Laser Soft Infosystems Limited, CHENNAI V. ITO, CHENNAI

ITA 107/CHNY/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 0897 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 09-01-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 20-01-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI BEFORE N.S. SAINI, ACCOUNTANT MEMBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER ITA NO.107/MDS/2012 (ASSESSMENT YEAR: 2007-08) LASER SOFT INFOSYSTEMS LTD., PRINCE INFO PARK, A BLOCK, 81B, II MAIN ROAD, AMBATTUR INDUSTRIAL ESTATE, AMBATTUR, CHENNAI-600 058. PAN: AAACL5896N VS. THE INCOME TAX OFFICER, COMPANY WARD-II(1) CHENNAI-600 034. (APPELLANT) (RESPONDENT) APPELLANT BY : MR. VIKRAM VIJAYARAGH AVAN, ADVOCATE RESPONDENT BY : MR. SHAJI P.JACOB, ADDL. CIT DATE OF HEARING : 9 TH JANUARY, 2013 DATE OF PRONOUNCEMENT : 31 ST JANUARY, 2013 O R D E R PER VIKAS AWASTHY, JM: THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE IMPUGNING THE ORDER OF THE CIT(A)-IV, CHENNAI DATE D 1.11.2011 RELEVANT TO THE ASSESSMENT YEAR 2007-08. THE ONLY ISSUE INVOLVED IN THE APPEAL IS WHETHER THE PR ODUCT DEVELOPMENT COST IS REVENUE OR CAPITAL IN NATURE? 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A COMPANY ENGAGED IN THE BUSINESS OF DEVELOPMENT AND EXPORT ITA NO.107/MDS/2012 2 OF COMPUTER SOFTWARE MAINLY FOR THE BANKING AND FIN ANCIAL SERVICE SECTOR. FOR THE ASSESSMENT YEAR 2007-08, T HE ASSESSEE FILED ITS RETURN OF INCOME ON 31.10.2007 A DMITTING INCOME OF ` 3,38,58,500/-. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY. THE ASSESSING OFFICER VIDE O RDER DATED 24.12.2009 DISALLOWED CERTAIN EXPENSES AND MADE AD DITIONS IN THE INCOME RETURNED BY THE ASSESSEE. THE ASSESS ING OFFICER INTER-ALIA MADE ADDITIONS ON ACCOUNT OF EXPENDITURE INCURRED BY THE ASSESSEE ON PRODUCT DEVELOPMENT. THE ASSESSEE CLAIMED THE EXPENDITURE TO BE REVENUE IN NATURE. THE STAND OF THE ASSESSEE BEFORE THE ASS ESSING OFFICER WAS THAT SINCE THE EXPENDITURE RELATES TO S ALARY, TRAVEL, RENTALS, CONSUMABLES, ELECTRICITY CHARGES ETC. WHIC H PRIMARILY RELATES TO DAY TO DAY FUNCTIONING OF THE ORGANIZATI ON, THEREFORE, THE SAME ARE TO BE ALLOWED AS REVENUE EXPENDITURE. AS PER THE ASSESSEE, SIMILAR REVENUE EXPENDITURE IS INCUR RED BY THE COMPANY WHENEVER IT DEVELOPS A NEW PRODUCT OR ENHA NCES AN EXISTING PRODUCT TO MEET THE EMERGING MARKET DEM AND. SINCE THE EXPENDITURE IS DONE IN ANTICIPATION OF FU TURE ORDERS, THESE ARE CLASSIFIED AS PRODUCT DEVELOPMENT EXPENDI TURE. IN ITA NO.107/MDS/2012 3 TUNE WITH THE COMPANYS ACCOUNTING POLICIES, SUCH PRODUCT DEVELOPMENT EXPENSES ARE TREATED AS DEFERRED EXPEND ITURE IN THE BOOKS AND WRITTEN OFF EQUALLY OVER A PERIOD OF THREE YEARS COMMENCING FROM THE SUBSEQUENT YEAR. 3. