2018 (1) TMI 511 - AT - Income Tax

Nature of expenditure - expenditure incurred by the assessee towards licence fee paid for using MS Office software - revenue or capital - Held that - It is not in dispute that the assessee purchased MS Office software and used the same in its business. By purchasing MS Office software, the assessee has not become owner of the software. The ownership of MS Office software remained with Microsoft company. The assessee has to necessarily renew the licence periodically for using the same in the business. Merely because the assessee is using MS Office software as operating software in its system, it does not mean that MS Office software is the capital asset in the hands of the assessee-company. All assets / licence for use of software cannot be construed as capital asset merely because it gives an enduring benefit. By using MS Office software in the business of the assessee, the assessee gets enduring benefit in the course of earning of profit. So long as the assessee is a licensee, the ownership of MS Office software remains with Microsoft company. This Tribunal is of the considered opinion that the expenditure cannot be construed to be capital expenditure. See CIT Versus SOUTHERN ROADWAYS LTD. 2007 (6) TMI 193 - MADRAS HIGH COURT - Assessing Officer is directed to allow the expenditure incurred by the assessee in acquiring licence of MS Office software as revenue expenditure - Decided in favour of assessee Diminution in value of investment - assessee admittedly invested in the subsidiary company, namely, M/s iLink Systems UK - Held that - Both the authorities below rejected the claim of the assessee on the ground that income from UK subsidiary company is not taxable in India. Therefore, the loss in diminution in value cannot be allowed while computing the total income. The fact is that the control and management of subsidiary company in India was not considered by the both the authorities below. Moreover, the Double Taxation Avoidance Agreement between UK and India was also not considered. Therefore, the matter needs to be re-examined by the Assessing Officer. Accordingly, the orders of both the authorities below are set aside and the issue is remitted back to the file of the Assessing Officer. The Assessing Officer shall reconsider the issue afresh after considering the control and management of the UK subsidiary company and Double Taxation Avoidance Agreement between UK and India. Thereafter, the Assessing Officer shall decide the issue in accordance with law, after giving a reasonable opportunity to the assessee. Bad debts written off - Held that - For the purpose of claiming an amount as bad debt, it should have been taken as income of the assessee in any one of the earlier years and it has to be written off in the books of account. The Assessing Officer has not verified whether the claim made by the assessee was written off in the books. Moreover, the assessee claims that the money was advanced and invested in the sister concern. Whether it is a loss during the course of business or not also needs to be examined. Since these facts are not examined by both the authorities below, this Tribunal is of the considered opinion that the matter needs to be reconsidered. Accordingly, the orders of both the authorities below are set aside and the issue of addition made on account of bad debt is remitted back to the file of the Assessing Officer who shall reconsider the issue afresh on the basis of material available on record.

Summary

Issues:
1. Treatment of expenditure incurred for MS Office software license.
2. Diminution in value of investment in subsidiary company.
3. Bad debts written off to sister concern.

Analysis:

1. Treatment of expenditure for MS Office software license:
The appellant claimed expenditure on MS Office software license as revenue under Section 37 of the Income-tax Act, 1961, while the Assessing Officer treated it as capital expenditure. The appellant cited judgments from various High Courts to support their claim. The Tribunal observed that the ownership of the software remained with Microsoft, and the licensee (appellant) had to periodically renew the license. The Tribunal held that the expenditure cannot be considered capital as the software provided enduring benefit in the course of earning profit. The Tribunal set aside the lower authorities' orders and directed the Assessing Officer to treat the expenditure as revenue.

2. Diminution in value of investment in subsidiary company:
The appellant claimed diminution in value of investment in a UK subsidiary due to continuous losses, seeking it as a revenue expenditure. The Departmental Representative argued that the loss on diminution in value of investment in the UK subsidiary was not allowable as income from the subsidiary was exempted from taxation in India. The Tribunal noted that control and management of the subsidiary company in India and the Double Taxation Avoidance Agreement between UK and India were not considered by the lower authorities. The matter was remitted back to the Assessing Officer for re-examination.

3. Bad debts written off to sister concern:
The appellant claimed bad debts for an amount advanced to its sister concern, which could not be recovered due to the sister concern closing its business. The Departmental Representative contended that the amount advanced was not a debt and was not written off in the books. The Tribunal found that the claim was not verified for write-off in the books and whether it constituted a business loss. The issue was remitted back to the Assessing Officer for further examination.

In conclusion, the Tribunal partially allowed the appeal for statistical purposes and allowed the other appeals related to the treatment of expenditure for MS Office software license. The issues regarding diminution in value of investment and bad debts written off to the sister concern were remitted back to the Assessing Officer for re-examination based on the observations made.