IN INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI BEFORE SHRI B. R. BASKARAN, AM AND SHRI PAWAN SINGH, JM I.T.A. No. 1778/Mum/2013 (Assessment Year: 2009-10) Directi Internet Solutions Pvt. Ltd. ACIT-5(1), Mumbai 102, Osia Friendship, Gaothan Lane No.4, Off: J.P. Road, Opp. Ram Mandir, Vs. Andheri (W), Mumbai-400058 PAN/GIR No. AACCG4058M ( Appellant) : ( Respondent) I.T.A. No. 5150/Mum/2014 ( Assessment Year: 2010-11) Directi Internet Solutions Pvt. Ltd. DCIT-5(1), Mumbai Regency CHS Ltd. Office No.11 & 12, Next to Nandi Cinema, National Vs. Library Road, Bandra (W), Mumbai-400050. PAN/GIR No. AACCG4058M ( Appellant) : ( Respondent) Appellant by : Shri Feroze Andhyarujina -AR Respondent by : Shri Nitin Waghmode (DR) : 12.07.2016 Date of Hearing : 30.09.2016 Date of Pronouncement O R D E R Per Pawan Singh, JM: 1. These two appeals are filed by assessee against order of CIT(Appeals) -9, Mumbai dated 10.01.2013 and 28.04.2014 for Assessment Years (AYs) 2009-10 & 2010-11 respectively. In both appeal, assessee has raised common grounds of appeal; hence both appeals were clubbed, heard together and are decided by I. T . A. N o s . 1 7 7 8 / M / 2 0 1 3 & 5 1 5 0 / M / 2 0 1 4 Directi Internet Solutions P. Ltd. common order. Basically, assessee has raised only two grounds which are as under: (1) Disallowance u/s. 14A r.w.Rule 8D of Act. (2) Disallowance of Software Usage Charges. ITA No. 1778/Mum/2013- AY-2009-10 2. Brief facts of case are that assessee filed return of income for relevant Assessment Year (AY) on 22.09.2009 declaring total income of Rs. NIL. return of income came under scrutiny. assessment under u/s 143( 3) was framed vide order dated 13.02.2011. While framing assessment, AO made disallowance u/s. 14A of Rs. 19,43,486/-. assessee claimed Software uses Charges of Rs. 14,56,292/-. AO hold that payments were made on account of software development which is capital in nature. Thus, depreciation @ 60% was allowed and accordingly. Rs. 5,82,517/- was disallowed. Aggrieved by order of AO, assessee filed appeal before CIT(A). CIT(A) confirmed both disallowance in impugned order. Thus, present appeal is filed before us. In ITA No. 5150/Mum/2014 AY-2010-11. assessee filed return of income on 30.09.2010 declaring total income of Rs. 98,69,335/-. assessment came under scrutiny and while framing assessment, AO disallowed sum of Rs.10,52,335/- u/s. 14A. assessee claimed Software Uses charges of Rs.13,83,762/-. AO allowed depreciation @ 60% and Rs. 5,53,505/- was disallowed in assessment order. assessee carried that matter in appeal before First Appellate Authority (FAA), wherein both disallowance was confirmed. Hence, present appeal is filed before us. 3. We have heard Ld AR of assessee and Ld DR for Revenue and perused material available on record. ld AR of assessee argued that provisions of section 14A are not applicable to assessee-company as no expenses are debited to P&L A/c of Company. assessee has not incurred any expenditure in relation to investment in tax exempt securities. entire investment has been made out of assessee s own fund consisting of Share Capital, Interest free reserves and Credit Balance. AO made disallowance of Rs. 10,52,355/- u/s. 14A r.w. Rule 8D without giving any finding that any expenses were incurred in relation to earning 2 I. T . A. N o s . 1 7 7 8 / M / 2 0 1 3 & 5 1 5 0 / M / 2 0 1 4 Directi Internet Solutions P. Ltd. of exempt income. Ld. AR of assessee further relied upon decision of Rajshree Production Pvt. Ltd. (TS-570 ITAT 2013, Mum), Kalyan Steel Ltd. vs. ACIT (ITA No. 1733/PN/2011), CIT vs. Gujarat State Fertilizers & Chemicals Ltd. (2013) 85 CCH 226 (GUJHC), Shopper Stop Ltd. vs. ACIT, ACIT vs. Midcaps Ltd. decision of Indore Tribunal. On other hand, Ld. DR for Revenue strongly supported order of authorities below. 4. We have considered rival contention of parties and perused material available on record. AO while making assessment observed that assessee derived dividend income of Rs. 2,30,94,862/- which is claimed as exempt income, assessee has paid interest of loan of Rs. 3,92,930/- on interest. assessee has not allocated any expenses for earning exempt income, thus, provision of section 14A comes into play and worked out disallowance in accordance with Rule 8D of Income-tax Rules, 1962 and calculated disallowance of Rs. 19,43,486/-. Before First Appellate Authority (FAA), assessee submitted that entire investment have been made out of assessee s own fund as far as interest of Rs. 3,92,930/- which was paid to Karnataka Bank Ltd. on term loan of Rs. 500 Lakhs, taken from it on 30th May 2008, on same date it was utilized by advancing loan to M/s harmony Investments & Properties of interest which is shown as income in P&L account, hence, this interest payment cannot be considered while computing disallowance u/s 14A. It was further submitted that disallowance made by AO is highly excessive as same amounts to 8.42% of total exempt