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE ALLEGED EXPENDITURE ON PRODUCT DEVELOPMENT RESULTS IN CREAT ING OF PROTOTYPE WHICH WILL BE USED TO DEVELOP SOFTWARE AG AIN AND AGAIN FOR DIFFERENT SYSTEMS. THE ASSESSING OFFICER FURTHER OBSERVED THAT THE ASSESSEE HAS NOT FURNISHED THE D ETAILS OF INCOME GENERATED BY INCURRING THIS EXPENDITURE. S INCE, IT RELATES TO NEW PRODUCT FROM WHICH THE ASSESSEE WILL BE GENERATING INCOME IN FUTURE, ALL THESE EXPENSES HAV E TO BE CAPITALIZED. THE ASSESSING OFFICER REJECTED THE CON TENTION OF THE ASSESSEE AND TREATED THE ENTIRE EXPENDITURE OF ` 4,56,96,957/- AS CAPITAL IN NATURE. 4. AGGRIEVED AGAINST THE ASSESSMENT ORDER, THE ASSE SSEE PREFERRED AN APPEAL BEFORE THE CIT(A). THE ASSESSEE CONTENDED BEFORE THE CIT(A) THAT THE ASSESSING OFFI CER HAS FAILED TO APPRECIATE THE FACT THAT EXPENDITURE INC URRED TOWARDS PROJECT DEVELOPMENT IS PURELY REVENUE IN NATURE A ND IS ITA NO.107/MDS/2012 4 RELATED TO BUSINESS ACTIVITIES OF THE ASSESSEE COMP ANY AND THE TREATMENT GIVEN IN BOOKS WOULD NOT AFFECT THE C LAIM OF DEDUCTION UNDER THE PROVISIONS OF THE INCOME TAX AC T. THE ASSESSEE CLAIMED THAT THE EXPENDITURE IS ALLOWABLE UNDER SECTION 37 OF THE ACT. THE ASSESSEE MADE AN ALTERNA TE PRAYER THAT IN CASE THE EXPENDITURE IS TO BE TREATED AS CA PITAL IN NATURE, THE ASSESSEE IS ENTITLED TO CLAIM DEPRECIAT ION @ 60% AS APPLICABLE TO COMPUTER SOFTWARE BASED ON CLAUSE III(5) OF NEW APPENDIX I READ WITH RULE 5 OF THE INCOME TAX R ULES, 1962. THE CIT(A) DISMISSED BOTH THE PLEAS OF THE ASSESSE E AND UPHELD THE FINDINGS OF THE ASSESSING OFFICER. T HE CIT(A) HELD THAT THE EXPENDITURE INCURRED ON SOFTWARE DEV ELOPMENT IS CAPITAL EXPENDITURE AND THE ASSESSEE IS ENTITLED TO CLAIM DEPRECIATION @ 25% AS IN THE CASE OF INTANGIBLE ASS ET OR COPY RIGHT. AGGRIEVED AGAINST THE ORDER OF THE CIT(A), THE ASS ESSEE HAS COME IN SECOND APPEAL BEFORE THE TRIBUNAL. 5. MR. VIKRAM VIJAYARAGHAVAN APPEARING ON BEHALF OF THE ASSESSEE REITERATED HIS STAND TAKEN BEFORE THE AUTH ORITIES ITA NO.107/MDS/2012 5 BELOW. THE LEARNED COUNSEL SUBMITTED THAT BOTH THE ASSESSING OFFICER AND CIT(A) HAVE FAILED TO APPRECI ATE THE FACT THAT EXPENDITURE INCURRED ON THE DEVELOPMENT O F NEW PRODUCT IS REVENUE IN NATURE. THE EXPENDITURE IS A LLOWABLE UNDER SECTION 37 OF THE INCOME TAX ACT, AS THE SAME WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE COMPANY. THE EXPENDITURE IN RELATION TO PRODUCT DEVELOPMENT HAS NEITHER GENERATED ANY CAPIT AL ASSET NOR HAS RESULTED IN ENDURING BENEFIT TO THE ASSESSE E AND AS SUCH THE EXPENDITURE CANNOT BE TREATED AS CAPITAL EXPENDITURE. IN ORDER TO SUPPORT HIS CONTENTIONS, THE COUNSEL FOR THE ASSESSEE RELIED ON THE ORDER OF THE PUNE BE NCH OF THE TRIBUNAL IN ITA NO. 1179, 1205 & 