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TMI Blog2016 (8) TMI 643X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst the interest income liable to be assessed u/s 56 of the Act. In our opinion the CIT(A) has passed a very reasoned order which requires no interference on our part. - Decided in favour of assessee. Nature of expenses - revenue or capital - Held that:- On perusal of the records including the orders of authorities below, we find that the expenses incurred by the assessee under various heads as has been mentioned herein above are more of revenue in nature than the capital ones. The AO without going into the real nature of the expenses, described the same as capital in nature whereas as a matter of fact, the ld. CIT(A) has gone into the nature of expenses purpose of expenses and business expediency and accordingly treated the same as revenue expenditure. We, therefore finding no fault with the findings of ld.CIT(A) on this issue, dismiss the ground taken by the revenue by upholding the order of CIT(A) on this issue and direct the AO accordingly. Repairs and maintenance of plant and machinery for purchase of software - allowable revenue expenditure. Addition made by the AO towards Stamp Duty and Registration Fee - Held that:- We find that the ld. CIT(A) after going into th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... together, heard together and disposed of in this consolidated order. Appeal wise adjudication is given in the succeeding paragraphs. 2. First we will take up the appeal bearing No.I.T.A. No.6081/Mum/2014 by the revenue 3. Only issue raised in this appeal is whether the first appellate authority (FAA) was justified in deleting the addition made by the AO on account of claiming of interest expense u/s 57(iii) without appreciating the fact that the was no direct nexus between the loan borrowed by the assessee and the interest bearing loan advanced by the assessee. 4. Brief facts of the case are that the assessee filed its return of income for the assessment year 2010-11 on 4.10.2010 declaring total loss of ₹ 2,51,33,965/-. The return was processed under section 143(1) of the Income tax Act, 1961. Thereafter the case of the assessee was selected for scrutiny and the statutory notices u/s 143(2) and 142(1) were issued and served upon the assessee. The assessment was framed by the AO after considering the submissions of the assessee as made from time to time during the assessment proceedings vide order dated 20.2.2013 passed under section 143(3) of the Act by assessing los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding from other companies was totally wrong and against the provisions of Act. Finally, the ld. DR submitted that the order of ld. CIT(A) was wrong and therefore deserved to be quashed by restoring the order of the AO. 6. On the contrary, the ld. Counsel brought to our notice that there was direct nexus between the interest bearing borrowed funds and earning of interest income by advancing loans to other companies and the AO had completely ignored this fact while making the disallowance as claimed u/s 57(iii) of the Act. The ld. AR further submitted that the AO disallowed the deduction claimed u/s 57 on the ground that the purpose of taking loan from bank was not connected with the loan advanced, whereas the provisions of section 57 (iii) of the Act provided for the deduction where the expenditure was incurred wholly and exclusively for the purpose of making or earning such income and thus, existence of nexus between the activity producing the income and the expenditure incurred is the sole criteria for claiming deduction u/s 57(iii) of the Act. The ld. AR strongly supported the order of ld. CIT(A) who has rightly appreciated the facts that there was a nexus between the earning ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal No.3 and 4 is against the deletion of software expenses ₹ 4,91,14,857/- by ld.CIT(A) by holding the same as revenue in nature as against the capital expenditure treated by AO. 13. Brief facts of the case are that the assessee filed its return of income for the assessment year 2008-09 on 27.9.2008 declaring total loss of ₹ 110,90,93,410/-. The return was processed under section 143(1) of the Income tax Act, 1961. Thereafter the case of the assessee was selected for scrutiny and the statutory notices u/s 143(2) and 142(1) were issued and served upon the assessee. The assessment was framed by the AO, after considering the submissions of the assessee as made from time to time during the assessment proceedings vide order 29.12.2010 passed under section 143(3) of the Act by assessing the loss at ₹ 1,04,48,39,034/- by making various disallowances as detailed in para 6 of the assessment order. 14. Regarding the issue raised in grounds No.1 and 2 the facts are that the AO during the course of assessment proceedings found that the assessee has debited the following expenses under the head Advertising, marketing and sales promotion expenses : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses, as the decision given in the case of Monte ,Motors Ltd. ,in ITA No. 978/2011 and again in case of CIT V/s Orient Ceramics and Industries Ltd (ITA No.65 and 66 of 2011) by Hon ble High Court Delhi. In view of this the place taken by the appellant that expenses incurred under the head marketing research, brand building, advertisement and sales promotion are revenue expenses as supported by cited decisions on the issue, are allowed. Accordingly the addition made of ₹ 2,34,98,339/-while treating the same as capital expenditure being not sustainable is deleted herewith. The ground number 1 taken by the appellant is allowed. 