depreciation. The appellant contended that the software expenditure did not provide enduring benefits, citing a special bench decision. The ITAT referred to the special bench decision, emphasizing the importance of the functional test in determining the nature of software expenditure. The ITAT directed the AO to assess the software's functions in relation to the business requirements to determine if the expenditure was capital or revenue in nature. The ITAT allowed this ground for statistical purposes.

Issue 3 - Disallowance of business expenditure on service charges paid:
The AO disallowed business expenditure on service charges paid to a company, considering it a capital expenditure. The CIT[A] upheld the disallowance, stating that the payment was not related to business services. The appellant argued that the payment was for purchasing the clientele business of the company, which the MOU confirmed. The ITAT reviewed the MOU and found that the payment was for acquiring the business of the company, making it capital expenditure. The ITAT upheld the disallowance, stating that the payment was capital in nature. The appeal was partly allowed with this modification.