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TMI Blog2014 (11) TMI 688X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure incurred by the assessee on the software was in the nature of the revenue expenditure - a sum of ₹ 23,30,9261 was claimed by the assessee as software expenses - This amount represent payment made to Clariant International Ltd. Towards acquisition of right to use the software "Lotus Notes" developed by Clariant International Ltd which according to assessee is powerful, multifaceted software that help to wo effectively - if the expenditure incurred on software are to facilitate the assessee's business or enabling the management to conduct the business more efficiently or more profitably then it cannot be said to be in the nature of profit making and has to be treated as 'revenue expenditure - the expenditure incurred by the assessee on the software is to be treated as revenue expenditure – Decided against revenue. Non-compete fees paid to Ex-Managing Director disallowed – Held that:- The assessee had paid non-compete fee to its Ex-Managing Director for restricting him to share his expertise or to join any other company in a similar line of business of chemicals for a period of three years on a consideration of ₹ 154.20 lakhs - Since the agreement for restri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the assessee has debited interest expenditure of ₹ 260.75 lakhs in the P L account and has not attributed any indirect expenditure for earning of the exempt income. After relying on the decision of Special Bench of ITAT in the case of I.T.O. Vs. Daga Capital Management (P) Ltd. (2009) 117 ITD 169 (Mum)[SB] and the decision of Hon ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. vs. DCIT (2010) 328 ITR 81 (Bom.), the AO held that though Rule 8-D is applicable from A.Y. 2008-09, however, as per the formula given in Rule 8-D, a reasonable basis is to be adopted for working out the disallowance. Accordingly he worked out the disallowance aggregating to ₹ 47,97,915/- not only under the head interest expenditure but also for certain indirect expenses. The working of the A.O. has been given in para 4.3 of the assessment order. 4. Before the ld. CIT(A), the assessee had given detail submission with regard to the availability of the surplus funds for making the investments and also about the indirect expenses which can be said to be attributable to earning of exempt income. The ld. CIT(A) deleted the disallowance of interest expenditure on the groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plea of disallowance being restricted to 2% of the dividend income can be taken before the Assessing Officer following the earlier years precedence. Accordingly, ground No. 2, as raised by the Department stands dismissed as the learned Commissioner (Appeals) has already given direction to the Assessing Officer to work out the disallowance on some reasonable basis. 8. Thus, consistence with precedence of the earlier years, the entire issue of disallowance u/s 14-A is set aside to the file of the AO, to examine and work out some reasonable basis for disallowance having regard to the facts of the case, dehors rule 8D and after giving proper opportunity to the assessee. Accordingly, the ground raised by the assessee as well as by the Department is treated as allowed for statistical purpose. 9. Now coming to the other grounds raised in Department s appeal. In ground No. 2, the department has challenged the deletion of addition made on account of software acquisition charges which was treated by the A.O. as capital expenditure. 10. Before us, it has been admitted by both the parties that similar issue had come up for consideration before the Tribunal in the earlier years, where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expenditure being in the nature of Revenue and held that as it had provided enduring benefit and the expenditure being on account of capital, the assessee was entitled to claim depreciation only. He provided depreciation @ 25% and the balance amount of ₹ 17,48,1951- was added to the income of the assessee. The Ld. CIT(A) has sustained the - action of A.0. The assessee is aggrieved, hence, has filed aforementioned grounds. 