2008 (5) TMI 294 - AT - Income Tax

Disallowed Sustained software expenses - Nature of expenses Capital or Revenue ? - w/off bad debt - allowed as Expenses or Business Loss ? Sustained disallowance of software expenses - HELD THAT - The emerging scenario is that the payments are all for access to certain software used by share brokers for accessing NSE and controlling their trading functions. Assessee being into the business of share broking no doubt such expenditure was for business purpose only. Now to ascertain whether the expenditure was of capital nature if we apply the tests laid down by the Special Bench of this Tribunal in the case of Amway India Enterprises Ors. vs. Dy. CIT 2008 (2) TMI 454 - ITAT DELHI-C it can be seen that the assessee did not get any enduring benefit. If it had to continue to have the access it was required to pay the amount periodically. The software ownership was not transferred to the assessee since the invoice of the party clearly mentions Client Access Licence . Though it did help the assessee to be competitive in its line of business and for the efficient conduct of its day-to-day business this alone would not be sufficient to hold the outgoes to be expenditure of capital nature. Thus we find that the disallowance of the impugned amount was not called for. Hence we set aside the order of the AO and the learned CIT(A) in this regard and delete the disallowance. Assessee succeeds in ground No. 1. Sustained a disallowance of w/off - business loss or bad debts - HELD THAT - It is undisputed fact that the dues to the assessee arose on account of its business dealings with the clients and brokerage on such deals had been considered for computing its income. For that matter the AO himself has admitted that such clients were debtors of the assessee and so accounted as well. Therefore in the light of the decision of the Special Bench of this Tribunal in Dy. CIT vs. Oman International Bank SAOG 2006 (5) TMI 117 - ITAT BOMBAY-H assessee having written off such amount it had satisfied the stipulation as per s. 36(1)(vii). If we consider it from the angle of business loss such deals having been done in the course of its business they were nothing but business loss since the write offs were effected due to recoveries having become difficult. Assessee has also shown as income in later years whatever was recovered. We are also supported in this behalf by the decision of this Tribunal in the case of CIT vs. B.D. Shroff where in similar circumstances write off of dues from clients was allowed. Therefore we are of the opinion that the AO was not correct in not allowing this claim. Resultantly we set aside the orders of both the learned CIT(A) and the AO in this regard and delete the disallowance. Ground No. two of the assessee is allowed. In the result appeal of the assessee stands allowed.

Summary

Issues:
1. Disallowance of software expenses
2. Disallowance of business loss

Analysis:

Issue 1: Disallowance of Software Expenses
The appeal was filed against the order of the CIT(A) regarding the disallowance of software expenses. The disallowance was based on the reasoning that the expenses deserved to be treated as capital expenditure as they were for acquiring a client access license for various software products. The assessee argued that the expenses were for a client access license for a specific software product and were not for systems software. The Tribunal analyzed the nature of the expenditure and found that the assessee did not receive any enduring benefit from the payments. The ownership of the software was not transferred, and the assessee had to pay periodically to maintain access. The Tribunal applied tests laid down by a Special Bench and concluded that the disallowance was not justified. Therefore, the disallowance of Rs. 11,62,560 was deleted, and the assessee succeeded in this ground.

Issue 2: Disallowance of Business Loss
The second ground of appeal pertained to the disallowance of a business loss claimed by the assessee. The assessee explained that the amount represented bad debts from clients that had become irrecoverable. The AO did not accept the claim, stating that the debts were not covered under the relevant provisions. The assessee contended that the debts should be allowed as bad debts or as business loss under different sections of the IT Act. The Tribunal examined the provisions and found that the debts had been accounted for in the assessee's income computation. Additionally, the Tribunal considered the debts as business loss since they arose from the business dealings of the assessee and were difficult to recover. Citing precedents and relevant provisions, the Tribunal concluded that the AO was incorrect in disallowing the claim. As a result, the disallowance of Rs. 10,24,571 was deleted, and the second ground of the assessee was allowed.

In conclusion, the appeal of the assessee was allowed in both issues, leading to the deletion of disallowances related to software expenses and business loss for the assessment year in question.