Facts of the Case

The Revenue filed an appeal challenging the order of the Income Tax Appellate Tribunal dated 30.03.2021 concerning multiple disallowances made by the Assessing Officer (AO) against the assessee, Times Internet Limited.

The key disallowances included:

  • Disallowance under Section 14A read with Rule 8D
  • Business expenditure disallowed under Section 37(1)
  • Depreciation on software licenses
  • Treatment of software expenditure as capital instead of revenue

The Tribunal had deleted these disallowances, leading to the present appeal before the High Court.

Issues Involved

  1. Whether disallowance under Section 14A read with Rule 8D should include all investments or only those yielding exempt income.
  2. Whether disallowance of business expenditure under Section 37(1) was justified.
  3. Whether depreciation on software should be restricted to 25% or allowed at 60%.
  4. Whether software expenditure should be treated as capital or revenue expenditure.

Petitioner’s Arguments (Revenue)

  • The ITAT erred in deleting disallowance under Section 14A by excluding certain investments.
  • The deletion of business expenditure disallowance under Section 37(1) was incorrect, as expenses were allegedly not wholly for business purposes.
  • Depreciation on software licenses should be restricted to 25% instead of 60%.
  • Software expenditure should be treated as capital expenditure due to enduring benefit.

Respondent’s Arguments (Assessee – Times Internet Limited)

  • Disallowance under Section 14A should only consider investments yielding exempt income.
  • Business expenditure was wholly incurred for business purposes and had been consistently allowed in earlier years.
  • Software used was integral to computer systems and qualified for 60% depreciation.
  • Software and website-related expenses are revenue in nature as per judicial precedents.

Court Findings / Order

The Delhi High Court dismissed the Revenue’s appeal and upheld the Tribunal’s order:

1. Section 14A Disallowance

  • Covered by precedent in Cargo Motors (P.) Ltd.
  • Only investments yielding exempt income should be considered

2. Section 37(1) – Business Expenditure

  • Disallowance was rightly deleted
  • AO failed to identify specific non-business expenses
  • Ad hoc disallowance not sustainable

3. Depreciation on Software

  • Software integral to hardware qualifies for 60% depreciation
  • Rule of consistency applied

4. Software Expenditure (Capital vs Revenue)

  • Held to be revenue expenditure
  • Covered by precedent including CIT vs India Visit.com (P) Ltd.

Final Outcome

  • No substantial question of law arose
  • Appeal dismissed

Important Clarifications

  • Section 14A applies only to investments generating exempt income
  • Ad hoc disallowances without identifying specific expenses are invalid
  • Software forming part of computer systems qualifies for higher depreciation
  • Website/software expenses are generally revenue in nature, not capital

Sections Involved

  • Section 14A of Income Tax Act, 1961
  • Rule 8D of Income Tax Rules, 1962
  • Section 37(1) – Business Expenditure
  • Depreciation provisions (Appendix I – Computers & Software)

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/60813102023ITA5792023_133209.pdf


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