1206/PN/2009 AND 466/PN/2011 IN OPUS SOFTWARE SOLUTIONS P. LTD. VS. ACIT., WHEREIN THE TRIBUNAL HAS HELD THAT THE EXPENDITURE INCURRED ON DEVELOPMENT OF VARIOUS SOFTWARE PACKAGES FOR BEI NG SOLD IN THE ASSESSEES BUSINESS OF SOFTWARE DEVELOPMENT AND SELLING IS TO BE REGARDED AS IN THE NATURE OF REVEN UE EXPENDITURE. ITA NO.107/MDS/2012 6 6. SHRI SHAJI P.JACOB APPEARING ON BEHALF OF THE RE VENUE SUBMITTED THAT THE ORDER OF CIT(A) IS A WELL REASO NED AND THE CIT(A) IS ABSOLUTELY CORRECT IN HOLDING THAT NATURE OF EXPENDITURE IS CAPITAL IN NATURE AND THAT THE ASSES SEE IS ENTITLED TO CLAIM DEPRECIATION ON THE SAME @ 25%, A S IN THE CASE OF COPYRIGHTS OR INTANGIBLE ASSETS. THE DR SUB MITTED THAT THE ASSESSEE IS NOT ENTITLED TO CLAIM DEPRECIATION @ 60% FOR THE REASONS RECORDED BY THE CIT(A) IN HIS ORDER. IN ORDER TO SUPPORT HIS CONTENTION THAT EXPENDITURE INCURRED BY THE ASSESSEE IS CAPITAL IN NATURE HE RELIED ON THE ORDE R OF THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS . M/S. MILLENNIUM INFOCOM LTD. REPORTED AS 2008-TIOL-481-I TAT- MAD. THE TRIBUNAL IN THE SAID ORDER HAS CATEGORICAL LY HELD THAT EXPENDITURE INCURRED BY THE ASSESSEE FOR ACQUI RING SOFTWARE IS CAPITAL EXPENDITURE. THE DR IN ORDER T O FURTHER FORTIFY HIS CONTENTIONS REFERRED TO THE JUDGEMENT OF THE HONBLE SUPREME COURT OF INDIA IN THE CASE OF DALMI A JAIN & CO.LTD. VS. CIT REPORTED AS 81 ITR 754 AND THE JUDG EMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF M/S EI D PARRY (INDIA) LTD. VS. CIT REPORTED AS 257 ITR 253 ( MAD) . ITA NO.107/MDS/2012 7 7. WE HAVE HEARD THE SUBMISSIONS MADE BY BOTH THE PARTIES. WE HAVE PERUSED THE ORDERS OF THE AUTHORIT IES BELOW AND THE JUDGEMENTS/ORDERS RELIED ON BY BOTH THE SID ES. IN ORDER TO DETERMINE WHETHER EXPENDITURE INCURRED IS REVENUE OR CAPITAL IN NATURE, IT HAS TO BE JUDGED ON VARIOU S FACTORS. THE HONBLE SUPREME COURT IN THE LANDMARK CASE OF EMPIR E JUTE CO. LTD. VS.CIT REPORTED AS 124 ITR 001 HAS LAID D OWN VARIOUS TEST TO DETERMINE THE NATURE OF EXPENDITURE . THE SAID JUDGEMENT HAS BEEN FOLLOWED YEAR AFTER YEAR BY THE HONBLE SUPREME COURT AND THE VARIOUS HIGH COURTS AS WEL L AS THE TRIBUNAL IN DECIDING SUCH ISSUE. IN THE SAID JUDGEM ENT, THE HONBLE APEX COURT WHILE CONSIDERING VARIOUS EARL IER JUDGEMENTS OBSERVED AS UNDER:- THE DECIDED CASES HAVE, FROM TIME TO TIME, EVOLVED VARIOUS TESTS FOR DISTINGUISHING BETWEEN CAPITAL AND REVENUE EXPENDIT URE BUT NO TEST IS PARAMOUNT OR CONCLUSIVE. THERE IS NO ALL EMBRACING FORMULA WHICH CAN PROVIDE A READY SOLUTION TO THE PROBLEM; NO TOUCHST ONE HAS BEEN DEVISED. EVERY CASE HAS TO BE DECIDED ON ITS OWN FA CTS, KEEPING IN MIND THE BROAD PICTURE OF THE WHOLE OPERATION IN RESPECT OF WHICH THE EXPENDITURE HAS BEEN INCURRED. BUT A FEW TESTS FORM ULATED BY THE COURTS MAY BE REFERRED TO AS THEY MIGHT HELP TO ARRIVE AT A CORRECT DECISION OF THE CONTROVERSY BETWEEN THE PARTIES. ONE CELEBRATED TEST IS THAT LAID DOWN BY LORD CAVE L.C. IN ATHERTON V. BRITISH INSUL ATED AND HELSBY ITA NO.107/MDS/2012 8 CABLES LTD. [1925] 10 TC 155, 192(HL), WHERE THE LE ARNED LAW LORD STATED: '........ WHEN AN EXPENDITURE IS MADE, NOT ONLY ONC E AND FOR ALL, BUT WITH A VIEW TO BRINGING INTO EXISTENCE AN ASSET OR AN AD VANTAGE FOR THE ENDURING BENEFIT OF A TRADE, I THINK THAT THERE IS VERY GOOD REASON (IN THE ABSENCE OF SPECIAL CIRCUMSTANCES LEADING TO AN OPPO SITE CONCLUSION) FOR TREATING SUCH AN EXPENDITURE AS PROPERLY ATTRIBUTAB LE NOT TO REVENUE BUT TO CAPITAL.' THIS TEST, AS THE PARENTHETICAL CLAUSE SHOWS, MUST YIELD WHERE THERE ARE SPECIAL CIRCUMSTANCES LEADING TO A CONTRARY CONCLUS ION AND, AS POINTED OUT BY LORD RADCLIFFE IN COMMISSIONER OF TAXES V. N CHANGA CONSOLIDATED COPPER MINES LTD. [1965] 58 ITR 241 (P C), IT WOULD BE MISLEADING TO SUPPOSE THAT IN ALL CASES, SECURING A BENEFIT FOR THE BUSINESS WOULD BE, PRIMA FACIE, CAPITAL EXPENDITURE SO LONG AS THE BENEFIT IS NOT SO TRANSITORY AS TO HAVE NO ENDURANC E AT ALL. THERE MAY BE CASES WHERE EXPENDITURE, EVEN IF INCURRED FOR OBTAI NING ADVANTAGE OF ENDURING BENEFIT, MAY, NONE THE LESS, BE ON REVENUE ACCOUNT AND THE TEST OF ENDURING BENEFIT MAY BREAK DOWN. IT IS NOT EVERY ADVANTAGE OF ENDURING NATURE ACQUIRED BY AN ASSESSEE THAT BRINGS THE CASE WITHIN THE PRINCIPLE LAID DOWN IN THIS TEST. WHAT IS MATERIAL TO CONSIDER IS THE NATURE OF THE ADVANTAGE IN A COMMERCIAL SENSE AND I T IS ONLY WHERE THE ADVANTAGE IS IN THE CAPITAL FIELD THAT THE EXPENDIT URE WOULD BE DISALLOWABLE ON AN APPLICATION OF THIS TEST. IF THE ADVANTAGE CONSISTS MERELY IN FACILITATING THE ASSESSEE'S TRADING OPERA TIONS OR ENABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEE'S BUSINESS T O BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHILE LEAVING T HE FIXED CAPITAL UNTOUCHED, THE EXPENDITURE WOULD BE ON REVENUE ACCO UNT, EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR AN INDEFINITE FUTURE. THE TEST OF ENDURING BENEFIT IS, THERE-FORE, NOT A CERTAIN OR CONCLUSIVE TEST AND IT CANNOT BE ITA NO.107/MDS/2012 9 APPLIED BLINDLY AND MECHANICALLY WITHOUT REGARD TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF A GIVEN CASE. XXXX ANOTHER TEST WHICH IS OFTEN APPLIED IS THE ONE BAS ED ON THE DISTINCTION BETWEEN FIXED AND CIRCULATING CAPITAL. THIS TEST WA S APPLIED BY LORD HALDANE IN THE LEADING CASE OF JOHN SMITH AND SON V . MOORE [1921] 12TC 266, 282 (HL) WHERE THE LEARNED LAW LORD DREW THE DISTINCTION BETWEEN FIXED CAPITAL AND CIRCULATING CAPITAL IN WO RDS WHICH HAVE ALMOST ACQUIRED THE STATUS OF A