TMI Blog2010 (8) TMI 1070X X X X Extracts X X X X X X X X Extracts X X X X ..... deleting the addition of ₹ 10,00,000/-, claimed as software development expenses, without considering that such expenditure is capital in nature and also specific rate of interest has been provided in section 32. 2. The appeal of the revenue is time barred by six days and a condition petition has been filed. After hearing the parties and considering the condonation petition, we condone the delay of six days and the appeal has been taken up for hearing on merits. 3. Ground No. 1 relates to deletion of addition of interest expenditure to the tune of ₹ 1,77,33,476/-. The AO disallowed the interest expenditure by holding the same to be prior period expenditure. Briefly stated facts of the case as observed by the AO are that during the course of assessment proceedings, the assessee, vide letter dated 24 October, 2006, furnished the details of interest of ₹ 3,44,91,422 paid on unsecured loans. However, the assessee has debited interest expense of ₹ 5,22,24,898 in the Profit Loss Account. On a specific query requiring the assessee to explain the said difference, the assessee, vide letter dated 27th November, 2006, submitted that the difference of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide his application dated 27th November, 2006 stated to have withdrawn its claim of interest expenses of the said amount of ₹ 1,77,33,476/-.Therefore, the AO rejected the books of account maintained by the assessee and disallowed the amount of ₹ 1,77,33,476/-. Before the Ld. CIT(A) the assessee s contention was that it had never the intention to forgo the legitimate interest expenditure claimed and debited to P L Account. It was also submitted that the assesee was undergoing a financial crunch and had suffered huge losses in earlier years. In order to tide over the severe liquidity/financial crunch, it approached through to its lenders for restructuring/rescheduling the outstanding loans/inter corporate deposits and the interest accumulated thereon. Since the negotiations/request of the assesee were pending with the lenders, the assessee was not providing the interest accrued on such loans in the accounts. He also contended that the assessee in the pending appeal before Hon ble ITAT for the AY 2003-04 raised an additional ground for claiming deduction of the aforesaid interest amount of ₹ 1,77,33,476/-. The ITAT vide its order dated 29th May, 2009 was pleased to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 36(1)(vii) of the I. T. Act since the same was not recognized as income in the Profit Loss Account by the appellant. It was similarly held by the AO in respect of advance of ₹ 2 lakh of Special D cor. As regards the other amount written off aggregating to ₹ 6,65,000/-, the AO held that the same are to be allowed as deduction only if the account are squared up during the year. Since the assessee has not filed any evidence of squaring up of account of Zeon Synthetics, Patna Medical and Central Petrochem, the said amount are not allowable as deduction u/s. 36(1)(vii) of the I. T,. Act. Accordingly, the AO disallowed the entire amount of ₹ 35,45,822 u/s. 26(1)(vii) of the I. T. Act. In appeal, the ld. CIT(A) deleted the addition as made by the AO. 8. At the time of hearing before us, the ld. DR relied on the order of the AO and submitted that the order of the Ld. CIT(A) may be set aside and that of AO be restored. 9. On the other hand, the Ld. Counsel for the assessee while reiterating his same submissions as submitted before the Ld. CIT(A) relied on the order passed by him and submitted that the amount of ₹ 33,45,822/- claimed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan was advanced, the same cannot be allowed as deduction in the captioned assessment year under appeal. In this regard the Ld. Counsel submitted that under the Act, bad debts are allowable deduction in the year in which they are written off in the books of accounts in terms of the provisions of section 36(1) (vii) of the Act. He also reiterated that the assessee had advanced the loan to the said company in the ordinary course of its money lending business. Section 36(1)(vii) read with section 36(2) of the Act, provides for allowability of deduction on account of bad debts written off resulting from non-recoverability, while computing the income chargeable under the head income from business and profession . A perusal of the aforesaid provisions indicates that in order that bad debt written off is allowable under section 36(1) (vii) of the Act, the following conditions must be satisfied: Debts other than in the business of money lending, Debts other than in the business of money lending The debt should be revenue in nature; The debt or part of the debt should have been taken into account while computing the taxable income for any year; The debt is written of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able as deduction under section 36(1)(vii) of the 1.T. Act. As regards the other amounts, the assessing officer submitted that the said amount were given by the erstwhile company and the assessee has not produced any document to establish that the erstwhile company was in money lending business. Therefore, the said amounts aggregating to ₹ 6,65,000 cannot be allowed as deduction. In reply to the said report, the Ld. AR submitted before the Ld. CIT(A) that the erstwhile Jubilee Investments Industries Ltd. was an NBFC and was duly registered with RBI pursuant to Section 451A of the RBI Act and was