2016 (5) TMI 1005 - AT - Income Tax

Disallowance of software expenses - revenue v.s capital expenditure - Held that - 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. See CIT Vs. Raychem RPG Ltd. (2011 (7) TMI 953 - Bombay High Court) - Decided in favour of assessee Disallowance of excess liability written back (debit balances) - Held that - 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 ₹ 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 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 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 (2) TMI 13 - BOMBAY HIGH COURT ), 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. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of software expenses by treating them as capital in nature.
2. Disallowance of excess liability written back (debit balances) amounting to ?21,25,585/- as business loss.

Detailed Analysis:

1. Disallowance of Software Expenses:

The assessee debited ?65,53,250/- as software expenses in its Profit & Loss Account, capitalizing ?55,52,783/- and claiming depreciation on it, while ?10,00,467/- was claimed as revenue expenditure. The Assessing Officer (AO) classified these expenses as capital expenditure and disallowed the ?5,25,130/- claimed as revenue expenditure. The CIT(A) upheld this decision, stating that the expenses were related to computer software and should be capitalized, noting that the nature of the expenses shared between NSEIL and NSCCF did not change their classification as capital expenditure.

Upon appeal, the Tribunal found that the software expenses were periodical, incurred for software upgrades, subscriptions, and annual license fees, which had a short lifespan and no enduring benefit. Citing the Bombay High Court's decision in CIT Vs. Raychem RPG Ltd., the Tribunal ruled that such expenses should be treated as revenue expenditure, thereby allowing the assessee's appeal on this issue.

2. Disallowance of Excess Liability Written Back:

The AO disallowed the excess liability written back amounting to ?21,25,585/-, arguing it did not qualify under Sections 41(1) or 37(1) of the Income Tax Act. The CIT(A) confirmed this, stating that the negative deposits suppressed taxable income and were not business expenditure or revenue in nature.

The assessee explained that the amount represented differential liability accrued in the normal course of business, collected as interest-free security deposits (IFSD) and additional base capital for margin requirements. Due to initial manual accounting processes, discrepancies arose, which were later reconciled, leading to the write-off as a one-time corrective action.

The Tribunal, agreeing with the assessee, found that the differential liability occurred in the normal course of business and had a direct nexus with business operations. Referencing the Bombay High Court's decision in Lord’s Dairy Farm Ltd. Vs. CIT, the Tribunal held that such losses, being genuine and incidental to business, should be deductible. Consequently, the Tribunal allowed the assessee's appeal on this issue as well.

Conclusion:

The Tribunal allowed the appeal filed by the assessee, ruling that:
- Software expenses should be treated as revenue expenditure.
- The excess liability written back should be allowed as a business loss.

Order Pronounced:
The appeal filed by the assessee was allowed, with the order pronounced in the open court on 15th April 2016.