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2016 (5) TMI 1005 - ITAT MUMBAI

2016 (5) TMI 1005 - ITAT MUMBAI - TMI - Disallowance of software expenses - revenue v.s capital expenditure - Held that:- We find that the expenses relate to computer software. From the details of the expenses it is clear that these software expenses are incurred by NSEIL for the common benefit of NSEIL and the assessee and both have shared these expenses. We further find that all such expenses are periodical in nature and mainly incurred for software upgradation charges, subscription, annual li .....

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rd meeting finally, after reconciliation of facts and figures came to know that as on 31.03.2007 an amount of ₹ 21.26 lacs is to be written off as a one-time corrective action to match the balances of member wise records, it rectified the same. We also find that this excess amount was reconciled with the accounts of the members and one-time payment was made to them after finding the reconciliation. For this we have gone through the reconciliation statement filed wherein he has reconciled t .....

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see being payable to members is allowable as a business loss u/s. 28 of the Act. We are of the view that this differential liability in the debit balances of the assessee has occurred in the normal course of carrying on business and is incidental to the business and this has a direct and proximate nexus between the business operation and the liability.

This view of ours is supported by the judgment of Honíble Bombay High Court in the case of Lordís Dairy Farm Ltd. Vs. CIT (1955 (2) TM .....

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n the ambit of any of the deduction mentioned in section 10(2) of the Act. It was further held by Honíble High court that when a businessman writes off an amount as a loss, there is prima facie evident that amount is irrecoverable. The department can rebut the prima facie inference by drawing attention to the circumstances or by leading some evidence to suggest that the position taken up by the assessee was not correct. - Decided in favour of assessee - ITA No. 3650/Mum/2013 - Dated:- 15-4-2016 .....

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first issue in this appeal of assessee is against the order of the CIT(A) confirming the disallowance made by AO of software expenses by treating the same as capital in nature. 3. Briefly stated facts are that the assessee has debited a sum of ₹ 65,53,250/- as software expenses in its P&L Account. The assessee itself has capitalized a sum of ₹ 55,52,783/- to the fixed assets and claimed depreciation on the same. Balance sum of ₹ 10,00,467/- was claimed as revenue expenditur .....

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Renewal of Lotus Notes License Rs.1,54,937 Subscription advantage for Citrix mainframe XPA starter Rs.21,000 system (20 user License) 3 yr. software subs for security suite product Rs.46,361 Telerate 8 equities package Rs.26,787 Rs.5,25,130 According to AO, as the assessee himself has claimed capitalization of software expenses partly and partly it has claimed as revenue expenditure, it is double standard. According to AO, these are capital expenditure and he disallowed the claim of assessee amo .....

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nse is related to software itself hence it has to be capitalized. The same cannot be claimed as revenue expenditure. Similar is the fact in respect of subscription advantage for use of license and three years software subscription for security suit product is also found to be related to software. The fact on record reveals that software expenses are incurred by NSEIL for common benefit of NSEIL and NSCCF (Appellant) these expenses are shared by the both the companies nevertheless the nature of t .....

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sing Officer, thus, disallowance of claim of revenue expenditure is sustained. However, the rate of depreciation is to bed allowed @ 60% and not @ 25% as has been held by the Hon ble Jurisdictional ITAT as referred to earlier. Therefore, Assessing Officer is directed to allow depreciation @ 60% instead of 25% on software purchases expenses of ₹ 5,25,130/-. Aggrieved, assessee is in appeal before Tribunal. 5. We have heard rival submissions and gone through facts and circumstances of the ca .....

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nd in such circumstances, the expenditure incurred for purchase of these software is called as revenue expenditure and not capital in nature. This issue is covered by the decision of Hon ble Bombay High Court in the case of CIT Vs. Raychem RPG Ltd. (2012) 346 ITR 138 (Bom), wherein it has been held as under: Held, (i) that the Tribunal in the assessee s own case for the assessment year 2001-02 had allowed the software expenditure as revenue expenditure finding that software did not form part of .....

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pparatus. Therefore, the expenditure was to be allowed. In view of the above and respectfully following the decision cited supra, we allow this issue of assessee s appeal. 6. The next issue in this appeal of assessee is as regards to the order of CIT(A) confirming the disallowance of excess liability written back (debit balances) amounting to ₹ 21,25,585/- being business loss occurred in normal course of its business. For this, assessee has raised following ground nos. 2.1 and 2.2: 2.1. On .....

