TMI Blog2011 (2) TMI 1411X X X X Extracts X X X X X X X X Extracts X X X X ..... n confirming the action of DCIT and disallowing the above expenditure. The learned DCIT be directed to allow computer software expenses of ₹ 2,09,290/- as revenue expenses and reduce the total income accordingly. 3. The assessee is a company engaged in the business of share and stock broking and is a member of the National Stock Exchange and Bombay Stock Exchange. The assessee claimed as a deduction in computing its income a sum of ₹ 2,09,290/- under the head software expenses . According to the assessee, the software expenses were incurred in connection with use of software and it did not result in enduring benefit to the assessee. It was also submitted that software has to be regularly updated, keeping pace with the rapid change of technology. The assessee relied on several judicial pronouncements in support of its claim that the expenditure on computer software was revenue expenditure. The Assessing Officer however did not accept the claim of the assessee. He by following the decision of Hon ble Rajasthan High Court in the case of CIT vs. Aravali Construction Pvt. Ltd., 259 ITR 30 held that the expenditure was a capital expenditure. The Assessing Officer however ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 question is clearly a revenue expenditure. We, therefore, direct that the entire sum of ₹ 2,09,290/- be allowed as deduction. 7. Ground No.2 raised by the assessee reads as follows: 2. On the facts and in the circumstances of the case and in law, the learned DCIT has erred in disallowing the bad debts of ₹ 2,25,422/-. The ld. CIT(A) has erred in restricting the disallowance to ₹ 41,750/- . The learned DCIT be directed to allow the appellant s claim of ₹ 41,750/- and reduce the total income accordingly. Without prejudice to the above, the appellant company claims that loss of ₹ 41,750 be allowed as deduction in computing the income under the head Profits and gains from business and profession as per provisions of section 28 and reduce the tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch, the department argued that u/s 36(2), no deduction on account of bad debt can be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee . It was argued that as the assessee had offered only the brokerage income to tax but not the value of shares purchased on behalf of clients, the latter could not be allowed as a bad debt u/s 36(1)(vii). HELD rejecting the claim of the department: (i) In Veerabhadra Rao 155 ITR 152 the Supreme Court held in the context of a loan that if the interest is offered to tax, the loan has been taken into account in computing the income of the assessee and qualifies for deduction u/s 36(1)(vii). The effect of the judgement is that in order to satisfy the condition stipulated in s. 36(2)(i), it is not necessary that the entire amount of debt has to be taken into account in computing the income of the assessee and it will be sufficient even if part of such debt is taken into account in computing the income of the assessee. This principle applies to a share broker. The amount receivable on account of brokerage is a part of debt receivable by the share broker from his client against purchase of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial Bench in the aforesaid decision and have directed the Division Bench to examine the claim of the Assessee and the stand of the AO on the above aspects. We feel that these aspects should be looked into by the AO and for this limited purpose, the issue should be remanded to the AO. 14. We accordingly hold following the decision of the Special Bench referred to above, the amount receivable by the assessee, who is a share broker, from his clients against the transactions of purchase of shares on their behalf constitutes debt which is a trading debt. The brokerage/commission income arising from such transactions very much forms part of the said debt and when the amount of such brokerage/commission has been taken into account in computation of income of the assessee of the relevant previous year or any earlier year, it satisfies the condition stipulated in section 36(2)(i) and the assessee is entitled to deduction u/s 36(1)(vii) by way of bad debts after having written of the said debts from his books of account as irrecoverable. The other aspects referred to in the earlier paragraph of this order will however need to be verified by the AO and for this limited purpose the issue i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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