15. The ld. DR submitted before us that the order of ld.CIT(A) was bad in law as the ld. CIT(A) has failed to appreciate the fact that the expenses as claimed by the assessee were of capital nature. The ld. DR heavily relied on the order of AO by submitting that the AO has rightly disallowed the expenditure being capital in nature as the assessee purposively suppressed the income by charging off the capital expenditure as revenue. The ld. DR prayed that the order of the ld. CIT(A) be set aside and that of AO be restored. 16. On the other hand, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... back ground, position at store, location creations, some banners, posters etc were the real expenses incurred under this head and they were of the nature of sales and marketing expenses for every year and, therefore, they were revenue in nature. The ld. AR finally relied on the order of ld.CIT(A) who after considering the submissions of the assessee has rightly deleted the addition and hence observations and findings of the ld.CIT(A) be upheld by dismissing the appeal of the revenue. 17. After going through the contentions of both sides and on perusal of the records including the orders of authorities below, we find that the expenses incurred by the assessee under various heads as has been mentioned herein above are more of revenue in nature than the capital ones. The AO without going into the real nature of the expenses, described the same as capital in nature whereas as a matter of fact, the ld. CIT(A) has gone into the nature of expenses purpose of expenses and business expediency and accordingly treated the same as revenue expenditure. We, therefore finding no fault with the findings of ld.CIT(A) on this issue, dismiss the ground No.1 and 2 taken by the revenue by upholding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness efficiently will still be revenue in nature. Same is the decision in case of Brics Securities Ltd in ITA No.4514/Mum/2008 by Hon ble ITAT, Mumbai again. In view of this the amount spent on these software for running the business efficiently by the appellant have to be allowed. Accordingly the addition made of ₹ 3,68,36,143 (total purchase amount of ₹ 4,91,14,857/- less depreciation of ₹ 1,22,78,714) being not sustainable is deleted herewith. The ground No.2 is allowed . Aggrieved by the order of ld.CIT(A), the revenue is in appeal before the Tribunal. 19. Before us the ld. DR submitted that the expenditure incurred by the assessee on the purchase of various computers software are capital in nature and the assessee derived the benefit of enduring nature which extended for more than a year and even longer and therefore the same could not be allowed as revenue expenditure. The ld. DR heavily relied on the order of AO and prayed for upholding of the order of AO. 20. Per contra, the ld. AR submitted before us that the expenditure incurred by the assessee for purchase of computer software were of revenue nature. The ld.AR submitted that the purchase of so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber of different systems in a large company's back office, including, planning, manufacturing, distribution, shipping, and accounting, Enterprise resource planning (ERP) is a system that integrates all of these functions into a single system, designed to serve the needs of each different department within the enterprise. ERP is more of a methodology than a piece of software, although it does incorporate several software applications, brought together under a single, integrated interface. 16 There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on application of this test. If the advantage consists merely in facilitating the assessee's day-to-day- administrative business operations or enabling the management and conduct o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered part of the Software and Documentation for purposes of this Section 6. 17 We find from the clauses of the agreement that the agreement itself could have been terminated by any party before the expiry of the term on any of the grounds stated in the agreement and amount will not be refunded. The relevant clauses of the agreement are reproduced as under:- 5. TERMS AND TERMINATION 5.1 Term. This agreement and the license granted hereunder shall become effective upon execution by both parties and shall continue in effect for a period of 25 years unless terminated under section 5.2. Under section 19A of the Copy-right (Amendment) Act, 1994, SAP waives Licensee's statutory requirement to use the Software within a period of one year from the date of this Agreement. 5.4 No Refund. In the event of any termination hereunder, Licensee shall not be entitled to any refund of any payments made by Licensee. 18 The expenses incurred for a software packages in the present computer world, which revolves on the modern communication technology, enables the assessee to carry on its business operations effectively, efficiently, smoothly and profitably. Such software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en that a sum of ₹ 30,000 had been paid to Central Depository Services India Ltd. as maintenance charges. A sum of ₹ 20,000 had been paid to Contek Software Technology Pvt. Ltd. for additional connection for D-Mat programme. A sum of ₹ 75,000 had been paid to Manish D. Shah for development of Window based software for trading. A sum of ₹ 10000 had been paid to Shri Manish D. Shah for development of equity stock management system software. A sum of ₹ 7500 was paid for availing span software for BSE derivative margin conclusion. ₹ 62,900 was paid for purchase of new licence CD for Windows XP. From the nature of the expenditure incurred as aforesaid it is clear that the software in question were basically to help the assessee in carrying on its business more efficiently and effectively. We are of the view that no enduring benefit accrued to the assessee, so as to term the expenditure in question as capital expenditure. The fact that computer software is entitled to depreciation under I.T. Rules 1962 does not mean that any expenditure incurred on computer software had to be treated as capital expenditure. In our view the nature of expenses in questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 27,32,096/- being not sustainable is deleted herewith. The ground No.3 is allowed 25. The ld. DR while heavily supporting the order of AO submitted that the stamp duty and licence fee incurred by the assessee by debiting to rates and taxes were of capital nature and therefore the AO has rightly treated the same as capital expenditure. The ld. DR further submitted that these expenses were incurred for the purpose of enduring Long Term Lease and license and therefore the expenses incurred by the assessee were of long-lasting nature and lastly, the ld. DR prayed that the order of ld. CIT(A) be set aside and that of AO be restored. 