DEFINITION. HE SAID : 'FIXED CAPITAL AS WHAT THE OWNER TURNS TO PROFIT BY KEEPING IT IN HIS OWN POSSESSION; CIRCULATING CAPITAL AS WHAT HE MAKES PR OFIT OF BY PARTING WITH IT AND LETTING IT CHANGE MASTERS.' NOW SO LONG AS THE EXPENDITURE IN QUESTION CAN BE C LEARLY REFERRED TO THE ACQUISITION OF AN ASSET WHICH FALLS WITHIN ONE OR THE OTHER OF THESE TWO CATEGORIES, SUCH A TEST WOULD BE A CRITICAL ONE . BUT THIS TEST ALSO SOMETIMES BREAKS DOWN BECAUSE THERE ARE MANY FORMS OF EXPENDITURE WHICH DO NOT FALL EASILY WITHIN THESE TWO CATEGORIE S AND NOT INFREQUENTLY, AS POINTED OUT BY LORD RADCLIFFE IN C OMMISSIONER OF TAXES V. NCHANGA CONSOLIDATED COPPER MINES LTD. [1965] 58 ITR 241 (PC), THE LINE OF DEMARCATION IS DIFFICULT TO DRAW AND LE ADS TO SUBTLE DISTINCTIONS BETWEEN PROFIT THAT IS MADE ' OUT OF ' ASSETS AND PROFIT THAT IS MADE ' UPON ' ASSETS OR ' WITH ' ASSETS. MOREOVER, THERE MAY BE CASES WHERE EXPENDITURE, THOUGH REFERABLE TO OR IN CONNEC TION WITH FIXED CAPITAL, IS NEVERTHELESS ALLOWABLE AS REVENUE EXPEN DITURE. AN ILLUSTRATIVE EXAMPLE WOULD BE OF EXPENDITURE INCURRED IN PRESERV ING OR MAINTAINING CAPITAL ASSETS. THIS TEST IS, THEREFORE, CLEARLY NO T ONE OF UNIVERSAL APPLICATION. BUT EVEN IF WE WERE TO APPLY THIS TEST , IT WOULD NOT BE POSSIBLE TO CHARACTERISE THE AMOUNT PAID FOR PURCHA SE OF LOOM HOURS AS CAPITAL EXPENDITURE, BECAUSE ACQUISITION OF ADDITIO NAL LOOM HOURS DOES NOT ADD AT ALL TO THE FIXED CAPITAL OF THE ASSESSEE . THE PERMANENT ITA NO.107/MDS/2012 10 STRUCTURE OF WHICH THE INCOME IS TO BE THE PRODUCE OR FRUIT REMAIN, THE SAME; IT IS NOT ENLARGED. THE HONBLE APEX COURT FURTHER HELD THAT: WHEN DEALING WITH CASES OF THIS KIND WHERE THE QUE STION IS WHETHER EXPENDITURE INCURRED BY AN ASSESSEE IS CAPITAL OR R EVENUE EXPENDITURE, IT IS NECESSARY TO BEAR IN MIND WHAT DIXON J. SAID IN HALLSTORM'S PROPERTY LTD. V. FEDERAL COMMISSIONER OF TAXATION (72 CLR 63 4): ' WHAT IS AN OUTGOING OF CAPITAL AND WHAT IS AN OUTGOING ON ACCO UNT OF REVENUE DEPENDS ON WHAT THE EXPENDITURE IS CALCULATED TO EF FECT FROM A PRACTICAL AND BUSINESS POINT OF VIEW RATHER THAN UPON THE JUR ISTIC CLASSIFICATION OF THE LEGAL RIGHTS, IF ANY, SECURED, EMPLOYED OR EXHA USTED IN THE PROCESS. ' THE QUESTION MUST BE VIEWED IN THE LARGER CONTEXT O F BUSINESS NECESSITY OR EXPEDIENCY. IF THE OUTGOING EXPENDITURE IS SO RE LATED TO THE CARRYING ON OR THE CONDUCT OF THE BUSINESS THAT IT MAY BE RE GARDED AS AN INTEGRAL PART OF THE PROFIT-EARNING PROCESS AND NOT FOR ACQU ISITION OF AN ASSET OR A RIGHT OF A PERMANENT CHARACTER, THE POSSESSION OF WHICH IS A CONDITION OF THE CARRYING ON OF THE BUSINESS, THE EXPENDITURE MAY BE REGARDED AS REVENUE EXPENDITURE. AT TIMES THERE IS A THIN LINE OF DISTINCTION BETWEE N THE EXPENDITURE