TMI Blog2014 (11) TMI 378X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year Cubic Computing (P) Ltd 2,79,000 Software licence Chart FX 1st half of the year Swan Solutions and Services (P) Ltd 1,71,587 Software licence Windows server/2003 1st half of the year Capital Market Publishers India P Ltd. 1,20,833 Subscription to database Capital line 2nd half of the year LDS Infotech P Ltd. 1,12,463 Software licence Adobe photshop, Illustrator, flash 1st half of the year The Assessee submitted before the assessing officer that the above expenditure includes website development charges, annual maintenance charges, subscription of database and software license and they relate to functional software/utility software which only render supportive function to the business activity of the assessee. Accordingly it was contended that software expenditure should be allowed as revenue expenditure. However, the AO held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6,805/-. The ld. CIT(A) was convinced with the contentions of the assessee and hence, by following the decision of his predecessor rendered for assessment year 2004-05 in the Assessee s own case, confirmed the disallowance made u/s 14A of the Act to the extent of ₹ 86,805/-. The assessee is still aggrieved by the said decision rendered by the ld. CIT(A). 4. We heard the rival contentions and perused the record. The first issue relates to the software expenses claimed by the assessee as revenue expenditure. The Ld Counsel placed reliance on the decision of Hon ble Delhi High Court rendered in the case of CIT Vs. Indian Visit.Com (P) Ltd (2009)(176 Taxman 164) to submit the that expenditure incurred on website development is not capital in nature. On going through the above said case law, we notice that the Hon ble Delhi High Court has held that the website development charges has to be regarded as revenue expenditure. Hence, we find merit in the said contention of the assessee. Accordingly, respectfully following the decision rendered by Hon ble Delhi High Court (referred supra), we direct the assessing officer to allow expenditure relating to website development charges as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same to the extent of 84 per cent even when treated as capital asset within a period of two years. An assessee may own a software outright or be a licensee but the same may operate to confer benefit only in the revenue field and therefore it may have to be regarded as revenue expenditure. 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 an application of this test. If the advantage consists merely in facilitating the assessee s trading operations or enabling the management and conduct of the assessee s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. In other words, the functional test would become material and if on application of the same it is found that the expenditure operates to confer benefit in the revenue field, then the same would be revenue, irrespective of the duration of time for which the assessee acquires rights in a software. The period of advantage in the context of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placement agency where the applications from persons seeking jobs are invited through e-mail and are also forwarded to the concerned clients through e-mail, the same may form part of profit making apparatus of the assessee s business of placement agency and can be treated as a capital asset. (ii) As a general rule it may be stated that the more expensive the computer software, the more it is likely to be a central tool of the business and the more enduring is likely to be its effect adding to the profit earning apparatus. If there are associated capital expenditure like purchase of new computer equipment for running the software developed under a project, then it can be considered as capital expenditure. This is especially the case where the new hardware is not merely desirable but necessary for this purpose. (iii) Degree of associated organizational change : Similarly the degree of change intended in the way operations are carried out as a result of the computer software, for example, savings in the number, and changes in the location, of staff used to provide services to customers will have a bearing. The more radical the changes, the more likely the expenditure will be capital. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o technological obsolescence and continuous up-gradation. Accordingly, the Ld A.R submitted that they fall in the category of Revenue expenditure as per the tests laid down by the Special Bench in the case of Amway India Enterprises Ltd (supra) and also by the Hon ble Punjab and Haryana High Court in the case of Varinder Agro Chemicals Ltd (supra). 4.2 On a perusal of the narration given explaining the nature of software specified in the table extracted above, we notice that 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 said software supports the submission of Ld A.R that they are not the primary software, on which the business of the assessee is run, but they perform supporting role. Further, the Ld A.R has also submitted that they are having short life due to continuous upgrading. All these submissions have not been controverted by the revenue. Hence, we find merit in the contentions of the assessee that the expenditure incurred by the assessee in respect of the above sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on expenses to work out the total cost incurred in relation to the exempt income. Accordingly, we confirm the order of Ld CIT(A) on this issue. 6. We shall now take up the appeals filed by both the parties for AY 2008-09. The grounds raised by both the parties relate to the decision taken by Ld CIT(A) in respect of disallowance made u/s 14A of the Act. 7. The facts relating to the same are discussed in brief. During this year, the assessee disclosed dividend income of ₹ 8,33,46,239/- and Long term Capital gains of ₹ 68,88,582/- and claimed both the income as exempt. In its return of income, the assessee disallowed a sum of ₹ 1,25,605/- as expenditure incurred in earning the above said incomes. However, the assessing officer took the view that the disallowance u/s 14A should be worked out as per the provisions of rule 8D of the I.T Rules. The AO accepted that there was no requirement of making any disallowance out of interest expenditure. However, the AO disallowed part of indirect expenses calculated at 0.5% of the average value of investments, which worked out to ₹ 1,46,78,090/-, which was in terms of Rule 8D. Accordingly, the AO enhanced the disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts in the field of capital market. However, the Ld CIT(A) accepted the contention of the assessee that only those investments which has resulted in earning income should only be considered to compute disallowance under rule 8D(2)(iii) of I.T Rules. In this regard, the ld CIT(A) took support of the decision rendered by Chennai bench of ITAT in the case of Siva Industries and holding Ltd (59 DTR 182). Accordingly, the ld CIT(A) restricted the disallowance to ₹ 1,25,66,793/- as against the amount of ₹ 1,45,52,785/- disallowed by the AO. Aggrieved, both the parties are in appeal before us. 8. We have heard the rival contentions on this issue and perused the record. A perusal of the total investments held by the assessee would show 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. A perusal of details of investments would show that the assessee has invested mainly in various schemes of Reliance mutual fund and its subsidiaries. Investments made in other companies are viz,m Shares of Citicorp Financial Ltd (Rs.2.00 crores), Clearing Corporation Ltd (Rs.5.00 crores), ICICI Bank Ltd (0.5 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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