income. same may be reduced to 1% of dividend earned. CIT(A) concluded that assessee could not establish nexus between entire capital being invested in securities. It was impossible to believe that out of mixed (hotchpotch), proposed funds, entire capital would have given into investment in share without part going to business. It was further concluded that it is not possible that entire income would have been invested in share and debentures and share application money specially when assessee not categorized as to how such sum had been invested in business. assessee s case is covered by sub-sections (2) & (3) of section 14A of Act as assessee is claiming that no expenditure has been incurred by it in relation to exempt income. We have seen that as per balance sheet , investment reflected in as on 31.03.2010 3 I. T . A. N o s . 1 7 7 8 / M / 2 0 1 3 & 5 1 5 0 / M / 2 0 1 4 Directi Internet Solutions P. Ltd. was of Rs. 29,98,21,124/-. Further, as per balance sheet for AY 2009-10, total investment of assessee as on 31.03.2010 was Rs. 29,98,21,124/- and assessee was having reserve and surplus amount of Rs. 1,48,60,50,942/-. assessee has secured loan of Rs. 3,70,00,000/-. assessee-company has own sufficient fund. We have noticed that before making disallowance AO not made any enquiry about nature of investment as if it was strategic or investment were made in earlier years and manner in which exempt income was derived and credited to account of assessee. Similarly no such exercise was made by Ld. CIT(A). power of ld CIT(A) is co-terminus with AO. disallowance made by AO and sustained by ld CIT(A) is not in accordance with procedure prescribed u/s 14A r.w.s. Rule 8D. There is no finding that assessee has sufficient fund available with him or not. Hence, we deem it appropriate to restore this ground of appeal to file of AO to pass order afresh. AO shall made necessary enquiry about systematic/strategic investment and manner in which exempt income was earned and credited to account of assessee. AO shall grant adequate opportunity to assessee to submit its details with regard to earning of exempt income. Hence, this ground of appeal is allowed for statistical purpose. 5. Second Ground of appeal raised in present appeal is that CIT(A) erred in confirming disallowance of Software Usages Charges. Ld. AR of assessee argued that Software Uses Charges are Revenue in nature. Software Uses Charges are not enduring in nature and they are fully allowable and relied upon decision of Thomas Cook (I) Ltd. vs. DCIT, ITAT, Mumbai in ITA No. 9353 & 9354/Mum/1992 reported in 15 SOT 392. Ld. DR for Revenue supported orders of authorities below. 6. We have considered rival contention of parties and perused orders of authorities below. While making assessment, AO observed that assessee-company claimed Software Uses Charges of Rs. 14,56,292/- which was paid on account of Software Uses Charges. AO concluded it as Capital in nature and allowed only 60% depreciation, thus Rs. 5,82,517/- was disallowed. CIT(A) while considering this ground concluded that AO has given consequential effect on depreciation in specific year in accordance with provision of Act and on written down 4 I. T . A. N o s . 1 7 7 8 / M / 2 0 1 3 & 5 1 5 0 / M / 2 0 1 4 Directi Internet Solutions P. Ltd. value of previous year mentioned software capitalized by him on basis of depreciation allowed @ 60% in AY 2006-07. For ascertaining as to whether expenditure of computer software gives enduring benefit to assessee, duration of time for which assessee required right to use software become relevant having regard to fact that software becomes obsolete with technological innovation and advancement within short span of time, it would be said that where life of computer software is shorter (less than 2 years) it may be treated as revenue expenditure. In Thomas Cook (India) ltd Vs DCIT (supra) coordinate bench of Tribunal held that expenses incurred on up-gradation of software do not result into acquisition of any asset nor acquisition of enduring benefits as software become obsolete very quickly. Thus, following order of coordinate bench this Ground of appeal is allowed. ITA No. 5150/Mum/2014 7. assessee has raised identical grounds of appeal. Ground No.1 raised in ITA No. 1778/Mum/2013 is restored to file of AO; hence, Ground No. 1 in present appeal is also restored to file of AO. Ground No.2 in this appeal is also identical with Ground No.2 in ITA No. 1778/Mum/2013. Hence, Ground No.2 raised in present appeal is also allowed. In result, both appeal of assessee is allowed. Order announced in open court on 30th day of September 2 016. Sd/- Sd/- (B. R. Baskaran) (Pawan Singh) Accountant Member Judicial Member Mumbai; Dated :30.09.2016 Copy of Order forwarded to : 1. Appellant 2. Respondent 3. CIT(A) 4. CIT - concerned 5. , DR, ITAT, Mumbai 6. Guard File BY ORDER, (Dy./Asstt. Registrar) 5 Directi Internet Solutions Pvt. Ltd. v. ACIT-5(1), Mumbai