TO BE TREATED AS REVENUE OR CAPITAL IN NATURE. THESE TESTS HAVE TO BE APPLIED IN THE FACTS AND CIR CUMSTANCES OF EACH CASE TO COME TO THE FINAL CONCLUSION. IN T HE PRESENT CASE, AN EXPENDITURE HAS BEEN INCURRED BY THE ASSE SSEE TO BRING INTO EXISTENCE AN ASSET FROM WHICH IT WOULD E ARN REVENUE. THE LIFE OF THE ASSET AND THE NATURE OF E XPENDITURE ITA NO.107/MDS/2012 11 VIZ. SALARY, STAFF WELFARE EXPENSES ETC. IN BRINGIN G SUCH ASSETS INTO EXISTENCE CANNOT DETERMINE THE NATURE OF INVES TMENT MADE FOR DEVELOPING SUCH ASSET I.E. A COMPUTER SOF TWARE. THE ASSESSEE IS IN THE BUSINESS OF DEVELOPING SOFTW ARE. ONCE THE SOFTWARE IS DEVELOPED IT BECOMES THE ASSET OF T HE ASSESSEE. THE ASSESSEE EARNS INCOME/REVENUE FROM TH E SALE OF SUCH SOFTWARE TO VARIOUS CONSUMERS OR CLASS OF C ONSUMERS. THE SOFTWARE SO MADE GIVES AN ENDURING BENEFIT TO A N ASSESSEE. THE LIFE SPAN OF THE ASSET MAY NOT BE SO LONG BUT IT DOES NOT CHANGE THE NATURE OF EXPENDITURE OUTLAY. 8. A PERUSAL OF THE ORDER OF THE COMMISSIONER OF IN COME TAX (APPEALS) SHOWS THAT THE A.R. FOR THE ASSESSEE HAS FURNISHED INFORMATION RELATING TO THE INCOME THAT I S BEING RECEIVED OUT OF THE PRODUCT DEVELOPED. THE RELEVANT EXTRACT OF THE FINDING OF THE COMMISSIONER OF INCOME TAX (APPE ALS) ARE REPRODUCED HEREIN BELOW:- DURING THE APPEAL PROCEEDINGS, THE LD. A.R. WAS ASKED TO FURNISH INFORMATION RELATING TO INCOME THA T IS BEING RECEIVED OUT OF THIS AND IN PURSUANCE OF THE SAME, THE LD. AR HAS FILED WRITTEN SUBMISSION ITA NO.107/MDS/2012 12 DATED 13.10.2011 AND IN THE ANNEXURE ENCLOSED TO IT CLEARLY SHOWS THAT INCOME AROSE TO THE ASSESSEE COMPANY IN THE SUBSEQUENT YEARS BECAUSE OF THIS PRODUCT DEVELOPMENT EXPENSES AND HENCE THESE EXPENDITURE ARE TO BE TREATED AS CAPITAL ASSET WHICH GIVES RISE TO INCOME. THE INFORMATION FURNISHED BY THE ASSESSEE SHOWS THA T IT IS GENERATING REVENUE FROM THE SALE OF THE PRODUCT DEV ELOPED BY IT, THIS GIVES IMPUTES TO OUR VIEW THAT THE PRODUCT DEVELOPED IS ASSET OF THE ASSESSEE AND THE EXPENDITURE INCURRED ON ITS DEVELOPMENT HAS TO BE CAPITALIZED. 9. THE CIT(A) HAS FURTHER OBSERVED THAT THE PRODUC T DEVELOPMENT EXPENDITURE WAS TREATED AS CAPITAL ASSE T BY THE ASSESSEE COMPANY ITSELF IN THE BOOKS OF ACCOUNT AN D THEY HAVE VALUED THE SAME AS IF THE EXPENDITURE WILL YIE LD FOR THREE YEARS AND AMORTIZE THE ENTIRE EXPENDITURE. IT IS A WELL SETTLED LAW THAT THE ENTRIES IN THE BOOKS OF ACCOUNT MAY NO T BE CONCLUSIVE IN NATURE. HOWEVER, SOME INFERENCE CAN BE DRAWN FROM THEM WITH REGARD TO THE NATURE AND OBJEC TIVE OF THE EXPENDITURE. IF FUNCTIONAL TEST IS APPLIED IN THE INSTANT CASE , IT IS CLEAR THAT THE ADVANTAGE IS IN CAPITAL FIELD AND AS SUCH THE ITA NO.107/MDS/2012 13 EXPENDITURE IS CAPITAL IN NATURE. THE CREATION OF S OFTWARE IN THE CASE OF THE ASSESSEE DOES NOT MERELY FACILITATE IN TRADING OPERATION. THE SOFTWARE DEVELOPED IS A SOURCE OF GE NERATING REVENUE TO THE ASSESSEE. 