13.1 It was submitted by Ld. AR that similar expenses in respect of A. Y 2002-03 and 2003-04 were held to be allowable as revenue expenditure by Ld. CIT(A). He further submitted that the expenditure is in the nature of user of software which by no stretch of imagination can be said to be of expenditure in the nature of capital. It did not provide any enduring benefit to the assessee and was a powerful tool to carry out the work of the assessee effectively. Reliance was placed on the following decisions to contend that the expenditure was in the nature of Revenue. (I) CIT vs. Raychem RPG Ltd., 346 ITR 183 (Born) (ii) CIT vs. Asahi India Safety Glass Ltd. 346 ITR 329(Del) (ill) cur vs.Amway India Enterprises, 346 ITR 341 (Del) (iv) San ghvi Salv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the show cause notice, the assessee submitted that the said payment has been made to late, Mr. K.J. Bharucha as a non-compete fee on his retirement from the services w.e.f. March 31, 2006. This fee represented compensation for not joining any company or share any expertise with companies having same business for a period of three years. Since such a payment was made to Ex-Managing Director to restrict him to share his experience and expertise for a period of 3 years, so that there is no immediate threat to the interest of assessee s business, therefore, the same is business expenditure. However, the A.O. held that such payment of noncompete fee will result into enduring benefits to the assessee. Accordingly the same was treated as capital expenditure. 15. The ld. CIT(A) relying upon the decision of Hon ble Delhi High Court in the case of CIT vs. Eicher Ltd. (2008) 302 ITR 249 (Delhi), held that such a payment was paid for a restriction of three years and therefore, there is no question of any enduring benefit coming to the assessee. Moreover, the said Ex-Managing Director expired before the said period of three years, thus, such a payment is nothing but revenue expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is on revenue account. This proposition has been retreated by the same High Court in Carborandum Universal Ltd. Vs. JCIT, Tax appeal no. 244 0f 2006, order dated 10.09.2012 in detail after analyzing the aforesaid Supreme Court judgment and other several judgments. The relevant observation and findings are as under:- As far as the question as to whether an expenditure could be a capital expenditure or revenue expenditure is concerned, the concept that the expenditure yielding an advantage of an enduring nature would be only a capital expenditure, has been fine-tuned, that even when expenditure was incurred for obtaining advantage of enduring benefit, nonetheless, the same can be taken as one of revenue account. J n the decision reported in [1980] 124 ITR 1 (Empire Jute Co. Ltd. Vs. Commissioner of Income Tax (S.C.), the Apex Court painted out that the test of enduring benefit is not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. In a transaction of transfer of allotment of loom hours, on the question as to whether it is a revenue expenditure or a capital expenditure, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anent character, the possession of which is a condition of carrying on its trade at ell? It is clear from the above discussion that the payment made by the assessee for purchase of loom hours was expenditure laid out as part of the process of profit earning. It was, to use Lord Sumner's words, an outlay of a business in order to carry it on and to earn a profit out of this expense as an expense of carrying it on . [John Smith and Son v, Moore {1921]12 TC 266, 296 (HL)]. It was part' of the cost to, operating the profit-earning apparatus and was clearly in the nature of revenue expenditure. 16. Thus the question as to whether an expenditure is revenue or not has to be seen from the context of an expenditure forming part of the cost of the income earning machine or structure as opposed to part of the cost of performing the income-earning operations [1971] 82 ITR 902 (CIT Vs. Coal Shipments P. Ltd. (S.C.) 17. Thus, the consistent guiding principles in matters of understanding an expenditure as a capital or revenue, as held by the Apex Court, is to find out the aim and object of the expenditure and the commercial necessities of making such an expenditure. The quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of the assessee, we have no hesitation in holding that the expenditure is only on revenue account and not on capital account. In the circumstances, we accept the case of the assessee, set aside the order of the Tribunal and allow the Tax Case. 20. It may be pointed out that in the assessee's own case relating to the assessment years 1998-99, 1999-2000 in r.C.Nos.97 and 98 of 2008, by order dated 06.04.2011, Question Nos.2 and 4 herein were raised before this Court. The first question relating to scrap sales was considered and answered against the assessee, referring to the decision of the Tribunal reported in 97 ITO 306 (JCIT Vs. Virudhunagar Textiles Limited). The second question also was answered against the assessee, following the decision of this Court reported in [2006J 282 ITR 389 (Mad.) (CIT Vs. Chinnapandi) and the third question was also decided against the assessee following the decision reported in [1993} 199 ITR 43 (Escorts Ltd Vs. Union f India). 21. As far as the first question is concerned, we have referred to the decision of the Apex Court to grant relief to the assessee. As far as the second question is concerned, again, we have referred to the de ..... X X X X Extracts X X X X X X X X Extracts X X X X
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