26. On the contrary, the ld.AR submitted that the stamp duty has been incurred for lease transactions and the assessee has not purchased any capital asset. The ld.AR further submitted that the AO has himself mis-appreciated the facts of the case and wrongly treated the stamp duty and license fee which were of revenue nature as capital expenditure. The ld. AR further submitted that the AO has not given finding of facts or reasons for making such disallowance and the disallowance has made in the summary manner and without giving any reason or justif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioned in ground of appeal is now settled in favour of the revenue by the decision of Delhi Tribunal in the case of Cheminvest Ltd vs. ITO (ITAT Delhi Special Bench) reported in 121 ITD 318(SB)(Delhi) and after giving detailed reasons dismissed the appeal of the assessee by holding as under : 5.2.4 Having regard to fact and circumstances of the case and in view of the Hon ble ITAT Delhi Special Bench decision cited above and in the light of th e CBDT circular no. 5/2014 dated 11.2.2014 issued vide F No.225/182/2013-ITA.II Ground of appeal No.1 is not allowed 32. The ld.AR vehemently submitted before us that very basis on which the ld. CIT(A) by relying on the decision of Special Bench Delhi in the case of Cheminvest Ltd(supra) has founded his decision to dismiss the appeal of the assessee has now been reversed by Delhi High Court as reported in (2015) 61 taxmann.com 118(Delhi High Court) dated 2,9,2015. The ld.AR also submitted before us that all the investments amounting to ₹ 42,44,39,890/- were made in the subsidiaries companies and the motive was not to earn any dividend income but to gain control over the said subsidiaries and therefore these were strategic inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o.255 and 720/Mum/2012 ITAT 10. EIH Associated Hotels Limited V/s DCIT ITA No.1503/Mds/2012 11 ACIT V/s Spray Engineering Devices 23 Taxmann.com 267 ITAT 33. On the other hand, the ld.DR relied heavily on the orders of authorities below and prayed that the order passed by the ld. CIT(A) be upheld. As the assessee has made huge investments in shares and other securities and therefore has definitely incurred certain expenses in relation to those investments which were rightly computed by the AO u/s 14A r.w.r.8D 2(iii) of the I.T. Rules and prayed that the order of the ld.CIT(A) be upheld by dismissing the appeal of the assessee. 34. We have considered the rival contentions and perused the record including the orders of authorities below and the case laws relied by the parties. From the record before us, we find that the assessee has made huge investments as stated above on which it has not received any exempt income by way of dividend during the year. Similarly from the record, we observe that the investments were made in the subsidiary companies with a m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion framed was answered by holding that the expression 'does not form part of the total income' in section 14A envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous year. [Para 23] Consequently, the impugned order of the Tribunal is set aside and the appeal is allowed in the above terms. This Court should not be understood to have expressed any opinion on the issue of whether for the assessment year in question the interest expenditure incurred by the assessee would be allowable as business expenditure under section 36 (1)(iii). [Para 24] In the case of CIT V/s Shivam Motors (P) Ltd, the Hon ble Allahabad High Court has held as under : Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Year in which deductible (Interest) - Assessment year 2008-09 - Assessee was a dealer of TML and vehicles were supplied to assessee on credit - Initially an agreement was ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- was paid on funds utilized for making investments on which exempted income was receivable. Further, Ld. Commissioner of Income Tax (Appeals) has observed that in respect of investment of ₹ 6,07,775,000/- made in subsidiary companies as per documents produced before him, they are attributable to commercial expediency, because as per submission made by the assessee, it had to form Special Purpose Vehicles (SPY) in order to obtain contracts from the NHAI and the SPVs so formed engaged the assessee company as contract to execute the works awarded to them (i.e. SPVs) by the NHAI. In its profit and loss account for the year, the assessee has shown the turnover from execution of these contracts and therefore no expense and interest attributable to the investments made by the appellant in the PSVs can be disallowed u/s 14A LW. Rule 8D because it cannot be termed as expense/ interest incurred for earning exempted income. Under the circumstances, Ld. Commissioner of Income Tax (Appeals) is correct in holding that disallowance of a further sum ₹ 40,556/- calculated@2%ofthedividend earned is sufficient. Under the circumstances, we do not find any infirmity in the order of the Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X
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