10. FROM THE FACTS OF THE CASE AND DOCUMENTS ON RE CORD, WE ARE OF THE CONSIDERED OPINION THAT THE EXPENDITU RE INCURRED BY THE ASSESSEE IN THE DEVELOPMENT OF SOFTWARE IS C APITAL IN NATURE. OUR VIEW IS FURTHER FORTIFIED BY THE ORDER OF THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF M/S. MILLENNIU M INFOCOM LTD. (SUPRA). THE ASSESSEE IS ENJOYING BENEFITS FRO M THE SALE OF SOFTWARE TO DIFFERENT CUSTOMERS. THE PROTOTYPE O F THE SOFTWARE REMAINS WITH THE ASSESSEE. THE ASSESSEE IS ONLY GIVING COPY OF THE SOFTWARE WITHOUT DISCLOSING THE INTRICATE METHOD OF DEVELOPING THE SAME TO ITS PROSPECTIVE CU STOMERS. 11. IT IS AN UNDISPUTED FACT THAT SOFTWARE INDUSTR Y IS HIGHLY VOLATILE AND THERE ARE FREQUENT CHANGES OR UPGRADAT ION IN THE EXISTING SOFTWARES. ON ACCOUNT OF TECHNOLOGICAL ADV ANCEMENT AND CHANGING MARKET CONDITIONS, THE EXISTING SOFTWA RE BECOMES OBSOLETE VERY FAST. KEEPING THIS FACT IN M IND TO KEEP PACE WITH THE EVER CHANGING SOFTWARE TECHNOLOGY A ND TO ITA NO.107/MDS/2012 14 MEET THE CHANGING MARKET REQUIREMENTS, DEPRECIATION @ 60% HAS BEEN PROVIDED ON COMPUTER SOFTWARE AND HARDWARE . THE CIT(A) ON THE ONE HAND HAS GIVEN ITS FINDINGS THAT THE ASSESSEE HAS NOT SHOWN ANY ASSET IN ITS BALANCE SHE ET, THEREFORE, THE ASSESSEE IS NOT ENTITLED FOR DEPRECI ATION @ 60%, ON THE OTHER HAND, THE CIT(A) HAS ALLOWED DEPR ECIATION @ 25% TO THE ASSESSEE TREATING IT AS COPY RIGHT OR INTANGIBLE ASSET. THE FINDINGS OF THE CIT(A) ARE NOT TENABLE. ONCE IT IS HELD THAT THE EXPENDITURE INCURRED BY THE ASSESSEE FOR THE DEVELOPMENT OF THE SOFTWARE IS CAPITAL IN NATURE, THE SOFTWARE DEVELOPED BY THE ASSESSEE IS AN ASSET OF THE ASSESS EE. THE HONBLE SUPREME COURT OF INDIA IN THE CASE OF TATA CONSULTANCY SERVICES VS. STATE OF ANDHRA PRADESH R EPORTED AS 271 ITR 401 (SC) HAS HELD THAT COMPUTER SOFTWARE IS A TANGIBLE ASSET. AS PER CLAUSE III (5) OF NEW APPEND IX I READ WITH RULE 5 OF THE INCOME TAX RULES, 1962, RATE OF DEPRECIATION AS APPLICABLE TO COMPUTER SOFTWARE IS 60%. THEREFORE, WE HOLD THAT THE ASSESSEE IS ENTITLED TO CLAIM DEPRECIATION @ 60% ON EXPENDITURE INCURRED IN THE DEVELOPMENT OF COMPUTER SOFTWARE BEING CAPITAL IN N ATURE. ITA NO.107/MDS/2012 15 12. IN VIEW OF OUR ABOVE FINDINGS, THE APPEAL OF TH E ASSESSEE IS PARTLY ALLOWED IN THE AFORESAID TERMS. ORDER PRONOUNCED IN THE OPEN COURT ON THURSDAY TH E 31 ST DAY OF JANUARY, 2013 AT CHENNAI. SD/- SD/- ( N.S. SAINI ) (VIKAS AWASTHY) ACCOUNTANT MEMBER JUDICIAL MEMBER CHENNAI, DATED THE 31 ST JANUARY, 2013. SOMU COPY TO: (1) APPELLANT (4) CIT(A) (2) RESPONDENT (5) D.R. (3) CIT (6) G.F.