2014 (11) TMI 378 - AT - Income Tax

Software expenses disallowed Revenue expenses or not Held that - Assessee rightly contended that the softwares purchased by the assessee were used to carry on the business more efficiently and they do not fall in the category of profit making apparatus of the assessee s business - they fall in the category of Revenue expenditure relying upon the tests laid down in Amway India Enterprises. Versus Deputy Commissioner Of Income-tax, Circle - 1(1), New Delhi 2008 (2) TMI 454 - ITAT DELHI-C - the software named Wealth spectrum is supportive software for PMS application - 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 software supports the submission of the assessee that they are not the primary software, on which the business of the assessee is run, but they perform supporting role and they are having short life due to continuous upgrading - All the submissions have not been controverted by the revenue thus, the order of the CIT(A) is set aside and the AO is directed to allow the claim Decided in favour of assessee. For the remaining two softwares that are Windows Server, 2003 and Abode Photoshop etc., the first one is an operating system and the second one is application software - Both the softwares are also having fairly long utility life - CIT(A) was justified in holding that the expenses incurred in acquisition of the softwares is capital in nature. Disallowance u/s 14A Application of formula provided under Rule 8D - Held that - The assessee had held investment of ₹ 70.62 crores as on 1.4.2007 and it has come down to ₹ 68.26 crores as on 31.3.2008 - the assessee has invested mainly in various schemes of Reliance mutual fund and its subsidiaries - out of aggregate investments of ₹ 68.25 crores, the investment made in other companies was only ₹ 8.00 crores - The remaining investments are mainly in various schemes of Reliance mutual fund only and also in other group concerns - the investments made in the various schemes of Reliance mutual fund and also in other group concerns are usually made out of business policy and the same does not require complex analysis by technical experts - there is no necessity to apply the formula prescribed in Rule 8D(2)(iii) of the Income tax Rules - the disallowance worked out by the assessee also appears to be on a lower side - 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 - thus, the disallowance under Rule 8D(2)(iii) is determined at ₹ 3,50,000 thus, the order of the CIT(A) is modified Decided partly in favour of assessee.

Summary

Issues Involved:
1. Disallowance of software expense for assessment year 2007-08.
2. Disallowance made under section 14A of the Income Tax Act for assessment year 2007-08.
3. Disallowance made under section 14A of the Income Tax Act for assessment year 2008-09.

Detailed Analysis:

1. Disallowance of Software Expense for Assessment Year 2007-08:
The Assessee, an asset manager of a mutual fund, claimed software expenses as revenue expenditure. The Assessing Officer (AO) treated these expenses as capital expenditure, allowing depreciation at 60% as per the Depreciation Schedule. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this decision for most software except for "Capitaline," which was an annual payment and thus allowed as revenue expenditure.

The Tribunal, however, referenced the Delhi High Court's decision in CIT Vs. Indian Visit.Com (P) Ltd, which categorized website development charges as revenue expenditure. It also cited the Punjab & Haryana High Court's ruling in CIT Vs. Varinder Agro Chemicals Ltd, emphasizing that software expenses are revenue in nature if they are not of enduring benefit and become outdated quickly. The Tribunal concluded that software like "Wealth spectrum," "i-deal," and "Chart FX" are functional and supportive, thus qualifying as revenue expenditure. However, "Windows Server, 2003" and "Adobe Photoshop" were deemed capital expenditures due to their longer utility life.

2. Disallowance Made Under Section 14A for Assessment Year 2007-08:
The AO disallowed Rs. 25,26,129 under section 14A, applying Rule 8D, which mandates disallowance of administrative expenses related to exempt income. The Assessee argued that no expenses were incurred for earning the exempt income and cited the Bombay High Court's decision in Godrej & Boyce Mfg Co Ltd Vs DCIT, which held Rule 8D applicable prospectively from assessment year 2008-09.

The CIT(A) accepted the Assessee's revised disallowance of Rs. 86,805 based on a reasonable basis, considering the limited number of transactions and the direct credit of dividends to the bank account. The Tribunal upheld this disallowance, noting that the Assessee itself had provided a working of the disallowance at Rs. 86,805, which included a portion of salary and minor conveyance and communication expenses.

3. Disallowance Made Under Section 14A for Assessment Year 2008-09:
For assessment year 2008-09, the AO applied Rule 8D, resulting in a disallowance of Rs. 1,46,78,090. The Assessee had initially disallowed Rs. 1,25,605 in its return. The CIT(A) reduced the disallowance to Rs. 1,25,66,793, accepting that only investments yielding income should be considered under Rule 8D(2)(iii).

The Tribunal noted that the Assessee's investments were primarily in its own mutual fund schemes and group concerns, which do not require complex analysis. It also observed that the Assessee's transactions were limited, with most dividends received through direct credit or reinvestment. The Tribunal found the Assessee's initial disallowance too low and the AO's application of Rule 8D excessive. It determined a fair disallowance of Rs. 3,50,000, modifying the CIT(A)'s order accordingly.

Conclusion:
The Tribunal partly allowed the Assessee's appeal for assessment year 2007-08, directing the AO to treat certain software expenses as revenue expenditure. It upheld the CIT(A)'s disallowance under section 14A for assessment year 2007-08 at Rs. 86,805. For assessment year 2008-09, the Tribunal modified the CIT(A)'s disallowance under section 14A to Rs. 3,50,000. The Assessee's appeal for assessment year 2008-09 was dismissed, and the Revenue's appeal was partly allowed.