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n holding that differential liability on account of mis-match with NCSS System has not accrued to the appellant without appreciating that on reinstatement of liability by the appellant the same being payable to members is an allowable business expenditure u/s. 37(1) of the Income Tax Act, 1961 or as a business loss u/s. 28 of the Income Tax Act, 1961. 7. Briefly stated facts are that the AO disallowed excess liability written back being debit balances amounting to ₹ 21,25,585/-. According .....

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sessee preferred appeal before CIT(A), who also confirmed the action of AO vide para 8.3 of his appellate order as under: 8.3 I have considered the finding of the Assessing Officer and rival submission of the appellant, carefully. I find that by crediting negative deposits of ₹ 21,25,585/ appellant has suppressed the taxable income because this is not an expenditure which is to be allowed. The clearing members of the appellant are required to bring in stipulated amount in the form of inter .....

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llant in respect of day to day business activity and same cannot be presumed to be revenue in nature. The Auditor has mention in Form No.3CD, Annexure 'H' that this is profit chargeable to tax u/s.41 but the fact reveals that such security deposits are not taxable income hence differences cannot be presumed to be cessation of liability or taxable income or allowable expenditure. Therefore, in the light of the above discussion, I find force in the arguments of the Assessing Officer. The v .....

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assessee. Such margin so forfeited is taxable income. Here is not the case alike. Similar, is the situation in other cited cases hence, I do not see any merit in the arguments advanced by the appellant through written submission. Thus, in view of the above discussion I am of the considered opinion that such negative debit of ₹ 21,25,585/- is not at all allowable expenditure, hence, disallowance made by the Assessing Officer is sustained. Aggrieved, assessee is in second appeal before Trib .....

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for meeting margin requirements. He also explained that daily margins not met by additional base capital but is collected by way of cash from members through an automated process at the end of trading plus one day. He also explained that in specific cases there could be a collection of ad hoc margins also. In this way, he explained that the IFSD is refundable only after the member surrenders his membership and margins are released automatically or at the option of the member. According to him, a .....

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made on daily basis. In subsequent years the interface system has been automated and made seamless to ensure that the output from the NCSS automatically creates an entry for the accounting system without any manual intervention. Accordingly, there was some old differences between the accounting records and member wise records maintained by NCSS with respect to earlier years when the interface was manual. He explained that the assessee in its board meeting finally, after reconciliation of facts a .....

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has reconciled the entire figure. Ld. counsel for the assessee in view of these facts stated that this is neither a claim of expenditure nor remission of liability u/s. 41(1) of the Act. Ld. counsel for the assessee stated that this is clearly a business loss allowable u/s. 28 of the Act being differential liability on account of mismatch with assessee and NCSS system and this reinstatement of liability by the assessee being payable to members is allowable as a business loss u/s. 28 of the Act. .....

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td. Vs. CIT (1955) 27 ITR 700 (Bom) and also tribunal s order in the case of ACIT Vs. Lord Krishna Bank Ltd. in ITA Nos. 476, 581 & 716/Coch/2007 for AYs 2002-03 to 2004-05 dated 27.04.2012. 9. On the other hand, the Ld. Sr. DR heavily relied on the orders of the CIT(A) and also that of the AO. 10. We have heard rival submissions and gone through facts and circumstances of the case. We find from the facts of the case that the assessee collected stipulated amounts in the form of interest free .....

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day as daily margins, which was not meet by base capital. It is clear that the IFSD is refundable only after the member surrenders his membership and margins are released automatically or at the option of the member. We find from the facts that assessee maintains member wise margins and additional base capital collected and also ad hoc margins are levied on certain members. Factually, as per the accounting records of assessee, the main account is not reflected member wise but was reflected as o .....

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ng records and member wise records maintained by NCSS with respect to earlier years when the interface was manual. As explained by Ld. Counsel, the assessee in its board meeting finally, after reconciliation of facts and figures came to know that as on 31.03.2007 an amount of ₹ 21.26 lacs is to be written off as a one-time corrective action to match the balances of member wise records, it rectified the same. We also find that this excess amount was reconciled with the accounts of the membe .....

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