carrying on the business of NBFC and a copy of the registration certificate was placed in the paper book. The advance to the three parties were given in the ordinary course of money lending business and therefore, loss incurred on account of non recovery of the said advance is allowable deduction under section 36(l)(vii) or alternatively under section 28 of the Act. It was further submitted before the Ld. CIT(A) that the assessing officer had, in the assessment order, disallowed the loss of ₹ 6,65,000 merely on the ground that the assessee failed to file evidence that accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preceding paragraph was a NBFC registered with RBI. The said loans were given in the normal course of business of money lending by the erstwhile company. In the remand report, the assessing officer has challenged the said contention of the appellant, but on perusal of the certificate granted to the erstwhile company, it is noticed that the erstwhile company was actually granted NBFC status by the RBI. Therefore, the contention of the assessing officer that whether or not the erstwhile company was engaged in money lending business is not known has no force. Furthermore, it is noticed that in the assessment order, the assessing officer made disallowance only on the ground that the amounts due to the appellant were not squared up in the books of account and that the said loans were not advanced in the normal course of money lending business. That being so, in my view considered view, since the said loans were given by the erstwhile company, which stood merged with the appellant pursuant to the scheme of amalgamation in the normal course of money lending business had been written off in the books of account, the said amount is allowable as deduction to the appellant. Accordingly, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er alia to deal in foreign currency/ money changer, in line appellant s expansion plan. The aforesaid software, it is respectfully submitted, was application software, which is an essential aid for the appellant for smooth running of its foreign exchange business and for statistical analysis of data required for dealing in foreign currency. Management information system software amounting to ₹ 5, 00,000: The appellant has incurred expense towards license fee of new software, viz., Management information system software, which was claimed as revenue expenditure. The aforesaid software, it is respectfully submitted, was application software, which is an essential aid for the appellant to carry on statistical analysis/ generate reports to have a better control, smooth functioning of the business, human resource management, etc. The appellant company had been using other software version in the past for effecting control/ facilitation of business. With technology upgradation, expansion of business and also to keep pace with technology levels, the appellant company needed to have an improved version of the software to meet its requirement/ expectations. it is respectfully su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellant also reiterated the submissions originally made. Aggrieved by the said order, After considering the assessee s submissions and the remand report of the AO, the Ld. CIT(A) directed the AO to allow the expenditure of ₹ 10 lakh as revenue deduction and also directed to withdraw depreciation allowed to the assessee. Aggrieved by the said order, now the revenue is in appeal before us. 12. At the time of hearing before us, the Ld. DR relied on the order of the AO and on the other hand, the Ld. Counsel for the assessee relied on the order of the Ld. CIT(A). 13. After hearing both the sides and also perusing the material available on record, we find that in the remand report the AO has accepted the contention of the assessee that expenditure incurred towards Umang Credit Capital Ltd. amounting to ₹ 3,15,800/- is allowable deduction. But as regards the balance of ₹ 10 lakh is concerned, the AO relied upon the assessment order. Before us also the Ld. DR relied upon the order of the AO in respect of ₹ 10 lakhs. After considering the detailed submission of the assessee as we have stated hereinabove and also the contention of the Ld. DR, we find that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee for a period beyond two years can be considered as accrual of benefit of enduring nature. However, that by itself will not make the expenditure incurred on software as capital in nature and the functional test as discussed above also needs to be satisfied. iii) Once the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred on computer software is capital or revenue has to software as capital in nature and the .functional test as discussed above also needs to be satisfied. iv) Once the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred on computer software is capital or revenue has to be seen from the point of view of its utility to a businessman and how important an economic or functional role it plays in his business. In other words, the functional test becomes more important and relevant because of the peculiar nature of the computer software and its possible use in different circus of business touching either capital or revenue field or its utility to a businessman which may touch either capital or revenue field. 60. Having laid down the criteria for determining the nature of exp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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