August 2008
S. 37(1), S. 28, S. 36(1)(vii) : Access fee for usage of software is not capital expenditure; Claims for bad debts and alternatively, as business loss, of dues receivable against sales value of shares of clients allowed.
By Ashok Dhere, Jagdish D. Shah, Chartered Accountants
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Part B — Unreported Decisions
(Full texts of the following Tribunal decisions are available
at the Society’s office on written request. For members desiring that the
Society mails a copy to them, Rs.30 per decision will be charged for
photocopying and postage.)
18 Angel Capital & Debt Market Ltd. v. ACIT
ITAT ‘I’ Bench, Mumbai
Before R. K. Gupta (JM) and
Abraham P. George (AM)
ITA No. 7075 /Mum./2005
A.Y. : 2002-03. Decided on : 12-5-2008
Counsel for assessee/revenue : Rajiv Khandelwal/
Bharat Bhushan
(1) S. 37(1) of the Income-tax Act, 1961 — Capital or
revenue expenditure — Payment of access fee for the usage of software —
Whether allowable as revenue expenditure — Held, Yes.
(2) S. 28 and S. 36(1)(vii) of the Income-tax Act,
1961 — Assessee, a sharebroker — Dues against the sales value of shares of the
clients sold written off and claimed as bad debts and alternatively, as
business loss — Whether the claim of the assessee allowable — Held, Yes.
Per Abraham P. George :
Facts :
The assessee was a sharebroker and had effectively taken two
grounds in appeal before the Tribunal, the facts whereof were as under :
(1) During the year the assessee had paid the sum of
Rs.11.62 lacs as charges for client access licence of a software viz.,
Derivatives front-office software product for NSE. The amount paid was claimed
as business expenditure. However, the Assessing Officer as well as the CIT(A)
rejected the claim of the assessee and treated the same as capital
expenditure.
(2) The non-recoverable dues of Rs.10.25 lacs from its
clients, which were written off by the assessee in its books of accounts were
claimed as bad debts u/s.36(1)(vii). According to the AO, out of the total sum
receivable from the clients, that part which was not brokerage i.e.,
the value of the shares, was not covered u/s.36(2). Hence, the assessee’s
claim was rejected. The alternative claim of the assessee to allow the claim
u/s.28, by treating the same as business loss was not considered by the AO.
Before the Tribunal the actions of the lower authorities were
justified by the Revenue on the ground that the payment was made for acquisition
of system software and not application software.
Held :
(1) The Tribunal noted that the amount paid by the assessee
was for access to certain software used by sharebrokers for accessing NSE and
controlling its trading functions. By this, according to the Tribunal, the
assessee did not get any enduring benefit. This was so because the assessee was
required to pay the amount periodically in order to have its continuous access.
It was also noted by the Tribunal that the ownership to the software was not
transferred to the assessee. According to the Tribunal, though the software did
help the assessee to be competitive in its line of business and for the
efficient conduct of its day-to-day business, that alone would not be sufficient
to hold the payment as capital expenditure. Further, relying on the test laid
down by the Special Bench in the case of Amway India Enterprises, the Tribunal
allowed the appeal of the assessee.
(2) Relying on the decision of the Special Bench Tribunal in
the case of Oman International Bank SAOG, the Tribunal held that the assessee
having written off the non-recoverable dues, had satisfied the stipulation as
per S. 36(1)(vii). According to it, based on the decision of the Mumbai Tribunal
in the case of B. D. Shroff, the assessee was entitled to succeed even under the
alternative ground viz., by way of trading loss u/s.28.
Cases referred to :
(1) Amway India Enterprises & Others v. Dy. CIT, 21
SOT 1 (Del) (SB);
(2) Dy. CIT v. Oman International Bank, SAOG 100 ITD
257 (SB);
(3) CIT v. B. D. Shroff, (ITA No. 4475 / Mum. /
2000)
