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2016 (11) TMI 1029 - AT - Income TaxDisallowance u/s 14A - Held that - The assessee s case is covered by sub-sections (2) & (3) of section 14A as the assessee is claiming that no expenditure has been incurred by it in relation to the exempt income. We have seen that as per the balance sheet , investment reflected in as on 31.03.2010 was of ₹ 29,98,21,124/-. Further, as per the balance sheet for AY 2009-10, the total investment of the assessee as on 31.03.2010 was ₹ 29,98,21,124/- and the assessee was having reserve and surplus amount of ₹ 1,48,60,50,942/-. The assessee has secured loan of ₹ 3,70,00,000/-. The assessee-company has own sufficient fund. We have noticed that before making disallowance the AO not made any enquiry about the nature of investment as if it was strategic or the investment were made in earlier years and the manner in which exempt income was derived and credited to the account of assessee. Similarly no such exercise was made by Ld. CIT(A). The power of ld CIT(A) is co-terminus with AO. The disallowance made by AO and sustained by ld CIT(A) is not in accordance with the procedure prescribed u/s 14A r.w.s. Rule 8D. There is no finding that assessee has sufficient fund available with him or not. Hence, we deem it appropriate to restore this ground of appeal to the file of AO to pass order afresh. Disallowance of Software Usages Charges - revenue v/s capital expenditure - Held that - For ascertaining as to whether the expenditure of computer software gives enduring benefit to assessee, the duration of time for which assessee required right to use the software become relevant having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time, it would be said that where the life of computer software is shorter (less than 2 years) it may be treated as revenue expenditure. In Thomas Cook (India) ltd Vs DCIT (2006 (1) TMI 176 - ITAT BOMBAY-I ) the coordinate bench of Tribunal held that expenses incurred on up-gradation of software do not result into acquisition of any asset nor acquisition of enduring benefits as software become obsolete very quickly.
Issues:
1. Disallowance under section 14A r.w.Rule 8D of the Act. 2. Disallowance of Software Usage Charges. Issue 1: Disallowance under section 14A r.w.Rule 8D of the Act: The appellant filed appeals against the CIT(Appeals) order for AYs 2009-10 & 2010-11 regarding disallowance under section 14A and Software Usage Charges. The AO disallowed amounts under section 14A for both years. The appellant argued that section 14A should not apply as no expenses were debited to the P&L A/c and no expenditure was incurred in relation to tax-exempt securities. The AO calculated disallowances under Rule 8D. The CIT(A) upheld the disallowances. The Tribunal found that the AO did not inquire about the nature of investments or how exempt income was earned. The disallowance was deemed excessive, and the case was remanded to the AO for fresh assessment. Issue 2: Disallowance of Software Usage Charges: The AO disallowed Software Usage Charges as capital in nature, allowing only 60% depreciation. The CIT(A) upheld this disallowance based on depreciation allowed in a previous year. The Tribunal considered whether the software expenditure provided enduring benefits. It cited a case where software upgrades were treated as revenue expenditure due to quick obsolescence. Following this precedent, the Tribunal allowed the appeal regarding Software Usage Charges. In conclusion, both appeals were allowed, with the first issue remanded to the AO for fresh assessment and the second issue decided in favor of the appellant based on the nature of the software expenditure.
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